================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 7, 2001 Commission File No. 001-14625 HOST MARRIOTT CORPORATION 10400 Fernwood Road Bethesda, Maryland 20817 (301) 380-9000 Maryland 53-0085950 ----------------------- (State of Incorporation) (I.R.S. Employer ---------------- Identification Number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- <TABLE> <CAPTION> Shares outstanding Class at October 15, 2001 ------------- ------------------- <S> <C> Common Stock, $0.01 par value 262,992,720 Purchase share rights for Series A Junior Participating Preferred Stock, $0.01 par value -- Class A Cumulative Redeemable Preferred Stock, $0.01 par value 4,160,000 Class B Cumulative Redeemable Preferred Stock, $0.01 par value 4,000,000 Class C Cumulative Redeemable Preferred Stock, $0.01 par value 5,980,000 </TABLE> ================================================================================
INDEX ----- <TABLE> <CAPTION> Page No. -------- <S> <C> Part I. FINANCIAL INFORMATION (Unaudited): Condensed Consolidated Balance Sheets- September 7, 2001 and December 31, 2000.......................... 3 Condensed Consolidated Statements of Operations- Twelve Weeks and Thirty-six Weeks Ended September 7, 2001 and September 8, 2000.......................... 4 Condensed Consolidated Statements of Cash Flows- Thirty-six Weeks Ended September 7, 2001 and September 8, 2000... 7 Notes to Condensed Consolidated Financial Statements.............. 8 Management's Discussion and Analysis of Results of Operations and Financial Condition............................... 15 Quantitative and Qualitative Disclosures about Market Risk........ 22 PART II. OTHER INFORMATION AND SIGNATURE................................... 23 </TABLE> -2-
HOST MARRIOTT CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in millions) <TABLE> <CAPTION> September 7, December 31, 2001 2000 ------ ------ (unaudited) <S> <C> <C> ASSETS ------ Property and equipment, net......................................................... $7,177 $7,110 Notes and other receivables (including amounts due from affiliates of $9 million and $164 million, respectively)....................................... 56 211 Due from Manager.................................................................... 143 -- Rent receivable..................................................................... 6 65 Investments in affiliates........................................................... 147 128 Other assets........................................................................ 426 444 Restricted cash..................................................................... 124 125 Cash and cash equivalents........................................................... 182 313 ------ ------ $8,261 $8,396 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Debt Senior notes..................................................................... $2,782 $2,790 Mortgage debt.................................................................... 2,292 2,275 Other............................................................................ 317 257 ------ ------ 5,391 5,322 Accounts payable and accrued expenses............................................... 225 381 Other liabilities................................................................... 303 312 ------ ------ Total liabilities............................................................ 5,919 6,015 ------ ------ Minority interest................................................................... 219 485 Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary whose sole assets are the convertible subordinated debentures due 2026 ("Convertible Preferred Securities")............ 475 475 Shareholders' equity Cumulative redeemable preferred stock (liquidation preference $354 million), 50 million shares authorized; 14.2 million shares issued and outstanding......... 339 196 Common stock, 750 million shares authorized; 262.6 million shares and 221.3 million shares issued and outstanding, respectively........................ 3 2 Additional paid-in capital.......................................................... 2,059 1,824 Accumulated other comprehensive income (loss)....................................... 3 (1) Retained deficit.................................................................... (756) (600) ------ ------ Total shareholders' equity................................................... 1,648 1,421 ------ ------ $8,261 $8,396 ====== ====== </TABLE> See Notes to Condensed Consolidated Statements -3-
