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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 14, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 001-14625
HOST MARRIOTT, L.P.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-2095412
- --------------------------- --------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
10400 Fernwood Road, Bethesda, Maryland 20817
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (301) 380-9000
(Former name, former address and former fiscal year, if changed since last
report) Not Applicable
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of units outstanding as of the latest practicable date.
The registrant had 292,977,057 units of its common limited partnership
units outstanding as of July 15, 2002.
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INDEX
PART I. FINANCIAL INFORMATION
Page No.
--------
ITEM 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets-
June 14, 2002 and December 31, 2001 ...................................... 3
Condensed Consolidated Statements of Operations-
Twelve Weeks and Twenty-four Weeks Ended
June 14, 2002 and June 15, 2001 .......................................... 4
Condensed Consolidated Statements of Cash Flows-
Twenty-four Weeks Ended June 14, 2002 and June 15, 2001 .................. 6
Notes to Condensed Consolidated Financial Statements ........................ 8
ITEM 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition ....................................... 17
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk................... 27
PART II. OTHER INFORMATION AND SIGNATURE
ITEM 1. Legal Proceedings ........................................................... 29
ITEM 5. Other Items ................................................................. 29
ITEM 6. Exhibits and Reports on Form 8-K ............................................ 44
-2-
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
June 14, December 31,
2002 2001
----------- -----------
(unaudited)
ASSETS
------
Property and equipment, net ........................................................... $ 7,159 $ 6,999
Notes and other receivables (including amounts due from affiliates of $6 million and
$6 million, respectively) .......................................................... 54 54
Due from Managers ..................................................................... 150 141
Investments in affiliates ............................................................. 143 142
Other assets .......................................................................... 581 532
Restricted cash ....................................................................... 124 114
Cash and cash equivalents ............................................................. 243 352
----------- -----------
$ 8,454 $ 8,334
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Debt
Senior notes ....................................................................... $ 3,232 $ 3,235
Mortgage debt ...................................................................... 2,313 2,261
Convertible debt obligation to Host Marriott Corporation ........................... 492 492
Other .............................................................................. 105 106
----------- -----------
6,142 6,094
Accounts payable and accrued expenses ................................................. 114 121
Other liabilities ..................................................................... 309 320
----------- -----------
Total liabilities ................................................................ 6,565 6,535
----------- -----------
Minority interest ..................................................................... 109 108
Limited partnership interests of third parties at redemption value (representing
28.1 million units and 21.6 million units at June 14, 2002 and December 31,
2001, respectively) ................................................................ 323 194
Partners' capital
General partner .................................................................... 1 1
Cumulative redeemable preferred limited partner .................................... 339 339
Limited partner .................................................................... 1,119 1,162
Accumulated other comprehensive loss ............................................... (2) (5)
----------- -----------
Total partners' capital .......................................................... 1,457 1,497
----------- -----------
$ 8,454 $ 8,334
=========== ===========
See Notes to Condensed Consolidated Statements
-3-
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve and Twenty-four Weeks Ended June 14, 2002 and June 15, 2001
(unaudited, in millions, except per unit amounts)
Twelve Weeks Ended Twenty-four Weeks Ended
------------------------ ------------------------
June 14, June 15, June 14, June 15,
2002 2001 2002 2001
---------- ---------- ---------- ----------
REVENUES
Rooms ......................................................... $ 543 $ 590 $ 1,008 $ 1,112
Food and beverage ............................................. 288 295 532 548
Other ......................................................... 65 73 120 137
---------- ---------- ---------- ----------
Total hotel sales ........................................... 896 958 1,660 1,797
Rental income ................................................. 24 36 50 70
---------- ---------- ---------- ----------
Total revenues .............................................. 920 994 1,710 1,867
---------- ---------- ---------- ----------
OPERATING COSTS AND EXPENSES
Rooms ......................................................... 129 135 240 256
Food and beverage ............................................. 205 208 380 399
Hotel departmental costs and deductions ....................... 225 232 421 440
Management fees ............................................... 44 54 80 106
Taxes, insurance, and other property-level expenses ........... 72 75 134 140
Depreciation and amortization ................................. 84 100 168 177
Corporate expenses ............................................ 7 9 20 17
Other expenses ................................................ 5 5 9 7
Lease repurchase expense ...................................... -- 5 -- 5
---------- ---------- ---------- ----------
OPERATING PROFIT ................................................ 149 171 258 320
Minority interest expense ..................................... (4) (5) (9) (12)
Interest income ............................................... 4 12 7 20
Interest expense .............................................. (114) (112) (226) (222)
Net gains on property transactions ............................ 1 -- 2 1
Equity in earnings (losses) of affiliates ..................... 1 2 (3) 4
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES ...................................... 37 68 29 111
Provision for income taxes ...................................... (11) (12) (15) (15)
---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS ............................... 26 56 14 96
DISCONTINUED OPERATIONS
Income (loss) from operations ................................... -- (1) 7 (1)
---------- ---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEMS ............................... 26 55 21 95
Extraordinary gain.............................................. -- -- 6 --
---------- ---------- ---------- ----------
NET INCOME ...................................................... $ 26 $ 55 $ 27 $ 95
========== ========== ========== ==========
Less: Dividends on Preferred Units .............................. (9) (9) (18) (14)
---------- ---------- ---------- ----------
NET INCOME AVAILABLE TO COMMON UNITHOLDERS ...................... $ 17 $ 46 $ 9 $ 81
========== ========== ========== ==========
See Notes to Condensed Consolidated Statements
-4-
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
Twelve and Twenty-four Weeks Ended June 14, 2002 and June 15, 2001
(unaudited, in millions, except per unit amounts)
Twelve Weeks Ended Twenty-four Weeks Ended
------------------- -----------------------
June 14, June 15, June 14, June 15,
2002 2001 2002 2001
-------- -------- -------- --------
BASIC EARNINGS PER COMMON UNIT:
Continuing operations ................................. $ .06 $ .16 $ (.01) $ .28
Discontinued operations ............................... -- -- .02 --
Extraordinary gain .................................... -- -- .02 --
-------- -------- ------- --------
BASIC EARNINGS PER COMMON UNIT .......................... $ .06 $ .16 $ .03 $ .28
======== ======== ======= ========
DILUTED EARNINGS PER COMMON UNIT:
Continuing operations ................................. $ .06 $ .16 $ (.01) $ .28
Discontinued operations ............................... -- -- .02 --
Extraordinary gain .................................... -- -- .02 --
-------- -------- ------- --------
DILUTED EARNINGS PER COMMON UNIT ........................ $ .06 $ .16 $ .03 $ .28
======== ======== ======= ========
See Notes to Condensed Consolidated Statements
-5-
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty-four Weeks Ended June 14, 2002 and June 15, 2001
(unaudited)
2002 2001
----------- -----------
OPERATING ACTIVITIES
Net income from continuing operations .............................................. $ 14 $ 96
Adjustments to reconcile to cash from operations:
Depreciation and amortization .................................................. 168 177
Deferred income taxes .......................................................... 5 (11)
Deferred contingent rental income .............................................. 2 15
Net gains on property transactions ............................................. (2) (1)
Equity in losses/(earnings) of affiliates ...................................... 3 (4)
Purchase of Crestline leases ................................................... -- (204)
Changes in other operating accounts ............................................ (23) 10
Other .......................................................................... 9 1
----------- -----------
Cash provided by operations ............................................... 176 79
----------- -----------
INVESTING ACTIVITIES
Acquisitions ....................................................................... (117) (2)
Capital expenditures:
Capital expenditures for renewals and replacements ............................. (80) (102)
New investment capital expenditures ............................................ (10) (30)
Other investments .............................................................. (6) (12)
Note receivable collections, net ................................................... -- 10
----------- -----------
Cash used in investing activities ......................................... (213) (136)
----------- -----------
FINANCING ACTIVITIES
Issuances of debt, net of financing costs .......................................... (7) 121
Scheduled principal repayments ..................................................... (36) (24)
Debt prepayments ................................................................... -- (115)
Issuances of common units .......................................................... 1 2
Issuances of cumulative redeemable preferred units, net ............................ -- 144
Distributions ...................................................................... (18) (159)
Other .............................................................................. (12) (8)
----------- -----------
Cash used in financing activities ......................................... (72) (39)
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS .............................................. $ (109) $ (96)
=========== ===========
See Notes to Condensed Consolidated Statements
-6-
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty-four Weeks Ended June 14, 2002 and June 15, 2001
(unaudited)
Supplemental schedule of noncash investing and financing activities:
During February 2002, 1.1 million Operating Partnership Units (OP Units) were
issued to acquire minority interests in the partnership owning the San Diego
Marina Marriott hotel. This transaction resulted in an increase to property and
equipment of $10.5 million to reflect the fair value of the interest acquired.
During April 2002, the Company increased its ownership percentage in the
partnership that owns the hotel to 90% as a result of the exchange by minority
partners in San Diego of partnership units in the hotel for 6.9 million OP
Units. Host REIT has agreed to promptly register approximately 6.9 million
shares of its common stock for resale by such holders upon their conversion of
the OP Units. The transaction resulted in an increase in property and equipment
of $56.1 million and a corresponding increase in minority interest and equity to
reflect the fair value of the interest acquired.
During January 2002, the Company transferred the St. Louis Marriott Pavilion to
the mortgage lender. The Company recorded the difference between the debt
extinguished and the fair value of the assets surrendered of $9.6 million, net
of tax expense of $3.6 million, as a $6 million extraordinary item. The Company
also recorded the operations of the hotel transferred, net of tax, as income
from discontinued operations.
On June 14, 2002, the Company acquired the Boston Marriott Copley Place in
Boston, Massachusetts for a cash price of $117 million and an assumption of $97
million of mortgage debt.
See Notes to Condensed Consolidated Statements
-7-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization
Host Marriott, L.P. (the "Operating Partnership" or the "Company" or "Host
LP") is a Delaware limited partnership whose sole general partner is Host
Marriott Corporation ("Host REIT" or "Host Marriott"). Host REIT, a
Maryland corporation, operating through an umbrella partnership structure,
is a self-managed and self-administered real estate investment trust
("REIT") with its operations conducted through the Operating Partnership
and its subsidiaries. As of June 14, 2002, Host REIT owned approximately
90% of the Operating Partnership.
2. Summary of Significant Accounting Policies
The accompanying condensed consolidated financial statements of the
Company and its subsidiaries have been prepared without audit. Certain
information and footnote disclosures normally included in financial
statements presented in accordance with accounting principles generally
accepted in the United States have been condensed or omitted. The Company
believes the disclosures made are adequate to make the information
presented not misleading. However, the unaudited condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's annual
report on Form 10-K for the fiscal year ended December 31, 2001.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to
present fairly the financial position of the Company as of June 14, 2002,
the results of its operations for the twelve and twenty-four weeks ended
June 14, 2002 and June 15, 2001, and cash flows for the twenty-four weeks
ended June 14, 2002 and June 15, 2001. Interim results are not necessarily
indicative of fiscal year performance because of the impact of seasonal
and short-term variations.
Certain reclassifications were made to the prior year financial statements
to conform to the current presentation.
The Company consolidates entities in which it owns a controlling financial
interest (when it owns over 50% of the voting shares of another company
or, in the case of partnership investments, when the 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 in or block management
decisions. All material intercompany transactions and balances have been
eliminated.
Revenue from operations of the Company's hotels not leased to third
parties is recognized when the services are provided. For the Company's
hotels leased to third parties, rental income is recorded when due and is
the greater of base rent or percentage rent, as defined. Percentage rent
received pursuant to the leases but not recognized until all contingencies
have been met is deferred and included on the balance sheet as deferred
rent. Contingent rental revenue of $1 million and $8 million for the
twelve weeks ended June 14, 2002 and June 15, 2001, respectively, and $2
million and $15 million for the twenty-four weeks ended June 14, 2002 and
June 15, 2001, respectively, has been deferred. Contingent rent in the
first and second quarters of 2001 related to four full-service and certain
limited service hotel leases. Effective June 16, 2001, the Company
purchased the four full-service hotel leases and, accordingly, all
contingent rent subsequently recorded has been for the limited service
leases.
3. Earnings Per Unit
Basic earnings per common unit is computed by dividing net income
available to common unitholders by the weighted average number of shares
of common units outstanding. Diluted earnings per 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 potentially dilutive securities. Dilutive
securities may include units distributed to Host REIT for Host REIT common
shares granted under comprehensive stock plans, minority interests that
have the right to convert their limited partner interest to common OP
Units and the Convertible Preferred Securities. No effect is shown for
securities if they are anti-dilutive.
Twelve weeks ended
----------------------------------------------------------------------
June 14, 2002 June 15, 2001
---------------------------------- ---------------------------------
Income Units Per Unit Income Units Per Unit
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
---------------------------------- ----------------------------------
(in millions, except per unit amounts)
Net income ........................................... $ 26 291.6 $ .09 $ 55 284.4 $ .19
Distributions on preferred limited partner
Units and Preferred OP Units ...................... (9) -- (.03) (9) -- (.03)
---- ----- ---- ---- ----- -----
Basic income available to common
unitholders ......................................... 17 291.6 .06 46 284.4 .16
Assuming distribution of units to Host
Marriott Corporation for Host Marriott
Corporation common shares granted under the
Host Marriott comprehensive stock plan, less
shares assumed purchased at average market price .. -- 3.2 -- -- 3.8 --
Assuming conversion of minority OP Units
issuable .......................................... -- -- -- 1 9.3 --
---- ------ ----- ---- ----- -----
Diluted earnings ..................................... $ 17 294.8 $ .06 $.47 297.5 $ .16
==== ====== ===== ==== ===== =====
-8-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Twenty-four weeks ended
------------------------------------------------------------------------
June 14, 2002 June 15, 2001
---------------------------------- -----------------------------------
Income Units Per Unit Income Units Per Unit
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
---------------------------------- ------------------------------------
(in millions, except per unit amounts)
Net income ........................................ $ 27 288.4 $ .09 $ 95 284.6 $ 33
Distributions on preferred limited partner
Units and Preferred OP Units ................... (18) -- (.06) (14) -- (.05)
---- ----- ----- ---- ----- -----
Basic income available to common
unitholders ...................................... 9 288.4 .03 81 284.6 .28
Assuming distribution of units to Host
Marriott Corporation for Host Marriott
Corporation common shares granted under
the Host Marriott comprehensive stock
plan, less shares assumed purchased at
average market price ............................. -- -- -- -- 4.2 --
Assuming issuance of minority OP Units
issuable ....................................... -- -- -- -- -- --
---- ----- ----- ---- ----- -----
Diluted earnings .................................. $ 9 288.4 $ .03 $ 81 288.8 $ .28
==== ===== ===== ==== ===== =====
4 Equity Transactions
During February 2002, Host REIT filed a shelf registration statement for
1.1 million shares of its common stock to be issued in exchange for
partnership interests held by the minority partners in the partnership
that owns the San Diego Marina Marriott hotel. On March 15, 2002, the
minority partners sold the 1.1 million common shares to an underwriter for
resale on the open market. Concurrent with the issuance of the common
shares by Host REIT, the Company issued to Host REIT an equivalent number
of OP Units. Also, in April 2002, the Company acquired an additional
interest in the San Diego Marina Marriott hotel through the issuance of
6.9 million OP Units to certain minority partners in exchange for their
partnership interest. These transactions reduced Host REIT's ownership
percentage in the Operating Partnership to 90% and resulted in an increase
to property and equipment of $66.6 million to reflect the fair value of
the interest acquired. As a result of the acquisition, the Company now
owns approximately 90% of the interests in the partnership that owns the
hotel. The minority partner continues to receive fees for marketing and
other services, which totaled $1.7 million and $2.0 million for the
twenty-four weeks ended June 14, 2002 and June 15, 2001, respectively.
5. Debt
Effective June 6, 2002, the Company completed negotiations on a new credit
facility with an aggregate revolving commitment of up to $400 million. The
credit facility has an initial three-year term with an option to extend
for an additional year if certain conditions are met. Interest on
borrowings under the credit facility will be calculated based on a spread
over LIBOR that will vary based on the Company's leverage ratio. The
Company is required to pay a quarterly commitment fee that will vary based
on the amount of unused capacity under the credit facility. Currently, the
commitment fee is .55%. As of June 14, 2002 no amounts have been drawn on
the credit facility.
The new credit facility establishes financial covenants for leverage,
interest coverage, fixed charge coverage and unsecured interest coverage
at levels that are generally less stringent than those that
-9-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
would have been applicable under the prior facility. The new credit
facility also imposes other customary covenants and restrictions. In many
cases, the covenants have been modified to be comparable with the
requirements under the senior note indenture.
In the event we do not satisfy a minimum interest coverage ratio and
certain other conditions, both the new credit facility and the senior note
indenture restrict the Company's ability to incur debt, except debt
incurred under the credit facility or in connection with a refinancing of
existing debt. In addition, failure to satisfy this ratio will restrict
Host REIT's ability to declare and pay dividends, except dividends
necessary to maintain its status as a REIT. As a result of the effect on
our business of the September 11 terrorist attacks and the 2001 recession
we did not meet our specified minimum interest coverage ratio beginning in
the third quarter. Accordingly, we are subject to the restrictions
discussed above, although we may take certain actions to achieve compliance
on a pro forma basis.
In connection with its acquisition of Boston Marriott Copley Place
discussed below, on June 14, 2002, the Company assumed $97 million of
mortgage debt. The mortgage bears interest at a fixed rate of 8.39% and is
due on June 1, 2006.
6. Acquisitions
Effective June 14, 2002, the Company completed the acquisition of the
1,139-room Boston Marriott Copley Place. The $214 million purchase price
consisted of a $117 million cash payment and the assumption of $97 million
in mortgage debt.
7. Distributions Payable
On June 17, 2002, the Company announced that the Board of Directors of Host
REIT had declared a quarterly cash distribution of $0.625 per Class A, B,
and C preferred limited partner unit. The second quarter distribution was
paid on July 15, 2002 to unitholders of record on June 28, 2002.
8. Geographic Information
The Company's foreign operations consisted of four hotel properties located
in Canada and two hotel properties located in Mexico. The hotels in Mexico
were acquired in the second quarter of 2001 as a result of the purchase of
the remaining outside interests in Rockledge Hotel Properties, Inc. There
were no intercompany sales between the properties and the Company. The
following table presents revenues (in millions) for each of the
geographical areas in which the Company owns hotels.
Twelve Weeks Ended Twenty-four Weeks Ended
--------------------------------- ----------------------------------
June 14, 2002 June 15, 2001 June 14, 2002 June 15, 2001
------------- ------------- ------------- -------------
United States ................... $ 891 $ 962 $ 1,660 $ 1,820
International ................... 29 32 50 47
------------- -------------- ------------- -------------
Total ....................... $ 920 $ 994 $ 1,710 $ 1,867
============= ============== ============= =============
-10-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Comprehensive Income
The Company's other comprehensive income consists of unrealized gains and
losses on foreign currency translation adjustments and the right to receive
cash from HMSHost Corporation subsequent to the exercise of the options
held by certain former and current employees of Marriott International,
pursuant to the distribution agreement between the Company and HMSHost
Corporation. For the twelve and twenty-four weeks ended June 14, 2002,
comprehensive income totaled $27 million and $30 million, respectively.
Comprehensive income was $60 million and $97 million for the twelve and
twenty-four weeks ended June 15, 2001, respectively. As of June 14, 2002,
the Company's accumulated other comprehensive loss was $2 million compared
to $5 million as of December 31, 2001.
10. Supplemental Guarantor and Non-Guarantor Subsidiary Information
All subsidiaries of the Company guarantee the Senior Notes except those
owning 48 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 information sets forth the
financial position as of June 14, 2002 and December 31, 2001, the results
of operations for the twelve and twenty-four weeks ended June 14, 2002 and
June 15, 2001 and cash flows for the twenty-four weeks ended June 14, 2002
and June 15, 2001 of the parent, Guarantor Subsidiaries and the
Non-Guarantor Subsidiaries.