HOST MARRIOTT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Twelve Weeks Ended September 7, 2001 and September 8, 2000 (unaudited, in millions, except per share amounts) <TABLE> <CAPTION> 2001 2000 ------ ------ <S> <C> <C> REVENUES Hotel sales Rooms............................................................................. $ 528 $ -- Food and beverage................................................................. 234 -- Other............................................................................. 67 -- ------ ------ Total hotel sales.............................................................. 829 -- Rental income...................................................................... 19 227 ------ ------ Total revenues................................................................. 848 227 ------ ------ OPERATING COSTS AND EXPENSES Hotel operating expenses Rooms............................................................................. 133 -- Food and beverage................................................................. 188 -- Hotel departmental costs and deductions........................................... 229 -- Management fees and other......................................................... 37 -- Other property-level expenses..................................................... 66 66 Depreciation and amortization..................................................... 87 75 ------ ------ Total hotel operating costs and expenses....................................... 740 141 Corporate expenses................................................................ 7 7 Other expenses.................................................................... 3 -- ------ ------ OPERATING PROFIT.................................................................... 98 79 Minority interest (expense) benefit................................................ -- 4 Interest income.................................................................... 5 9 Interest expense................................................................... (104) (100) Net gains on property transactions................................................. 3 1 Equity in earnings of affiliates................................................... (1) 2 Dividends on Convertible Preferred Securities...................................... (7) (8) ------ ------ LOSS BEFORE INCOME TAXES............................................................ (6) (13) Provision for income taxes.......................................................... -- (4) ------ ------ LOSS BEFORE EXTRAORDINARY ITEM...................................................... (6) (17) Extraordinary loss.................................................................. (1) -- ------ ------ NET LOSS............................................................................ $ (7) $ (17) ====== ====== Less: Dividends on Preferred Stock................................................. (9) (5) ------ ------ NET LOSS AVAILABLE TO COMMON SHAREHOLDERS........................................... $ (16) $ (22) ====== ====== BASIC LOSS PER COMMON SHARE: Loss before extraordinary item...................................................... $(0.06) $(0.10) Extraordinary loss.................................................................. -- -- ------ ------ BASIC LOSS PER COMMON SHARE......................................................... $(0.06) $(0.10) ====== ====== DILUTED LOSS PER COMMON SHARE Loss before extraordinary item...................................................... $(0.06) $(0.10) Extraordinary loss.................................................................. -- -- ------ ------ DILUTED LOSS PER COMMON SHARE....................................................... $(0.06) $(0.10) ====== ====== </TABLE> See Notes to Condensed Consolidated Statements -4-
HOST MARRIOTT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Thirty-six Weeks Ended September 7, 2001 and September 8, 2000 (unaudited, in millions, except per share amounts) <TABLE> <CAPTION> 2001 2000 ------ ------ <S> <C> <C> REVENUES Hotel sales Rooms............................................................................. $1,638 $ -- Food and beverage................................................................. 782 -- Other............................................................................. 204 -- ------ ------ Total hotel sales.............................................................. 2,624 -- Rental income...................................................................... 81 588 ------ ------ Total revenues................................................................. 2,705 588 ------ ------ OPERATING COSTS AND EXPENSES Hotel operating expenses Rooms............................................................................. 389 -- Food and beverage................................................................. 587 -- Hotel departmental costs and deductions........................................... 669 -- Management fees and other......................................................... 143 -- Other property-level expenses..................................................... 194 191 Depreciation and amortization..................................................... 266 224 ------ ------ Total hotel operating costs and expenses....................................... 2,248 415 Corporate expenses................................................................ 24 27 Lease repurchase expense.......................................................... 5 -- Other expenses.................................................................... 11 9 ------ ------ OPERATING PROFIT.................................................................... 417 137 Minority interest (expense) benefit................................................ (26) 26 Interest income.................................................................... 