-11-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Supplemental Condensed Combined Consolidating Balance Sheets
(in millions)
June 14, 2002
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
Property and equipment, net .................... $ 1,093 $ 1,997 $ 4,069 $ -- $ 7,159
Notes and other receivables .................... 701 52 144 (843) 54
Due from Managers .............................. (5) 6 149 -- 150
Rent receivable ................................ 7 21 38 (59) 7
Investments in affiliate ....................... 2,837 1,914 -- (4,608) 143
Other assets ................................... 83 198 395 (102) 574
Restricted cash ................................ 32 3 89 -- 124
Cash and cash equivalents ...................... 79 8 156 -- 243
--------- ------------ ------------ ------------ ------------
Total assets ................................ $ 4,827 $ 4,199 $ 5,040 $ (5,612) $ 8,454
========= ============ ============ ============ ============
Debt ........................................... $ 2,541 $ 1,148 $ 2,669 $ (708) $ 5,650
Convertible debt obligation to Host Marriott ... 492 -- -- -- 492
Other liabilities .............................. 162 204 501 (444) 423
--------- ------------ ------------ ------------ ------------
Total liabilities ........................... 3,195 1,352 3,170 (1,152) 6,565
Minority interests ............................. -- -- 109 -- 109
Limited partner interest of third parties at
redemption value .............................. 323 -- -- -- 323
Owner's capital ................................ 1,309 2,847 1,761 (4,460) 1,457
--------- ------------ ------------ ------------ ------------
Total liabilities and owner's capital ....... $ 4,827 $ 4,199 $ 5,040 $ (5,612) $ 8,454
========= ============ ============ ============ ============
December 31, 2001
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
Property and equipment, net .................... $ 1,111 $ 2,026 $ 3,862 $ -- $ 6,999
Notes and other receivables .................... 704 50 147 (847) 54
Due from Managers .............................. (5) 9 137 -- 141
Rent receivable ................................ 2 16 26 (44) --
Investments in affiliates ...................... 2,734 1,898 -- (4,490) 142
Other assets ................................... 83 186 384 (121) 532
Restricted cash ................................ 22 4 88 -- 114
Cash and cash equivalents ...................... 222 8 122 -- 352
--------- ------------ ------------ ------------ ------------
Total assets ................................ $ 4,873 $ 4,197 $ 4,766 $ (5,502) $ 8,334
========= ============ ============ ============ ============
Debt ........................................... $ 2,545 $ 1,151 $ 2,618 $ (712) $ 5,602
Convertible debt obligation to Host Marriott ... 492 -- -- -- 492
Other liabilities .............................. 145 158 438 (300) 441
--------- ------------ ------------ ------------ ------------
Total liabilities ........................... 3,182 1,309 3,056 (1,012) 6,535
Minority interests ............................ -- -- 108 -- 108
Limited partner interest of third parties at
redemption value .............................. 194 -- -- -- 194
Partners' capital .............................. 1,497 2,888 1,602 (4,490) 1,497
--------- ------------ ------------ ------------ ------------
Total liabilities and owner's capital ....... $ 4,873 $ 4,197 $ 4,766 $ (5,502) $ 8,334
========= ============ ============ ============ ============
-12-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Supplemental Condensed Combined Statements of Operations
(in millions)
Twelve Weeks Ended June 14, 2002
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
REVENUES ....................................... $ 36 $ 50 $ 1,011 $ (177) $ 920
Hotel operating expenses ....................... -- 3 (606) -- (603)
Taxes, insurance and other property-level --
expenses .................................... (14) (17) (41) (72)
Rental expense ................................. -- -- (255) 255 --
Depreciation and amortization .................. (15) (25) (44) -- (84)
Corporate expenses ............................. (1) (2) (4) -- (7)
Other expenses ................................. 1 (1) (5) -- (5)
Minority interest expense ...................... -- -- (4) -- (4)
Interest income ................................ 10 2 2 (10) 4
Interest expense ............................... (49) (24) (51) 10 (114)
Net gains on property transactions ............. -- -- 1 -- 1
Equity in earning (losses) of affiliates ....... (18) 2 (1) 18 1
--------- ------------ ------------ ------------ ------------
(Loss) income before income taxes .............. (50) (12) 3 96 37
(Provision for) benefit from income taxes ...... (2) -- (9) -- (11)
--------- ------------ ------------ ------------ ------------
NET INCOME (LOSS) .............................. $ (52) $ (12) $ (6) $ 96 $ 26
========= ============ ============ ============ ============
Twelve Weeks Ended June 15, 2001
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
REVENUES ....................................... $ 30 $ 48 $ 1,083 $ (167) $ 994
Hotel operating expenses ....................... -- -- (629) -- (629)
Taxes, insurance and other property-level (16)
expenses .................................... (12) (47) -- (75)
Rental expenses ................................ -- -- (287) 287 --
Depreciation and amortization .................. (21) (30) (49) -- (100)
Corporate expenses ............................. -- (3) (6) -- (9)
Other expenses ................................. (3) (1) (6) -- (10)
Minority interest expense ...................... -- -- (5) -- (5)
Interest income ................................ 15 2 7 (12) 12
Interest expense ............................... (43) (25) (56) 12 (112)
Net gains on property transactions ............. (1) -- 1 -- --
Equity in earnings (losses) of affiliates ...... (26) 2 -- 26 2
--------- ------------ ------------ ------------ ------------
(Loss) income before income taxes .............. (61) (23) 6 146 68
(Provision for) benefit from income taxes ...... (4) -- (8) -- (12)
--------- ------------ ------------ ------------ ------------
(Loss) income from continuing operations ....... (65) (23) (2) 146 56
Discontinued Operations ........................
Loss from operations ........................ -- -- (1) -- (1)
--------- ------------ ------------ ------------ ------------
NET INCOME (LOSS) .............................. $ (65) $ (23) $ (3) $ 146 $ 55
========= ============ ============ ============ ============
-13-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Supplemental Condensed Combined Statements of Operations
(in millions)
Twenty-four Weeks Ended June 14, 2002
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
REVENUES ............................................ $ 68 $ 89 $ 1,882 $ (329) $ 1,710
Hotel operating expenses ............................ -- 3 (1,124) -- (1,121)
Taxes, insurance and other property-level
expenses ......................................... (27) (29) (78) -- (134)
Rental expense ...................................... -- -- (477) 477 --
Depreciation and amortization ....................... (31) (49) (88) -- (168)
Corporate expenses .................................. (3) (6) (11) -- (20)
Other expenses ...................................... (1) (1) (7) -- (9)
Minority interest expense ........................... (1) -- (8) -- (9)
Interest income ..................................... 20 4 3 (20) 7
Interest expense .................................... (97) (49) (100) 20 (226)
Net gains on property transactions .................. -- -- 2 -- 2
Equity in earnings (losses) of affiliates ........... (46) (2) (3) 48 (3)
--------- ------------ ------------ ------------ ------------
(Loss) income before income taxes ................... (118) (40) (9) 196 29
(Provision for) benefit from income taxes ........... (3) -- (12) -- (15)
---------- ------------ ------------ ------------ ------------
(Loss) income from continuing operations ............ (121) (40) (21) 196 14
Discontinued Operations
Income from operations ........................... -- -- 7 -- 7
--------- ------------ ------------ ------------ ------------
Income (loss) before extraordinary items ............ (121) (40) (14) 196 21
Extraordinary gain on the extinguishment of debt .... -- -- 6 -- 6
--------- ------------ ------------ ------------ ------------
NET INCOME (LOSS) ................................... $ (121) $ (40) $ (8) $ 196 $ 27
========= ============ ============ ============ ============
Twenty-four Weeks Ended June 15, 2001
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
REVENUES ............................................ $ 63 $ 89 $ 2,027 $ (312) $ 1,867
Hotel operating expenses ............................ -- -- (1,201) -- (1,201)
Taxes, insurance and other property-level
expenses ......................................... (25) (30) (85) -- (140)
Rental expenses ..................................... -- -- (544) 544 --
Depreciation and amortization ....................... (36) (54) (87) -- (177)
Corporate expenses .................................. (2) (5) (10) -- (17)
Other expenses ...................................... (3) (1) (8) -- (12)
Minority interest expense ........................... (2) -- (10) -- (12)
Interest income ..................................... 25 3 11 (19) 20
Interest expense .................................... (90) (49) (102) 19 (222)
Net gains on property transactions .................. (1) -- 2 -- 1
Equity in earnings (losses) of affiliates ........... (60) (7) -- 71 4
--------- ------------ ------------ ------------ ------------
(Loss) income before income taxes ................... (131) (54) (7) 303 111
(Provision for) benefit from income taxes ........... (6) -- (9) -- (15)
--------- ------------ ------------ ------------ -------------
(Loss) income from continuing operations ............ (137) (54) (16) 303 96
Discontinued Operations
Loss from operations ............................. -- -- (1) -- (1)
--------- ------------ ------------ ------------ ------------
NET INCOME (LOSS) ................................... $ (137) $ (54) $ (17) $ 303 $ 95
========= ============ ============ ============ ============
-14-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Supplemental Condensed Combined Statements of Cash Flows
(in millions)
Twenty-four Weeks Ended June 14, 2002
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Consolidated
OPERATING ACTIVITIES
Cash from operations ........................................ $ (3) $ 45 $ 134 $ 176
------------- ------------ ------------ -------------
INVESTING ACTIVITIES
Acquisitions ................................................ -- -- (117) (117)
Capital expenditures and other investments .................. (18) (27) (51) (96)
------------ ------------ ------------ -------------
Cash used in investing activities ........................... (18) (27) (168) (213)
------------ ------------ ------------ --------------
FINANCING ACTIVITIES
Issuances of debt, net of financing costs ................... (7) -- -- (7)
Repayment of debt ........................................... (14) (2) (20) (36)
Issuances of common units ................................... 1 -- -- 1
Distributions ............................................... (18) -- -- (18)
Other ....................................................... (12) -- -- (12)
Transfers to/from Parent .................................... (72) (16) 88 --
------------ ------------ ------------ --------------
Cash (used in) provided by financing activities ............. (122) (18) 68 (72)
------------ ------------ ------------ --------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS .............................................. $ (143) $ -- $ 34 $ (109)
============ =========== ============ ==============
Twenty-four Weeks Ended June 15, 2001
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Consolidated
OPERATING ACTIVITIES
Cash from operations ........................................ $ (179) $ 87 $ 171 $ 79
------------ ------------ ------------ -------------
INVESTING ACTIVITIES
Acquisitions ................................................ (2) -- -- (2)
Capital expenditures and other investments .................. (28) (56) (60) (144)
Other ....................................................... 10 -- -- 10
------------ ------------ ------------ -------------
Cash used in investing activities ........................... (20) (56) (60) (136)
------------ ------------ ------------ -------------
FINANCING ACTIVITIES
Issuances of debt, net of financing costs ................... 115 -- 6 121
Repayment of debt ........................................... (116) (6) (17) (139)
Issuances of common units ................................... 2 -- -- 2
Distributions ............................................... (159) -- -- (159)
Issuances of cumulative redeemable preferred units, net ..... 144 -- -- 144
Other ....................................................... (9) 1 -- (8)
Transfers to/from Parent .................................... 84 (27) (57) --
------------ ------------ ------------ -------------
Cash (used in) provided by financing activities ............. 61 (32) (68) (39)
------------ ------------ ------------ -------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS .............................................. $ (138) $ (1) $ 43 $ (96)
============ ============ ============ =============
-15-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Subsequent Events
On July 25, 2002, we completed our negotiations with Marriott International
of changes to the management and other agreements for substantially all of
our Marriott- and Ritz-Carlton-managed hotels. We believe that these
changes, which are effective as of December 29, 2001, will provide
meaningful benefits to us. We estimate that the cash flow benefit from
these modifications will be approximately $8 million in 2002 and increase
to approximately $25 million by 2006, of which approximately two-thirds is
related to cost reductions and other benefits and one-third is related to
reduction in incentive management fees. The management contract changes
include the following:
. Providing additional approval rights over hotel operating budgets,
capital budgets, shared service programs, and changes to certain
system wide programs;
. Reducing the amount of working capital requirements and expanding an
existing agreement that allows us to fund FF&E expenditures as
incurred from a consolidated account rather than escrowing funds at
the hotel level, which collectively increases cash available to us for
general corporate purposes by approximately $125 million.
. Reducing incentive management fees payable on Marriott-managed hotels;
. Reducing the amount we pay related to frequent guest programs;
. Gradually reducing the amounts payable with respect to various
centrally administered programs; and,
. Providing additional territorial restrictions for certain hotels in 10
markets.
In addition to these modifications, we have expanded the pool of hotels
subject to an existing agreement that allows us to sell assets unencumbered
by a Marriott management agreement without the payment of termination fees.
The revised pool will include forty-six assets, 75% (measured by EBITDA) of
which may be sold over approximately a ten year or greater period. This
flexibility will enhance the value of these assets and our ability to
recycle capital.
We have also agreed to terminate Marriott International's right to purchase
up to 20% of each class of our outstanding voting shares upon certain
changes of control and to clarify existing provisions in the management
agreements that limit our ability to sell a hotel or our company to a
competitor of Marriott International.
-16-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Forward-looking Statements
Certain statements contained in this report constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. We have based these forward-looking statements on our current expectations
and projections about future events. We identify forward-looking statements in
this Report by using words or phrases such as "believe," "expect," "may be,"
"intend," "predict," "project," "plan," "objective," "will be," "should,"
"estimate," or "anticipate," or the negative thereof or other variations thereof
or comparable terminology. All forward-looking statements are not guarantees of
future performance and involve known and unknown risks, uncertainties and other
factors which may cause our actual transactions, results, performance or
achievements to be materially different from any future transactions, results,
performance or achievements expressed or implied by such forward-looking
statements. These risks and uncertainties include the risks discussed elsewhere
in this Report. Although we believe the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, we can give no
assurance that we will attain these expectations or that any deviations will not
be material. Except as otherwise required by the federal securities laws, we
disclaim any obligations or undertaking to publicly release any updates or
revisions to any forward-looking statement contained in this Report 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.
Recent Events
Credit Facility and Senior Notes. On June 6, 2002, we entered into a new credit
facility that provides an aggregate revolving loan commitment amount of up to
$400 million ($300 million of which is available initially, with up to an
additional $100 million becoming available to the extent that our leverage ratio
falls below certain specified levels). The new credit facility also includes
subcommitments for the issuance of letters of credit and loans to certain of our
Canadian subsidiaries in Canadian Dollars, in each case in an amount of up to
$100 million. The new credit facility replaces the prior credit facility. The
new credit facility has an initial scheduled maturity in June 2005. We have an
option to extend the maturity for an additional year if certain conditions are
met at the time of the initial scheduled maturity.
As with the prior facility, the debt under the new credit facility is guaranteed
by certain of our existing subsidiaries and is currently secured by pledges of
equity interests in many of our subsidiaries. Unlike the prior facility, all or
a portion of the pledges can be released in the event that our pro forma
leverage ratio, as defined in the credit facility, falls below a certain level
for two consecutive fiscal quarters. The spread we pay over LIBOR on borrowings
under the new credit facility will adjust based on our leverage ratio. We also
will pay a quarterly commitment fee of .55% on the unused portion of the
available loan commitment. Currently, we have no amounts outstanding under the
credit facility.
The new credit facility establishes financial covenants for leverage, interest
coverage, fixed charge coverage and unsecured interest coverage levels that are
generally less stringent than those that would have been applicable under the
prior facility. The new credit facility also imposes other customary covenants
and restrictions. In many cases, the covenants have been modified to be
comparable with the requirements under our senior note indenture.
In the event we do not satisfy a minimum interest coverage ratio and certain
other conditions, both the new credit facility and our senior note indenture
restrict our ability to incur debt, except debt incurred under our credit
facility or in connection with a refinancing of existing debt. In addition,
failure to satisfy this ratio will restrict Host REIT's ability to declare and
pay dividends, except dividends
-17-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
necessary to maintain their status as a REIT. As a result of the effect on our
business of the September 11 terrorist attacks and the 2001 recession we did not
meet our specified minimum interest coverage ratio beginning in the third
quarter. Accordingly, we are subject to the restrictions discussed above,
although we may take certain actions to achieve compliance on a pro forma basis.
These actions include, among others, retiring existing debt, swapping certain of
our fixed interest rate debt for lower floating interest rate debt or the
acquisition of less leveraged properties. While we believe that we have the
ability to complete these actions, there can be no assurance that these options
will be available to us later in the year, or if available, that these options
would be at a price that would be acceptable.
We have $3.2 billion of senior notes outstanding as of June 14, 2002. On June
25, 2002, the $450 million of outstanding 91/2% Series H notes were exchanged
for 91/2% Series I notes. The terms of the Series I notes are substantially
identical to the terms of the Series H notes except that the Series I notes are
registered under the Securities Act of 1933 and are, therefore, freely
transferable.
Hotel Acquisition. Effective June 14, 2002 we completed the acquisition of the
1,139-room Boston Marriott Copley Place for $214 million consisting of a $117
million cash payment and the assumption of $97 million in mortgage debt. The
property is located in downtown Boston, Massachusetts and is part of a 3.7
million square foot high-end mixed use development, which includes 200 upscale
retail shops and restaurants and is adjacent to the Hynes Convention Center. The
acquisition is consistent with our strategy of buying upper upscale properties
in hard to duplicate urban, convention and resort locations. We believe that the
Boston market has been particularly hard hit by the slowdown in the economy in
recent years and that, as a result, should benefit from an eventual improvement
in business in this market.
Insurance Coverage. The insurance markets nationwide were significantly impacted
by the terrorist attacks on September 11, 2001 and as a result it has become
more difficult and more expensive to obtain adequate insurance coverage. We
recently obtained new comprehensive insurance policies including general
liability, property, business interruption and other risks with respect to all
of our properties. We believe our insurance coverage is appropriate to protect
our properties. However, the terrorism coverage we have obtained excludes
various risks such as nuclear or biological acts, and is subject to annual
aggregate. For our Marriott operated properties, these aggregate limits are
shared among various properties, including other properties managed by Marriott
International that are not owned by us. The insurance on our non-Marriott
branded properties has been renewed under similar terms, except that this
coverage is not shared among other owners. Additionally, our new policies have
significantly higher premiums although these costs should remain at less than
0.1% of our annual revenues. We estimate that insurance costs for these
hotel-related property and terrorism insurance policies will increase
approximately $13 million to $25 million in 2002.
In addition, our debt agreements, typically require us to maintain a minimum
rating of our insurance carrier from Standard & Poors, A.M Best or other rating
agencies. Currently, we do not satisfy the requirement for a minimum Standard &
Poors rating of AA for seven of our properties subject to approximately $739
million of indebtedness. We have notified our lenders regarding this situation,
and we have obtained, for certain of our Marriott-managed properties that have
mortgage debt, insurance coverage provided by a carrier with a rating from
Standard & Poors of AA- and a rating from A.M. Best of A+XV. However, we cannot
assure you that each of our lenders will be satisfied with the AA- rating level
of our current carrier. If the lenders are unwilling or unable to amend or waive
these covenants, or if we are unable to obtain insurance coverage that complies
with the covenants in these loan agreements the lenders may determine that we
are out of compliance with the terms of the relevant debt agreement in which
case to the extent the lenders chose to pursue their remedies and we were unable
to prevent this course of action we may be required to refinance the debt with
debt carrying different insurance requirements. There can be no assurances that
we will be able to complete such a refinancing on terms acceptable to us or at
-18-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
all. We describe changes to our insurance coverage and the risks related thereto
in Part II, Item 5 of this Report.
Management and Other Agreements. On July 25, 2002, we completed our
negotiations with Marriott International of changes to the management and
other agreements for substantially all of our Marriott- and
Ritz-Carlton-managed hotels. We believe that these changes, which are
effective as of December 29, 2001, will provide meaningful benefits to us.
We estimate that the cash flow benefit from these modifications will be
approximately $8 million in 2002 and increase to approximately $25 million
by 2006, of which approximately two-thirds is related to cost reductions
and other benefits and one-third is related to reduction in incentive
management fees. The management contract changes include the following:
. Providing additional approval rights over hotel operating budgets,
capital budgets, shared service programs, and changes to certain
system wide programs;
. Reducing the amount of working capital requirements and expanding an
existing agreement that allows us to fund FF&E expenditures as
incurred from a consolidated account rather than escrowing funds at
the hotel level, which collectively increases cash available to us for
general corporate purposes by approximately $125 million.
. Reducing incentive management fees payable on Marriott-managed hotels;
. Reducing the amount we pay related to frequent guest programs;
. Gradually reducing the amounts payable with respect to various
centrally administered programs; and,
. Providing additional territorial restrictions for certain hotels in 10
markets.
In addition to these modifications, we have expanded the pool of hotels
subject to an existing agreement that allows us to sell assets unencumbered
by a Marriott management agreement without the payment of termination fees.
The revised pool will include forty-six assets, 75% (measured by EBITDA) of
which may be sold over approximately a ten year or greater period. This
flexibility will enhance the value of these assets and our ability to
recycle capital.
We have also agreed to terminate Marriott International's right to purchase
up to 20% of each class of our outstanding voting shares upon certain
changes of control and to clarify existing provisions in the management
agreements that limit our ability to sell a hotel or our company to a
competitor of Marriott International.
-19-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
exchange their hotel partnership interests for OP Units. In April 2002, the
investors elected to exchange 6,875,844 partnership units for OP Units, which
increased our ownership in the partnership that owns the hotel from a 51%
interest to a 90% interest. The minority partner continues to receive fees for
marketing and other services which totaled $1.7 million and $2.0 million for the
twenty-four weeks ended June 14, 2002 and June 15, 2001, respectively. Host REIT
has agreed to promptly register the equivalent shares of common stock with the
SEC for resale by such investors upon conversion of their OP Units. We would
receive no proceeds from the sale of these shares.