25 26 Interest expense................................................................... (311) (293) Net gains on property transactions................................................. 4 4 Equity in earnings of affiliates................................................... 3 5 Dividends on Convertible Preferred Securities...................................... (22) (22) ------ ------ INCOME (LOSS) BEFORE INCOME TAXES................................................... 90 (117) Provision for income taxes.......................................................... (15) (7) ------ ------ INCOME (LOSS) BEFORE EXTRAORDINARY ITEM............................................. 75 (124) Extraordinary loss.................................................................. (1) (3) ------ ------ NET INCOME (LOSS)................................................................... $ 74 $ (127) ====== ====== Less: Dividends on Preferred Stock................................................. (23) (15) Add: Gain on repurchase of Convertible Preferred Securities, net of income tax -- 4 expense of $1 million....................................................... ------ ------ NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS.................................. $ 51 $ (138) ====== ====== </TABLE> See Notes to Condensed Consolidated Statements -5-
HOST MARRIOTT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Thirty-six Weeks Ended September 7, 2001 and September 8, 2000 (unaudited, in millions, except per share amounts) <TABLE> <CAPTION> 2001 2000 ----- ------ <S> <C> <C> BASIC EARNINGS (LOSS) PER COMMON SHARE: Income (loss) before extraordinary items..................................... $0.21 $(0.61) Extraordinary loss........................................................... -- (0.01) ----- ------ BASIC EARNINGS (LOSS) PER COMMON SHARE....................................... $0.21 $(0.62) ===== ====== DILUTED EARNINGS (LOSS) PER COMMON SHARE: Income (loss) before extraordinary items..................................... $0.21 $(0.61) Extraordinary loss........................................................... -- (0.01) ----- ------ DILUTED EARNINGS (LOSS) PER COMMON SHARE..................................... $0.21 $(0.62) ===== ====== </TABLE> See Condensed Consolidated Statements -6-
HOST MARRIOTT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Thirty-six Weeks Ended September 7, 2001 and September 8, 2000 (unaudited, in millions) <TABLE> <CAPTION> 2001 2000 -------- -------- <S> <C> <C> OPERATING ACTIVITIES Income (loss) before extraordinary item...................................... $ 75 $ (124) Adjustments to reconcile to cash from operations: Depreciation and amortization.............................................. 266 224 Income taxes............................................................... (20) (20) Deferred contingent rental income.......................................... 18 366 Net gains on property transactions......................................... (4) (4) Equity in earnings of affiliates........................................... (3) (5) Purchase of Crestline leases............................................... (208) -- Changes in other operating accounts........................................ 82 21 Other...................................................................... (24) (60) -------- -------- Cash provided by operations............................................. 182 398 -------- -------- INVESTING ACTIVITIES Acquisitions................................................................. (63) (40) Capital expenditures: Capital expenditures for renewals and replacements......................... (148) (155) New investment capital expenditures........................................ (38) (88) Other investments.......................................................... (18) (28) Note receivable collections, net............................................. 9 4 -------- -------- Cash used in investing activities....................................... (258) (307) -------- -------- FINANCING ACTIVITIES Issuances of debt, net....................................................... 275 292 Scheduled principal repayments............................................... (41) (27) Debt prepayments............................................................. (226) (245) Issuances of common stock.................................................... 3 3 Issuances of cumulative redeemable preferred stock, net...................... 144 -- Repurchases of common stock.................................................. -- (44) Dividends.................................................................... (207) (154) Repurchases of Convertible Preferred Securities.............................. -- (15) Repurchases and redemptions of OP Units...................................... -- (3) Other........................................................................ (3) 13 -------- -------- Cash used in financing activities....................................... (55) (180) -------- -------- DECREASE IN CASH AND CASH EQUIVALENTS........................................ $ (131) $ (89) ======== ======== </TABLE> Supplemental schedule of noncash investing and financing activities: During the thirty-six weeks ended September 7, 2001 and September 8, 2000, respectively, approximately 41,551,000 shares and 449,000 shares of common stock were issued upon the conversion of outside OP Units valued at $227.0 million and $4.4 million, respectively. See Notes to Condensed Consolidated Statements -7-