Lodging Performance
For the second quarter of 2002, RevPAR for comparable hotels decreased
approximately 9.8% when compared to the same period in 2001. The decline is the
result of a decrease in average occupancy of 1.6 percentage points and the
decline of average room rates of 7.9%. Also, year-to-date RevPAR decreased
11.0%, as occupancy decreased 1.9 percentage points and room rates declined by
8.6%. A significant portion of the decline in room rate is a result of the
change in the mix of business to lower rated group and transient segments rather
than simply a reduction in room rate. If the rate of economic growth continues
to improve and airline travel increases, we expect it to create a rising demand
for our properties, particularly amongst individual business travelers, a
segment which typically pays a higher rate.
The changes in our RevPAR reflect a decline in operations in every region for
the quarter and year-to-date; however, the decreases in RevPAR varied across the
country. For example, our hotels in the Pacific region had a significant decline
as a result of a weakened technology industry, declining attendance at citywide
events and significant reductions in airline travel to the San Francisco
Airport. RevPAR for the twenty-four weeks ended June 14, 2002 at our hotels in
San Francisco and Los Angeles declined 27.3% and 19.3%, respectively, when
compared to the same period in 2001. However, our performance in other cities
was much better. For example, our three hotels in Philadelphia and three hotels
in San Antonio had RevPAR improvements of 4.0% and 7.1%, respectively, for the
twenty-four week period ended June 14, 2002. These cities were able to take
advantage of strong convention sales to generate an increase in RevPAR.
-20-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The charts below set forth performance information for our comparable properties
as of June 14, 2002:
Comparable by Region
Twenty-four Weeks Ended
As of June 14, 2002 June 14, 2002 June 15, 2001
----------------------- -------------------------------- -------------------------------
Average Average Percent
No. of No. of Average Occupancy Average Occupancy Change in
Properties/(1)/ Rooms Daily Rate Percentages RevPAR Daily Rate Percentages RevPAR RevPAR
--------------- ----- -------------------------------- ------------------------------- --------
Atlanta ........... 15 6,563 $ 147.85 69.0% $ 101.99 $ 159.06 70.5% $ 112.08 (9.0)%
DC Metro .......... 13 4,998 144.63 76.9 111.17 160.41 75.0 120.26 (7.6)
Florida ........... 13 7,581 163.43 73.4 119.95 173.42 74.4 129.00 (7.0)
International ..... 4 1,641 97.90 72.9 71.37 105.21 77.1 81.11 (12.0)
Mid-Atlantic ...... 9 6,222 191.15 79.0 150.93 200.35 81.4 163.18 (7.5)
Mountain .......... 8 3,313 107.90 69.3 74.79 116.10 70.6 81.91 (8.7)
New England ....... 6 2,277 134.37 69.1 92.91 158.15 71.7 113.38 (18.1)
North Central ..... 15 5,395 122.52 69.3 84.87 138.57 70.9 98.31 (13.7)
Pacific ........... 23 11,817 155.81 70.2 109.33 173.57 74.5 129.43 (15.5)
South Central ..... 12 6,515 134.14 81.0 108.66 140.18 79.1 110.86 (2.0)
------- ------
All Regions .. 118 56,322 148.17 73.2 108.42 160.94 74.8 120.26 (9.8)
======= ======
Comparable by Region
Twenty-four Weeks Ended
As of June 14, 2002 June 14, 2002 June 15, 2001
----------------------- -------------------------------- -------------------------------
Average Average Percent
No. of No. of Average Occupancy Average Occupancy Change in
Properties/(1)/ Rooms Daily Rate Percentages RevPAR Daily Rate Percentages RevPAR RevPAR
--------------- ----- -------------------------------- ------------------------------- --------
Atlanta ........... 15 6,563 $ 145.52 69.1% $ 100.50 $ 158.25 71.6% $ 113.25 (11.3)%
DC Metro .......... 13 4,998 140.51 70.2 98.66 159.82 70.3 112.35 (12.2)
Florida ........... 13 7,581 168.41 76.4 128.65 182.96 77.4 141.60 (9.1)
International ..... 4 1,641 96.26 68.7 66.09 103.36 73.3 75.73 (12.7)
Mid-Atlantic ...... 9 6,222 184.29 77.6 143.03 195.91 78.6 153.94 (7.1)
Mountain .......... 8 3,313 117.82 68.9 81.21 120.16 71.9 86.43 (6.0)
New England ....... 6 2,277 127.21 64.0 81.46 148.00 66.8 98.83 (17.6)
North Central ..... 15 5,395 117.92 65.7 77.52 133.45 67.8 90.41 (14.3)
Pacific ........... 23 11,817 156.51 70.3 110.08 177.35 74.5 132.14 (16.7)
South Central ..... 12 6,515 137.17 79.9 109.57 143.53 79.2 113.68 (3.6)
------- ------
All Regions .. 118 56,322 148.15 72.1 106.81 162.15 74.0 120.06 (11.0)
======= ======
_______________
/(1)/ Consists of 118 properties owned, directly or indirectly, by us for the
first and second quarters of 2002 and 2001, respectively, excluding
properties with non-comparable operating environments as a result of
acquisitions, dispositions, property damage and expansions and development
projects during the periods being compared.
-21-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The charts below set forth performance information for our entire portfolio as
of June 14, 2002:
All Properties by Region
Twelve Weeks Ended
As of June 14, 2002 June 14, 2002 June 15, 2001
--------------------------- --------------------------------- ----------------------------------
Average Average Percent
No. of No. of Average Occupancy Average Occupancy Change in
Properties/(1)/ Rooms/(1)/ Daily Rate Percentages RevPAR Daily Rate Percentages RevPAR RevPAR
--------------- ---------- --------------------------------- ---------------------------------- ------
Atlanta ........... 15 6,563 $ 147.85 69.0% $ 101.99 $ 159.06 70.5% $ 112.08 (9.0)%
DC Metro .......... 13 4,998 144.63 76.9 111.17 160.41 75.0 120.26 (7.6)
Florida ........... 14 7,876 167.10 72.9 121.78 173.42 74.4 129.00 (5.6)
International ..... 6 2,553 109.88 72.2 79.38 119.09 75.0 89.27 (11.1)
Mid-Atlantic ...... 10 6,726 190.62 78.8 150.14 200.33 81.5 163.35 (8.1)
Mountain .......... 8 3,313 107.87 69.3 74.77 116.60 69.1 80.56 (7.2)
New England ....... 7 3,416 134.85 69.2 93.33 158.15 71.7 113.38 (17.7)
North Central ..... 15 5,395 122.52 69.3 84.87 138.57 70.9 98.31 (13.7)
Pacific ........... 23 11,817 155.81 70.2 109.33 173.75 74.5 129.43 (15.5)
South Central ..... 12 6,515 134.14 81.0 108.66 137.76 78.6 108.34 0.3
---------- -------
All Regions .. 123 59,172 148.78 73.1 108.75 161.31 74.8 120.62 (9.8)
========== =======
All Properties by Region
Twenty-four Weeks Ended
As of June 14, 2002 June 14, 2002 June 15, 2001
--------------------------- --------------------------------- ----------------------------------
Average Average Percent
No. of No. of Average Occupancy Average Occupancy Change in
Properties/(1)/ Rooms/(1)/ Daily Rate Percentages RevPAR Daily Rate Percentages RevPAR RevPAR
--------------- ---------- --------------------------------- ---------------------------------- ------
Atlanta ........... 15 6,563 $ 145.52 69.1% $ 100.50 $ 158.25 71.6% S 113.25 (11.3)%
DC Metro .......... 13 4,998 140.51 70.2 98.66 159.82 70.3 112.35 (12.2)
Florida ........... 14 7,876 171.79 75.9 130.39 182.96 77.4 141.60 (7.9)
International ..... 6 2,553 109.61 69.2 75.83 112.88 72.8 82.20 (7.8)
Mid-Atlantic ...... 10 6,726 183.48 77.1 141.50 198.51 78.5 155.82 (9.2)
Mountain .......... 8 3,313 117.77 68.9 81.18 125.34 71.4 89.55 (9.4)
New England ....... 7 3,416 127.52 64.1 81.72 148.00 66.8 98.83 (17.3)
North Central ..... 15 5,395 117.92 65.7 77.52 133.45 67.8 90.41 (14.3)
Pacific ........... 23 11,817 156.51 70.3 110.08 177.35 74.5 132.14 (16.7)
South Central ..... 12 6,515 136.78 79.2 108.36 142.10 79.0 112.20 (3.4)
---------- -------
All Regions .. 123 59,172 148.67 72.0 106.97 163.28 74.1 121.00 (11.6)
========== =======
__________
/(1)/ For 2001, the results of operations represent 125 hotels with 60,080
rooms.
During the second quarter of 2001, we began to work with our managers
to control operating costs at our hotels through eliminating
management positions, closing unprofitable operations and other cost
control measures. We continued these measures during the first two
quarters of 2002, which resulted in a decrease in labor costs at the
hotels, productivity improvements and lower utility costs.
Additionally, decreases in our hotel margins were partially offset by
reduced incentive management fees and relatively stronger food and
beverage results. However, our ability to achieve significant
additional reductions in variable costs is limited. We believe that we
will see less of a year-over-year decline in margins in the third
quarter of 2002 than we saw in the second quarter of 2002.
Furthermore, during the fourth quarter we expect margins to improve
when compared to the fourth quarter of 2001 as we experience
significant increases in RevPAR over the exceptionally depressed
levels in 2001. For the full year of 2002, we expect an overall
decline in comparable property-level operating margins of 75 to 150
basis points when compared to 2001.
-22-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
We continue to work with the Port Authority of New York and New Jersey and the
Lower Manhattan Development Corporation to determine how the World Trade Center
site in New York will be redeveloped. We anticipate that it will be several
years before these issues are resolved. We are also working closely with our
insurance companies to resolve our claims related to the destruction of the
Marriott World Trade Center and the damage to the New York Marriott Financial
Center, including negotiating insurance payments for property damage as well as
business interruption. We reopened the New York Marriott Financial Center on
January 7, 2002. We have received no insurance proceeds for property damage at
the World Trade Center. To the extent that we do, it will be held in escrow by a
trustee until a final resolution on the site is determined.
During 2002, we expect to receive additional business interruption proceeds for
what we believe our operating results would have been absent the terrorist
attacks, although the actual receipt of some of these proceeds may not happen
before December 31, 2002. In addition, special restrictive accounting rules
developed for the events of September 11, 2001 may delay our ability to
recognize a portion of the business interruption advances as income until we
resolve certain contingencies with our insurance providers. Since September 11,
2001, the Company has received $40 million in insurance proceeds with respect to
the two hotels, $10 million of which was received subsequent to June 14, 2002.
Of the $40 million received, we have offset $13 million of operating expenses at
the properties and spent an additional $5 million in building repairs.
Results of Operations
2002 Compared to 2001
Revenues. Hotel sales decreased $62 million, or 6.5%, to $896 million for the
twelve weeks ended June 14, 2002 and decreased $137 million, or 7.6%, to $1,660
million for the twenty-four weeks ended June 14, 2002. This decline reflects the
continued weakness in the lodging industry, primarily as a result of reduced
business travel. We have adjusted our rooms sales mix to reflect this trend and,
as a result, have increased the amount of group business at our properties.
Although group business typically has a lower rate as compared to individual
business travelers, the difference has been mitigated by greater occupancy
levels and additional food and beverage revenues.
Rental income decreased $12 million, or 33.3%, to $24 million for the second
quarter of 2002 compared to the second quarter of 2001 and decreased $20
million, or 28.6% to $50 million for the twenty-four weeks ended June 14, 2002,
when compared to the same period in 2001. Rental income for the twenty-four
weeks ended June 14, 2002 and June 15, 2001 includes: 1) lease income from our
limited service hotel leases of $31 million for both periods, 2) lease income
from full-service hotel leases of $17 million and $37 million, respectively, and
3) office space rental income of $2 million for both periods. We repurchased the
lessee entities with respect to four of the five full-service hotels leased to
third parties effective June 16, 2001, terminating those leases for financial
reporting purposes. As a result, we currently record rental income with respect
to only one full-service hotel.
Operating Costs and Expenses. Operating costs and expenses decreased $52
million, or 6.4%, to $771 million for the second quarter of 2002 compared to the
second quarter of 2001. For the twenty-four weeks ended June 14, 2002, operating
costs and expenses decreased $95 million, or 6.2%, to $1.45 billion from the
same period in 2001. This decline is the result of our efforts to control
operating costs at the hotels and the overall decline in demand. Rental and
other expense for the twenty-four weeks ended June 14, 2002 and June 15, 2001,
includes expense for our limited service hotel leases of $32 million and $33
million, respectively, and office building expenses of $1 million for both
periods. These expenses
-23-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
are included in taxes, insurance and other property-level expenses on the
consolidated statements of operations.
Depreciation and Amortization. Depreciation and amortization expense decreased
$16 million or 16.0% for the second quarter of 2002 versus the second quarter of
2001, and decreased $9 million or 5.1% year-to-date. The decline in depreciation
expense reflects a $13 million impairment charge due to the reclassification of
certain hotels from held-for-use to held-for-sale recorded during the second
quarter of 2001, the sale of three hotels during the second half of 2001, and
the loss of the Marriott World Trade Center as a result of the September 11th
terrorist attacks. These declines were partially offset by the increased
depreciation related to the opening of the Ritz-Carlton, Naples Golf Resort in
January, 2002 and the consolidation of three hotels and other equipment as a
result of the acquisition of the voting interests in Rockledge Hotel Properties,
Inc. during April 2001.
Corporate Expenses. For the twenty-four weeks ended June 14, 2002, corporate
expenses increased $3 million, primarily as a result of an increase in
stock-based compensation expense related to the increase in the Company's stock
price since year-end.
Equity in Earnings (Losses) of Affiliates. For the twenty-four weeks ended June
14, 2002, equity in losses of affiliates was $3 million compared to equity in
earnings of affiliates of $4 million during the twenty-four weeks ended June 15,
2001. The decrease primarily reflects our equity share in operating losses on
investments in CBM Joint Venture LLC and JWDC Limited Partnership.
Discontinued Operations. During January of 2002, we transferred the St. Louis
Marriott Pavilion to the mortgage lender in a non-cash transaction. In
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," which we adopted January 1, 2002, the hotel's income from
operations, net of tax, of $7 million was recorded as discontinued operations.
Additionally, the standard requires the reclassification of the previously
reported earnings of the discontinued hotel to discontinued operations. As a
result, for the first two quarters of 2001, we recorded a loss from discontinued
operations of $1 million, net of taxes, for the operations of the St. Louis
Marriott Pavilion.
Extraordinary Gain. During the twenty-four weeks ended June 14, 2002, we
recorded an extraordinary gain, net of tax, of $6 million representing the
extinguishment of debt on the St. Louis Marriott Pavilion, which we transferred
to the lender.
Net Income Available to Common Unitholders. The decrease reflects the previously
discussed changes in operation as well as the increase in distributions on
preferred limited partner units due to the issuance of $143 million Class C
preferred stock during the second quarter of 2001.
Liquidity and Capital Resources
Our principal sources of cash are cash from operations, borrowings under our
revolving credit facility and our ability to obtain additional financing through
various financial markets. In addition, as a result of the recently completed
agreement with Marriott International, we will be receiving approximately $125
million in cash which will be available for general corporate purposes. Our
principal uses of cash are capital expenditures at our properties, payments on
debt and distributions to our equityholders and minority owners of the operating
partnership. We believe our sources of cash will be sufficient to meet our
liquidity needs.
-24-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
During the twenty-four weeks ended June 14, 2002, we reported a decrease in cash
and cash equivalents of $109 million, primarily a result of $117 million of cash
used for the purchase of the Boston Marriott Copley Place. At June 14, 2002, we
maintained $243 million of cash on hand, no outstanding debt on our credit
facility and no significant debt maturities until 2005. Our new long-term credit
facility, which we negotiated during the second quarter, is smaller but contains
less restrictive covenants than our previous facility. We do not believe we will
need to access the credit facility during 2002.
In addition to the recent acquisition of the Boston Marriott Copley, we remain
interested in both single asset and portfolio transactions and expect that over
the next couple of years there will be more opportunities to acquire assets that
are consistent with our target profile. On the disposition front, we are
continuing our efforts to sell non-core assets in slower growth markets that are
not consistent with our preferred portfolio. We are currently forecasting
dispositions of $75 to $100 million this year.
Cash from Operations. During 2002, our cash provided by operations increased by
$97 when compared to the same period in 2001. The increase over prior year is
primarily due to $204 million of operating cash used in the first half of 2001
for the purchase of the Crestline lessee entities, which was offset by the
decline in net income at the hotels.
Cash from/(used in) Investing Activities. Based on our assessment of the current
operating environment and to conserve capital, we have continued our disciplined
approach to capital expenditures during 2002. As a result, capital expenditures
at our properties have decreased by $48 million, or 33.3%, when compared to the
same period in 2001. We have achieved these decreases while focusing on property
maintenance and selected improvements to maintain high quality standards. We
anticipate spending approximately $185 million on capital expenditures in 2002.
As a result of the changes in the management agreements with Marriott
International discussed above, approximately $75 million of funds previously
held in escrow accounts for capital expenditures at certain properties will be
returned to us. While we continue to be obligated to fund capital expenditures
at these properties as such expenditures are approved by us, this modification
will enable us to use the available funds for general corporate purposes on an
ongoing basis. Other investing activity included the purchase of the Boston
Marriott Copley Place for $117 million of cash. The acquisition is consistent
with our strategy of buying upper-upscale properties in hard to duplicate urban,
convention and resort locations.
Cash from/(used in) Financing Activities. During 2002, the cash used in
financing activities primarily consisted of principal repayments on debt of $36
million and preferred Limited Partner Unit distributions of $18 million. On June
17, 2002, the Company announced that the Board of Directors had declared a
distribution of $0.625 per Preferred Limited Partner Unit, which was paid on
July 15, 2002 to unitholders of record on June 28, 2002. We have not declared a
distribution on our common limited partner units during 2002. Our policy on
paying distributions has been to distribute the minimum amount necessary for
Host REIT to maintain REIT status, which is generally an amount nearly equal to
its taxable income. We expect to be able to reinstate a minimal distribution on
our limited partner units during the fourth quarter of 2002 if we continue to
see improvement in our operations. It is our intention to continue to pay
distributions on our preferred units.
Aggregate Debt Maturities and Minimum Annual Rental Commitments on
Non-Cancelable Leases. The table below summarizes our obligations for principal
payments on our debt and the minimum lease payments due on our operating leases
(in millions).
-25-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Operating
Senior Notes Mortgage Debt Other Leases/(2)/
----------------- ----------------- ----------------- -----------------
2002/(1)/ ................ -- 26 -- 58
2003 ..................... -- 136 -- 104
2004 ..................... -- 83 -- 101
2005 ..................... 513 57 3 97
2006 ..................... 300 441 -- 95
Thereafter ............... 2,419 1,570 102 1,164
----------------- ----------------- ----------------- -----------------
Total ................ 3,232 2,313 105 1,619
================= ================= ================= =================
______________
/(1)/ Amounts shown for principal payments and minimum lease payments due on
our operating leases for 2002 are for the third and fourth quarters of
2002 only.
/(2)/ $839 million of the total operating lease expenditures is for ground
leases on our properties. $693 million of the total operating lease
expenditures above relate to our sale-leaseback relationships with
Hospitality Properties Trust (HPT) with regards to 53 Courtyard
properties and 18 Residence Inn properties. In connection with the REIT
conversion, we sublet the hotels to subsidiaries of Crestline Capital
Corporation (Crestline), now a subsidiary of Barcelo Hotels and
Resorts. Rent due to us under the non-cancelable sublease is equal to
the minimum rent payable by us under the lease with HPT and includes an
additional percentage rent payable to us. The percentage rent payable
under the subleases is sufficient to cover any additional rent due
under the non-recourse HPT lease, which is calculated based on the
hotel sales, and is guaranteed by Crestline, up to a maximum amount of
$30 million. Additionally, $41 million is due under the subleases with
regard to our former restaurant business. None of the $734 million of
rent due us under the subleases is included in the table above.
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 unitholders 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 other items have been, and will be incurred which are not reflected in
the EBITDA and Comparative FFO presentations.