HOST MARRIOTT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Organization Host Marriott Corporation ("Host REIT" or the "Company"), a Maryland corporation operating through an umbrella partnership structure, is primarily the owner of hotel properties. Host REIT operates as a self- managed and self-administered real estate investment trust ("REIT") with its operations conducted through an operating partnership, Host Marriott, L.P. (the "Operating Partnership" or "Host LP"), and its subsidiaries. Host REIT is the sole general partner of the Operating Partnership and as of September 7, 2001, owns approximately 92% of the Operating Partnership. The Work Incentives Improvement Act of 1999 ("REIT Modernization Act") amended the tax laws to permit REITs, effective January 1, 2001, to lease hotels to a subsidiary that qualifies as a taxable REIT subsidiary ("TRS"). Accordingly, a wholly owned subsidiary of Host LP, which has elected to be treated as a TRS for federal income tax purposes, acquired certain subsidiaries owning the leasehold interests with respect to 120 of the Company's full-service hotels (the "Lessee Entities") from Crestline Capital Corporation ("Crestline") and Wyndham International Inc. ("Wyndham"). As a result of the acquisitions, the Company's operating results reflect property-level revenues and expenses rather than rental income from lessees with respect to those 120 full-service properties from the effective dates of the acquisitions. 2. Summary of Significant Accounting Policies The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries have been prepared without audit. Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States have been condensed or omitted. The Company believes the disclosures made are adequate to make the information presented not misleading. However, the unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2000. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary to present fairly the financial position of the Company as of September 7, 2001, the results of its operations for the twelve and thirty-six weeks ended September 7, 2001, and September 8, 2000, and cash flows for the thirty-six weeks ended September 7, 2001, and September 8, 2000. Interim results are not necessarily indicative of fiscal year performance because of the impact of seasonal and short-term variations. Certain reclassifications were made to the prior year financial statements to conform to the current presentation. The Company consolidates entities in which it owns a controlling financial interest (generally when it owns over 50% of the voting shares of another company) and consolidates partnership investments when it owns a general partnership interest unless minority shareholders or other partners participate in or have the right to block management decisions. Revenue from operations of the Company's hotels not leased to third parties is recognized when the services are provided. As previously discussed, the Company, through its wholly owned TRS, acquired the Lessee Entities, and as a result, the Company no longer leases the properties to a third party, or receives rental income with respect to those 120 properties. Therefore, the Company's -8-
HOST MARRIOTT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) consolidated results of operations with respect to those 120 properties reflect, from the effective dates of the transactions, property-level revenues and expenses rather than rental income from lessees and are not comparable to 2000 results. Additionally, under the leases, the Company recorded the rental income due as 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 included on the balance sheet as deferred rent. Contingent rental revenue of $3 million and $75 million, respectively, for the twelve weeks ended September 7, 2001 and September 8, 2000, and $18 million and $366 million, respectively, for the thirty-six weeks ended September 7, 2001 and September 8, 2000, have been deferred. 3. Earnings Per Share Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income available to common shareholders as adjusted for potentially dilutive securities, by the weighted average number of shares of common stock outstanding plus other potentially dilutive securities. Dilutive securities may include shares granted under comprehensive stock plans and the Convertible Preferred Securities. Dilutive securities may also include those common and preferred Operating Partnership Units ("OP Units") issuable or outstanding that are held by minority partners which are assumed to be converted. No effect is shown for securities if they are anti-dilutive. <TABLE> <CAPTION> Twelve Weeks Ended ------------------------------------------------------------------------- September 7, 2001 September 8, 2000 ----------------------------------- ----------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------------------------------- ----------------------------------- <S> <C> <C> <C> <C> <C> <C> Net loss..................................... $ (7) 262.5 $ (.03) $ (17) 220.5 $ (.08) Dividends on preferred stock................ (9) -- (.03) (5) -- (.02) --------- --------- -------- --------- ---------- -------- Basic loss available to common shareholders per share...................... (16) 262.5 (.06) (22) 220.5 (.10) Assuming distribution of common shares granted under the comprehensive stock plan, less shares assumed purchased at average market price....................... -- -- -- -- -- -- Assuming conversion of minority OP Units outstanding................................ (2) 22.1 -- (5) 63.3 -- Assuming conversion of minority OP Units issuable................................... -- -- -- -- .6 -- Assuming conversion of preferred OP Units... -- -- -- -- -- -- --------- --------- -------- --------- ---------- -------- Diluted loss per share....................... $ (18) 284.6 $ (.06) $ (27) 284.4 $ (.10) ========= ========= ======== ========= ========== ======== </TABLE> -9-
HOST MARRIOTT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) <TABLE> <CAPTION> Thirty-six Weeks Ended ------------------------------------------------------------------------- September 7, 2001 September 8, 2000 ----------------------------------- ----------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------------------------------- ----------------------------------- <S> <C> <C> <C> <C> <C> <C> Net income (loss)............................ $ 74 244.3 $ .30 $ (127) 220.7 $ (.57) Dividends on preferred stock................ (23) -- (.09) (15) -- (.07) Gain on repurchase of Convertible Preferred Securities....................... -- -- -- 4 -- .02 --------- --------- -------- --------- ---------- -------- Basic income (loss) available to common shareholders per share...................... 51 244.3 .21 (138) 220.7 (.62) Assuming distribution of common shares granted under the comprehensive stock plan, less shares assumed purchased at average market price....................... -- 4.2 -- -- -- -- Assuming conversion of minority OP Units outstanding................................ 8 39.8 -- (38) 63.5 -- Assuming conversion of preferred OP Units... -- -- -- -- .6 -- --------- --------- -------- --------- ---------- -------- Diluted income (loss) per share.............. $ 59 288.3 $ .21 $ (176) 284.8 $ (.62) ========= ========= ======== ========= ========= ======== </TABLE> 4. OP Unit Conversions On May 29, May 7 and February 7, 2001, Blackstone and affiliates ("Blackstone") converted 18.2 million, 10.0 million and 12.5 million OP Units, respectively, to common shares and immediately sold them to an underwriter for sale on the open market. These units were obtained in connection with the purchase of the Blackstone luxury hotel portfolio in 1998. As a result of this transaction, Blackstone's ownership interest was reduced to approximately 1% of the outstanding OP Units of the Operating Partnership, and the Company increased its ownership in the Operating Partnership to approximately 92% of the outstanding OP Units. The Company received no proceeds as a result of these transactions. 5. Debt and Equity Issuances and Refinancing During the first quarter of 2001, the Company borrowed $115 million under the revolver portion of the bank credit facility to partially fund the acquisition of the Crestline Lessee Entities and other general corporate purposes and repaid the $115 million during the second quarter of 2001. During the third quarter of 2001, the Company borrowed $60 million under the revolver portion of the bank credit facility to fund the purchase of minority interests in seven hotels. During the fourth quarter of 2001, the Company borrowed an additional $250 million under the revolver portion of the bank credit facility. As of October 19, 2001, $150 million is outstanding under the term loan portion and $310 million is outstanding under the revolver portion of the bank credit facility. The remaining available capacity under the revolver is $315 million. On August 30, 2001, a Canadian subsidiary of the Company entered into a financing agreement pursuant to which it borrowed $96.6 million due August 2006 at a variable rate of LIBOR plus 275 basis points. The Calgary Marriott, Toronto Airport Marriott, Toronto Marriott Eaton Centre, and Toronto Delta Meadowvale hotels serve as collateral. The proceeds from this financing were used to refinance existing indebtedness on these hotels as well as to prepay the $88 million mortgage note on The Ritz-Carlton, Amelia Island hotel. Since the mortgage loan on these Canadian properties is denominated in U.S. dollars and the -10-