-26-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Twelve Weeks Ended Twenty-Four Weeks Ended
------------------------ ------------------------
June 14, June 15, June 14, June 15,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Income from continuing operations ......................... $ 26 $ 56 $ 14 $ 96
Effect on revenue of SAB 101 ............................ 1 8 2 15
Interest expense ........................................ 114 112 226 222
Depreciation and amortization ........................... 84 100 168 177
Minority interest expense ............................... 4 5 9 12
Income taxes ............................................ 11 12 15 15
Equity in (earnings) losses of affiliates ............... (1) (2) 3 (4)
Lease repurchase expense ................................ -- 5 -- 5
Other non-cash changes, net ............................. (1) 8 6 4
---------- ---------- ---------- ----------
EBITDA of Host LP ......................................... $ 238 $ 304 $ 443 $ 542
========== ========== ========== ==========
Interest expense ........................................ (114) (112) (226) (222)
Dividends on preferred limited partner units ............ (9) (9) (18) (14)
Income tax expense ...................................... (11) (12) (15) (15)
Effective impact of lease repurchase .................... 3 3 6 3
Partnership adjustments and other ....................... 3 (6) (8) --
---------- ---------- ---------- ----------
Comparative Funds From Operations of Host LP
available to common unitholders ......................... $ 110 $ 168 $ 182 $ 294
========== ========== ========== ==========
Our interest coverage ratio, defined as EBITDA divided by cash interest expense,
was 2.2 times and 2.7 times for the 2002 and 2001 twenty-four week periods,
respectively, and 2.1 times for full year 2001. The ratio of earnings to fixed
charges and preferred dividends was 1.2 to 1.0 in the second quarter of 2002
versus 1.5 to 1.0 in the second quarter of 2001. We reported a ratio of earnings
to fixed charges of 1.2 to 1.0 for the full year 2001.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
Historically, our debt has primarily been fixed rate, including all of our
outstanding senior notes. However, certain of our financial instruments are
sensitive to changes in interest rates, including our credit facility and the
mortgage debt on our Canadian properties. There were no amounts outstanding on
the credit facility during the second quarter and as of June 14, 2002. The
spread we pay over LIBOR on the credit facility will adjust based on our
leverage ratio. The Canadian mortgage debt, which is denominated in US dollars
and had a balance of $96.6 million at June 14, 2002, has an interest rate based
on LIBOR plus 275 basis points. The weighted average interest rate for this
mortgage debt was 4.7% for the twenty-four weeks ended June 14, 2002 and 5.5%
for the year ended December 31, 2001.
Subsequent to the Series H senior note offering in December 2001, we entered
into an interest rate swap agreement that effectively converts our obligation
under the $450 million notional amount of indebtedness from a fixed rate to a
floating rate based on 30 day LIBOR plus 450 basis points. The swap became
effective on January 15, 2002 and matures in January 2007. A change in the LIBOR
rate of 100 basis points will result in $4.5 million increase or decrease in
interest expense. The swap has been designated as a fair value 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 on the balance sheet as offsetting changes and have no
income statement effect.
-27-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
During January of 2002, we purchased, for $3.5 million, a 5-year interest rate
cap with a notional amount of $450 million. The interest rate cap limits our
exposure under the Series H interest rate swap to the extent that the floating
rate we are required to pay under that agreement exceeds 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. The fair value of this cap has decreased during
2002 and we have recorded expenses of $2.2 million and $1.1 million for the
twenty-four weeks and twelve weeks ended June 14, 2002, respectively.
Exchange Rate Sensitivity
In connection with the mortgage debt discussed above, our Canadian 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 on the mortgage debt. 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 was $(55)
thousand at June 14, 2002 and $1.5 million at December 31, 2001.
In addition, our hotels in Mexico have earnings that are denominated in pesos
while the debt obligations on these properties are denominated in dollars. We
have not hedged our currency risk in Mexico, however the peso has appreciated
significantly since our original investment in these hotels. To the extent that
the peso declines in value versus the dollar, some or all of the benefit due to
the appreciation of the peso may be offset. We are exploring refinancing the
debt on our hotels in Mexico, with the intent of replacing the current debt with
peso denominated debt. However, there can be no assurance that we will be
successful in completing such a refinancing.
-28-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We believe all of the lawsuits in which we are a defendant 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. We do not
believe the outcome of any of the current lawsuits will materially effect our
financial statements.
Item 5. Other Items
RISK FACTORS
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 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
-29-
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 lease $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, which did occur beginning in the third quarter, 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.
Risks of Ownership of Host REIT Common Stock
There are limitations on the ability of investors to acquire Host REIT common
stock and to effect a change in control. The charter and bylaws of Host REIT,
our partnership agreement, 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 Host REIT Common Stock--There are
possible adverse consequences of limits on ownership of Host REIT
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 interests of
Host REIT's shareholders, and even if the change in control would not
reasonably jeopardize Host REIT's REIT status.
-30-
.. Staggered board. Host REIT's Board of Directors consists of seven director
positions, one of which is currently vacant, 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 set forth 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's shareholders' ability to effect a change in control of Host REIT,
even if a change in control would be in the interests 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 common stock, directors may be
removed only for cause and only by the affirmative vote of 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 the 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 July
15, 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
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's
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.
.. 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
-31-
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 the
outstanding voting shares, and by two-thirds of the 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 Host REIT Common Stock--There are
limitations on the ability of investors to acquire Host REIT common stock
and to effect a change 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 its 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 its 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 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 Host REIT's bylaws. Amendments of this provision
of Host
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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.
.. 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 Host REIT's
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
persons 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 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 Host REIT common stock, subject to an
exception for shares of Host REIT common stock held prior to our 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 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 common stock in excess of the ownership limit. The ownership limit
may have the effect of delaying, deferring or preventing a change in control
and, therefore, could adversely affect the shareholders' ability to realize a
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premium over the then-prevailing market price for Host REIT common stock in
connection with such transaction.
We depend on external sources of capital for future growth and we may be unable
to access capital when necessary. As with REITs, but unlike corporations
generally, our ability to reduce our debt and finance our growth largely must be
funded by external sources of capital because Host REIT generally is required to
distribute to its shareholders at least 90% of its taxable income in order to
qualify as a REIT, including taxable income Host REIT recognizes for tax
purposes but with regard to which Host REIT does not receive corresponding cash.
Our ability to access the external capital we require could be hampered by a
number of factors many of which are outside of our control, including, without
limitation, declining general market conditions, unfavorable market perception
of our growth potential, decreases in our current and estimated future earnings,
excessive cash distributions or decreases in the market price of Host REIT
common stock. In addition, our ability to access additional capital may also be
limited by the terms of our existing indebtedness, which, among other things,
restricts our incurrence of debt and the payment of distributions. The
occurrence of any of these above-mentioned factors, individually or in
combination, could prevent us from being able to obtain the external capital we
require on terms that are acceptable to us or at all and the failure to obtain
necessary external capital could materially adversely affect our future growth.
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;
. reduced demand and increased operating costs and other conditions
resulting from recent terrorist attacks;
. changes in business and pleasure travel;
. 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 continuing weak economic conditions resulting from the effects of
the September 11, 2001 terrorist attacks and the 2001 economic recession, the
lodging industry has experienced a significant decline in business caused by a
reduction in travel, particularly in the business transient segment. As a
result, room revenues of our hotels continued to decrease during the first and
second quarters of 2002 compared to the prior year results. For the twenty-four
weeks ended June 14, 2002, our comparable RevPAR decreased 11.0% from the same
period in 2001 due to a decrease in occupancy of 1.9 percentage points to 72.1%
combined with a decline in the average room rate of 8.6% to $148.15. We
currently expect that reduced operating levels, as compared with 2001, will
continue in the third quarter of 2002. We expect that fourth quarter operations
will improve when compared to prior year, as fourth
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quarter 2001 operations were down significantly. There can be no assurance that
the current weak economic conditions will not continue for an extended period of
time and that they 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 of our hotels and assets related thereto are subject to various mortgages
in an aggregate amount of approximately $2.3 billion. Although generally the
debt is non-recourse to Host REIT and us, if these hotels do not produce
adequate cash flow to service the debt secured by such mortgages, the mortgage
lenders could foreclose on such assets and we would lose such assets. 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 make necessary
mortgage payments with funds from other sources. However, we cannot assure you
that permitting any such foreclosure would not adversely affect our long-term
business prospects.
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 current weak economic condition and continuing effects of the September
11, 2001 terrorist attacks, we have been working with our managers to
substantially reduce the operating costs of our hotels. While we have achieved
significant reductions in operating costs as a result of these efforts,
additional cost reductions could be difficult to achieve if operating levels
continue to decline, and some of the cost reductions achieved may eventually
need to be restored even if operations remain at reduced levels. In addition,
based on our assessment of the current operating environment, and in order to
conserve capital, we has reduced overall capital expenditure projects to levels
substantially lower than budgeted. Despite our efforts to reduce our expenses
and conserve our cash, 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. Additionally, our efforts to reduce operating costs and our
failure to make scheduled capital expenditures could adversely affect the growth
of our business and the value of our hotel properties.
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
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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.
On July 25, 2002, we finalized negotiations with Marriott International
concerning certain changes to the management and other agreements for our
Marriott-managed hotels. See "Management Discussion and Analysis of Results of
operating and Financial Condition -- Recent Events" for additional disclosure.
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 123 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. Prior to the departure of J. W. Marriott,
Jr. from Host REIT's board at the end of his term in May of 2002 and Richard E.
Marriott's resignation from the board of Marriott International in May of 2002
and during the period that we entered into most of our management agreements and
other arrangements with Marriott International, Richard E. Marriott was Host
REIT's Chairman of the Board and a director of Marriott International and his
brother, J. W. Marriott, Jr., was a member of Host REIT's Board of Directors and
served as a director and executive officer of Marriott International, and as a
result, both had potential conflicts of interest as Host REIT's directors when
making decisions regarding Marriott International, including decisions relating
to the management agreements involving our hotels and Marriott International's
management of competing lodging properties. 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. During this
period, Host REIT's Board of Directors followed 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
directors in matters that presented a conflict between the companies.
We have substantial leverage. We have a significant amount of indebtedness,
which 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
unitholders 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:
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. the sale of our OP Units;
. 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.
There is no charter or bylaw 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 new 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;
. the payment of dividends; and
. transactions with affiliates.
In addition, certain covenants in our new bank credit facility and the senior
notes indenture require us and our subsidiaries, as a condition to engaging in
certain activities, to meet financial performance tests. These restrictive
covenants, together with other restrictive covenants in 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. In addition, certain covenants in
our new bank credit facility and the senior notes indenture require us to meet
financial performance tests at all times without regard to the activities in
which we engage. 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.
Certain financial covenants under the documents governing our indebtedness limit
our ability to engage in activities that may be in our long-term best interest.