HOST MARRIOTT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) functional currency of the Canadian subsidiary is the Canadian dollar, the Company purchased derivative instruments for hedging of the foreign currency investment. The subsidiary has entered into 60 separate currency forward contracts to buy U.S. dollars at a fixed price. These forward contracts hedge the currency exposure of converting Canadian dollars to U.S. dollars on a monthly basis to cover debt service payments. On March 27, 2001, we sold approximately 6.0 million shares of 10% Class C preferred stock ("Class C Preferred Stock") with $0.01 par value for net proceeds of $144 million. Holders of the Class C Preferred Stock are entitled to receive cumulative cash dividends at a rate of 10% per annum of the $25 per share liquidation preference. Dividends are payable quarterly in arrears commencing April 15, 2001, on which date a pro rata dividend of $0.03 per share was distributed. Beginning March 27, 2006, we have the option to redeem the Class C Preferred Stock for $25 per share, plus accrued and unpaid dividends to the date of redemption. 6. Acquisitions and Developments Effective March 24, 2001, the Company purchased the 5% voting interests in each of Rockledge Hotel Properties, Inc. ("Rockledge") and Fernwood Hotel Assets, Inc. ("Fernwood") that were previously held by the Host Marriott Statutory Employee/Charitable Trust for approximately $2 million. Prior to this acquisition, the Company held a 95% non-voting interest in each company and accounted for such investments under the equity method. As a result of this acquisition, the Company holds 100% of the voting and non- voting interests in Rockledge and Fernwood, and its consolidated results of operations will reflect the revenues and expenses generated by the two taxable corporations, and its consolidated balance sheets will include the various assets. The assets consist of three additional full-service hotels: the 672-room St. Louis Marriott Pavilion Downtown in St. Louis, Missouri, and the 311-room JW Marriott Hotel Mexico City and the 600-room Mexico City Airport Marriott Hotel, both located in Mexico City, Mexico. The Company's acquisition, including certain joint venture interests, totaled approximately $356 million in assets and $262 million in liabilities, including $54 million of third party debt ($26 million of which matures in 2001). On June 16, 2001, the Company consummated an agreement with Crestline Capital Corporation for the acquisition of their lease agreement with respect to San Diego Marriott Hotel and Marina (the "San Diego Hotel"). The purchase price was $4.5 million, including legal and professional fees. Under the terms of the transaction, a wholly owned TRS of the Company acquired the lease by purchasing the lessee entity, effectively terminating the lease for financial reporting purposes. On June 28, 2001, the Company consummated an agreement to purchase substantially all the minority limited partnership interests held by Wyndham International, Inc. and affiliates ("Wyndham") with respect to seven full-service hotels for $60 million. As part of this acquisition, the leases were acquired from Wyndham with respect to the San Diego Marriott Mission Valley, the Minneapolis Marriott Southwest, and the Albany Marriott by a wholly owned TRS of the Company, effectively terminating the leases for financial reporting purposes. For purposes of purchase accounting no amounts were attributed to the leases themselves, as the leases had no value. The entire purchase price was allocated to the minority limited partner interests purchased. -11-
HOST MARRIOTT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 7. Dividends and Distributions Payable On September 19, 2001, the Company announced that the Board of Directors had declared quarterly cash dividends of $0.26 and $0.625 per share of common stock and preferred stock, respectively. The third quarter dividends were paid on October 12, 2001 to shareholders of record on September 28, 2001. 8. Geographic Information As of September 7, 2001, the Company's foreign operations consisted of four hotel properties located in Canada and two properties located in Mexico. There were no intercompany sales between the properties and the Company. The following table presents revenues for each of the geographical areas in which the Company owns hotels. As a result of the acquisition of the Crestline Lessee Entities, effective January 1, 2001 the Company's consolidated results of operations for the twelve and thirty-six weeks ended September 7, 2001 primarily represent property level revenues and expenses, whereas the results for the twelve and thirty-six weeks ended September 8, 2000 primarily represent rental income (in millions). <TABLE> <CAPTION> Twelve Weeks Ended Thirty-six Weeks Ended --------------------------- --------------------------- September 7, September 8, September 7, September 8, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> United States................. $ 823 $ 224 $ 2,633 $ 578 International................. 25 3 72 10 ------------ ------------ ------------ ------------ Total......................... $ 848 $ 227 $ 2,705 $ 588 ============ ============ ============ ============ </TABLE> 9. Comprehensive Income The Company's other comprehensive income consists of unrealized gains and losses on foreign currency translation adjustments and the right to receive cash from Host Marriott Services Corporation subsequent to the exercise of the options held by certain former and current employees of Marriott International, pursuant to the distribution agreement between the Company and Host Marriott Services Corporation. For the twelve weeks ended September 7, 2001, the comprehensive loss totaled $5 million. For the thirty-six weeks ended September 7, 2001, comprehensive income totaled $78 million. The comprehensive loss was $19 million and $128 million for the twelve and thirty-six weeks ended September 8, 2000, respectively. As of September 7, 2001, the Company's accumulated other comprehensive income was $3 million compared to a loss of $1 million at December 31, 2000. 10. Summarized Lease Pool Financial Statements During 2000, almost all the properties of the Company and its subsidiaries were leased to subsidiaries of Crestline. In conjunction with these leases, Crestline and certain of its subsidiaries entered into limited guarantees of the lease obligations of each lessee. The full-service hotel leases were grouped into four lease pools, with Crestline's guarantee limited to the greater of 10% of the aggregate rent payable for the preceding year or 10% of the aggregate rent payable under all leases in the respective pool. Additionally, the lessee's obligation under each lease agreement was guaranteed by all other lessees in the respective lease pool. As a result, the Company believed that the operating results of each full-service lease pool may have been material to the Company's financial statements for the year ended December 31, 2000. -12-
HOST MARRIOTT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Effective January 1, 2001, a wholly owned TRS of Host LP replaced Crestline as the lessee with respect to 116 of the Company's full-service hotels, and the third party credit concentration ceased to exist. Financial information of Crestline may be found in its quarterly and annual filings with the Securities and Exchange Commission. Further information regarding these leases and Crestline's limited guarantees may be found in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2000. The results of operations and summarized balance sheet data of the lease pools in which the Company's hotels were organized during 2000 are as follows (in millions): <TABLE> <CAPTION> Twelve Weeks Ended September 8, 2000 ------------------------------------ Pool 1 Pool 2 Pool 3 Pool 4 Combined ------------ ------------ ------------ ------------ -------------- <S> <C> <C> <C> <C> <C> Hotel Sales Rooms...................................... $147 $156 $137 $141 $ 581 Food and beverage.......................... 60 66 57 69 252 Other...................................... 14 16 16 19 65 ---- ---- ---- ---- ------ Total hotel sales..................... 221 238 210 229 898 Operating Costs and Expenses Rooms...................................... 36 40 34 33 143 Food and beverage.......................... 49 54 45 54 202 Other...................................... 62 58 57 57 234 Management fees............................ 10 15 10 14 49 Lease expense.............................. 63 67 62 70 262 Corporate and Interest Expenses............ -- -- 1 -- 1 ---- ---- ---- ---- ------ Total operating expenses.............. 220 234 209 228 891 ---- ---- ---- ---- ------ Operating Profit................................ 1 4 1 1 7 Income taxes............................... (1) (2) -- -- (3) ---- ---- ---- ---- ------ Net Income............................ $ -- $ 2 $ 1 $ 1 $ 4 ==== ==== ==== ==== ====== </TABLE> <TABLE> <CAPTION> Thirty-six Weeks Ended September 8, 2000 ---------------------------------------- Pool 1 Pool 2 Pool 3 Pool 4 Combined ----------- ----------- ----------- ----------- ------------- <S> <C> <C> <C> <C> <C> Hotel Sales Rooms...................................... $428 $469 $409 $433 $1,739 Food and beverage.......................... 188 219 189 235 831 Other...................................... 44 46 59 60 209 ---- ---- ---- ---- ------ Total hotel sales..................... 660 734 657 728 2,779 Operating Costs and Expenses Rooms...................................... 102 116 96 96 410 Food and beverage.......................... 145 165 140 167 617 Other...................................... 173 167 166 170 676 Management fees............................ 32 50 32 52 166 Lease expense.............................. 200 224 214 237 875 Corporate and Interest Expenses............ 1 1 1 1 4 ---- ---- ---- ---- ------ Total operating expenses.............. 653 723 649 723 2,748 ---- ---- ---- ---- ------ Operating Profit................................ 7 11 8 5 31 Income taxes............................... (3) (5) (3) (2) (13) ---- ---- ---- ---- ------ Net Income............................ $ 4 $ 6 $ 5 $ 3 $ 18 ==== ==== ==== ==== ====== </TABLE> <TABLE> <CAPTION> As of December 31, 2000 ----------------------- Pool 1 Pool 2 Pool 3 Pool 4 Combined ----------- ----------- ----------- ----------- ------------- <S> <C> <C> <C> <C> <C> Assets.......................................... $37 $37 $40 $44 $158 Liabilities..................................... 37 37 40 42 156 Equity.......................................... -- -- -- 2 2 </TABLE> -13-