Under the terms of our new bank credit facility and the indenture pursuant to
which nearly all of our outstanding senior notes were issued, we and our
subsidiaries are generally prohibited from incurring additional indebtedness
unless, at the time of such incurrence, we would satisfy certain requirements
set forth therein, including the
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consolidated coverage ratio as discussed above. As a result of the effects on
our business of the 2001 economic recession and the September 11, 2001 terrorist
attacks and the continuing weak economic climate, our consolidated coverage
ratio calculated beginning in the third quarter was less than 2.0 to 1.0.
Because our consolidated coverage ratio is below this level, the terms of our
indebtedness will prohibit us from incurring indebtedness other than the
incurrence of amounts under our credit facility and the incurrence of debt in
connection with refinancings. Our failure to maintain a consolidated coverage
ratio that is greater than 2.0 to 1.0 also limits our ability to reinstate the
payment of distributions on our common units.
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 June 1, 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.
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
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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 that 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.
Compliance with other government regulations can 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
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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.
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
recover fully under our prior terrorism insurance or be able maintain terrorism
insurance in adequate amounts or at acceptable premium levels" below), and on
our financial condition and results of operations as a whole.
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, our policies provide that
coverage is available on a per occurrence basis and that for each occurrence
there is an overall limit as well as various sub-limits on the amount of
insurance proceeds we can receive. Sub-limits exist for certain types of claims
such as service interruption, abatement, expediting costs or landscaping
replacement, and the dollar amounts of these sub-limits are significantly lower
than the dollar amounts of the overall coverage limit. Our policies also provide
that all of the claims from each of our properties resulting from a particular
insurable event, must be combined together for purposes of evaluating whether
the aggregate limits and sub-limits contained in our policies have been exceeded
and, in the case of our Marriott-managed hotels, any such claims will also be
combined with the claims of other owners of Marriott-managed hotels for the same
purpose. That means that if an insurable event occurs that affects more than one
of our hotels, or in the case of Marriott-managed hotels, affects other
Marriott-managed hotels, the claims from each affected hotel will be added
together to determine whether the aggregate limit or sub-limits, depending on
the type of claim, have been reached and each affected hotel will only receive
its share of the amount of insurance proceeds provided for under the policy. We
may incur losses in excess of insured limits and, as a result of shared limits,
we may be even less likely to receive sufficient coverage for risks that affect
multiple properties such as earthquakes or certain types of terrorism. In
addition, there are other risks such as war, some other forms of terrorism such
as nuclear or biological terrorism and some environmental hazards that may be
deemed to fall completely outside the general coverage limits of our policies or
may be uninsurable or may be too expensive to justify insuring against. If any
such risk were to materialize and materially adversely affect one or more of our
properties, we would not be able to recover any of our losses.
We may also encounter challenges with our insurance provider regarding whether a
particular claim is covered under our policy. Should a loss in excess of insured
limits or an uninsured loss occur or should we be unsuccessful in obtaining
coverage from an insurance carrier, 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
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event, we might nevertheless remain obligated for any mortgage debt or other
financial obligations related to the property.
We may not be able to recover fully under our prior terrorism insurance or be
able to maintain terrorism insurance in adequate amounts or at acceptable
premium levels in the future. As discussed above 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 had, through our
manager Marriott International, both property and business interruption
insurance with a major insurer for our two affected hotels from which we expect
to receive 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
July 1, 2002, we had received business interruption and property advances from
our insurers in an aggregate amount of $40 million of which approximately $5
million was for property insurance proceeds relating to the two hotels. 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.
In addition, as a result of the September 11, 2001 terrorist attacks, most
insurers have ceased offering terrorism coverage in conjunction with "all-risk"
property policies (described below), and separate terrorism insurance policies
are available only in limited coverage amounts and at expensive premium levels.
We have procured terrorism coverage that excludes various risks, such as nuclear
or biological acts, and is subject to annual aggregate limits which are shared
among various hotels as described above. Because we have only been able to
obtain limited amounts of terrorism insurance and due to the shared limits with
other owners, we may be exposed to reduced coverage levels in the event another
owner experiences a catastrophic loss. Furthermore, for a limited number of our
properties, the terrorism coverage we have procured is limited to less than full
replacement costs, even if the full coverage is available. As a result, there
can be no assurance that we would receive full replacement value for any of our
properties damaged or destroyed in future terrorist attacks.
We may be unable to satisfy the insurance requirements of our lenders given the
changes in the insurance industry after the terrorist attacks of September 11,
2001. Pursuant to the terms of many of our mortgage agreements, we have been and
are required to maintain adequate or full replacement cost "all-risk" property
insurance and, in some instances, terrorism insurance. In the months following
the terrorist attacks of September 11, 2001, our policies in effect during the
time of the terrorist attacks expired and we recently completed renewals of the
all-risk property insurance policies for nearly all of our hotels. However,
because of the terrorist attacks, most insurers have ceased offering terrorism
coverage in conjunction with "all-risk" property policies. As a result, the
"all-risk" property insurance on our properties may not be considered acceptable
to mortgage lenders. While these policies generally provide full replacement
cost and full business interruption coverage for our properties, our new
coverage is subject to substantial limits on a per-occurrence basis and other
exclusions, including certain risks of terrorism. Should our lenders or mortgage
servicers deem our insurance coverage to be inadequate, we could be forced to
procure additional insurance, if available, at cost levels that might be
unacceptable to us, and to the extent that insurance premiums remain at their
current levels and/or coverage remains limited, it could become more difficult
or more expensive to obtain similar financing in the future.
In addition, our debt agreements, typically require us to maintain a minimum
rating of our insurance carrier from Standard & Poors, A.M Best or other rating
agencies. Currently, we do not satisfy the requirement for a minimum Standard &
Poors rating of AA for seven of our properties subject to approximately $739
million of indebtedness. We have notified our lenders regarding this situation,
and we have obtained, for certain of our Marriott-managed properties that have
mortgage debt, insurance coverage provided by a carrier with a rating from
Standard & Poors of AA- and a rating from A.M. Best of A+XV. However, we cannot
assure you that each of our lenders will be satisfied with the AA- rating level
of our current carrier. If the lenders are unwilling or unable to amend or waive
these covenants, or if we are unable to obtain insurance coverage that complies
with the covenants in these loan agreements the lenders may determine that we
are out of compliance with the terms of the relevant debt agreement in which
case to the extent the lenders chose to pursue their remedies and we were unable
to prevent this course of action we may be required to refinance the debt with
debt carrying different insurance requirements. There can be no assurances that
we will be able to complete such a refinancing on terms acceptable to us or at
all.
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Our former independent public accountant Arthur Andersen LLP is likely to cease
operating after having been found guilty of federal obstruction of justice
charges arising from the government's investigation of Enron Corporation and, as
a result, it is unlikely that you will be able to exercise effective remedies
against them in any future legal action. Our consolidated financial statements
as of and for each of the three years in the period ended December 31, 2001 were
audited by Arthur Andersen LLP. On March 14, 2002, Andersen was indicted on
federal obstruction of justice charges arising from the government's
investigation of Enron Corporation. On June 15, 2002, a jury in Houston, Texas
found Arthur Andersen LLP guilty of federal obstruction of justice charges
arising from the federal government's investigation of Enron Corp. In light of
the jury verdict and the underlying events, Arthur Andersen LLP has informed the
Securities and Exchange Commission that it will cease practicing before the SEC
by August 31, 2002, unless the SEC determines another date is appropriate. A
substantial number of Arthur Andersen LLP's personnel have already left the
firm, and substantially all remaining personnel are expected to do so in the
near future. Because of the significant decline in their size and the
possibility that they will cease to operate, you are unlikely to be able to
exercise effective remedies or collect judgments against them.
Moreover, as a public company, we are required to file with the SEC periodic
financial statements audited or reviewed by an independent public accountant.
The SEC has said that it will continue accepting financial statements audited by
Arthur Andersen LLP on an interim basis if Arthur Andersen LLP is able to make
certain representations to its clients concerning audit quality controls. Arthur
Andersen LLP has made such representations to us. However, for the reasons noted
above, Arthur Andersen LLP may be unable to make these representations in the
future or to provide other information or documents that would customarily be
received by us or the underwriters in connection with this offering, including
consents and "comfort letters". In addition, Arthur Andersen LLP may be unable
to perform procedures to assure the continued accuracy of its report on our
audited financial statements included in this prospectus. Arthur Andersen LLP
will be unable to provide such information and documents and perform such
procedures in future financings and other transactions. As a result, we may
encounter delays, additional expense and other difficulties in this offering,
future financings or other transactions.
Federal Income Tax Risks
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
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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, which in turn
would constitute an event of default under our outstanding debt securities.
Adverse 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 such qualification. If Host REIT
fails to qualify as a REIT, it would 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
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 distributes 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.
Our obligations to Host REIT potentially may increase our indebtedness or cause
us to liquidate investments on adverse terms. To continue to qualify as a REIT,
Host REIT 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 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 REIT 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 REIT's sole source of
cash to make these distributions is from 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 REIT 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 REIT.
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 REIT 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 REIT. In addition, because the REIT distribution requirements prevent Host
REIT 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 REIT, in which case we may be
required to liquidate investments on adverse terms in order to satisfy such
obligations of Host REIT.
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Notwithstanding Host REIT'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 REIT. Among other things, 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 of assets,
including the hotels, in which interests were owned by Host REIT, directly or
indirectly, immediately prior to January 1, 1999, the first day of Host REIT'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 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 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 REIT
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 REIT 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 REIT
for the payment of, all taxes incurred by Host REIT (and any related interest
and penalties), except for taxes imposed on Host REIT by reason of its failure
to qualify as a REIT or to distribute to its stockholders 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 REIT, in which case we may be
required to liquidate investments on adverse terms in order to satisfy such
obligations of Host REIT.
Item 6. Reports on Form 8-K
(b) Reports on Form 8-K.
.. May 24, 2002 - The Company announced that upon the recommendation of its
Audit Committee, the Board of Directors had dismissed Arthur Andersen LLP
as its independent auditor and appointed KPMG, LLP to serve as the
independent auditor for the fiscal year ending December 31, 2002.
.. June 14, 2002 - The Company announced that it had entered into a new credit
facility with Deutsche Bank Trust Company Americas, as Administrative
Agent, Bank of America, N.A., as syndication agent and certain other agents
and lenders.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOST MARRIOTT, L.P.
July 27, 2002 /s/ Donald D. Olinger
---------------------
Donald D. Olinger
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
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