HOST MARRIOTT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 11. Subsequent Events As a result of the terrorist attacks on the New York World Trade Center towers in New York on September 11, 2001, the New York Marriott World Trade Center hotel was destroyed. The book value of the New York Marriott World Trade Center hotel was approximately $129 million. The New York Marriott Financial Center hotel also suffered damage from debris as well as from the efforts of fire fighters who used the building to combat fires in the surrounding area. The Company is in the process of repairing the damage to the New York Marriott Financial Center (the "Financial Center") and expects to have such repairs completed within several months. Public access to the area surrounding the site, including the Financial Center hotel, has been restricted, but should be restored shortly. Under our ground lease with the Port Authority of New York and New Jersey (the "Port Authority") the Company is required to rebuild the New York World Trade Center Marriott subject to the Port Authority rebuilding the foundation of the hotel. As of this date, no determination has been made regarding the timing and configuration of any reconstruction of the World Trade Center Complex. The decision to rebuild the New York Marriott World Trade Center, which involves the Company, our manager and numerous government authorities, is in part dependent on when, how and if the entire World Trade Center complex is rebuilt. The decision to rebuild may also affect the amount and timing of insurance proceeds. However, the Company does not expect these decisions to be made soon and expects any potential reconstruction to take a number of years. The Company has business interruption insurance on both hotels which the Company expects will minimize the financial impact of the terrorist attacks. The Company also has casualty insurance, which should cover the cost of repairs to the New York Financial Center and replacement of the New York Marriott World Trade Center. Under EITF 01-10, the cost of the loss associated with the terrorist acts, if any, would be reported as an unusual item in the fourth quarter. The recovery of lost operations under business interruption insurance will also be recorded as an unusual item. -14-
HOST MARRIOTT CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Forward-looking Statements Certain matters discussed herein are forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. We identify forward-looking statements in this quarterly report on Form 10-Q by using words or phrases such as "believe," "expect," "may be," "intend," "predict," "project," "plan," "objective," "will be," "should," "estimate," or "anticipate," or the negative thereof or other variations thereof or comparable terminology. All forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual transactions, results, performance or achievements to be materially different from any future transactions, results, performance or achievements expressed or implied by such forward-looking statements. Although we believe the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that we will attain these expectations or that any deviations will not be material. Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this quarterly report on Form 10-Q to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Recent Events, Liquidity and Capital Resources On September 11, 2001, several aircraft were hijacked and destroyed in terrorist attacks on the World Trade Center Towers in New York City and the Pentagon in northern Virginia. As a result of the attacks and the collapse of the World Trade Center Towers, the Company's New York Marriott World Trade Center hotel was destroyed. In addition, we sustained considerable damage to a second property, the New York Marriott Financial Center hotel. Subsequent to the attacks, the Federal Aviation Administration closed United States airspace to commercial traffic for several days. As described below, the aftermath of these events, together with a slowing economy, has adversely affected our operations. We have both casualty and business interruption insurance for our two affected hotels through our manager, Marriott International, Inc. We have begun restoring the New York Marriott Financial Center hotel to operating condition and anticipate that it will reopen in the next several months. We are required under our ground lease with The Port Authority of New York and New Jersey to rebuild the World Trade Center hotel, and our insurance provides for rebuilding of the asset at replacement cost. In addition, we are obligated to make payments on behalf of the property, including ground rent and debt service. We are also contingently liable for severance payments for employees of both hotels as well as other operating liabilities. While we expect to receive business interruption proceeds from the insurance to cover all or a substantial portion of the costs at both hotels, we cannot currently determine the amount or timing of those payments. In accordance with EITF 01-10, we will reflect the disaster on the properties and the effect on operations of the hotels as unusual. We believe that as a result of the timing of receipt of insurance proceeds it is possible that we may record an unusual loss in the fourth quarter of this year primarily related to a complete write-off of the World Trade Center hotel assets and record unusual gains in future periods for repairs, replacement and business interruption although no final determination has been made. In the third quarter, which ended September 7, 2001, RevPAR for comparable hotels showed a significant decline of over 11.9% over the prior year quarter with hotel occupancy of 73.8% due in part to a slowing economy and the reduction in business travel. During the 4-week period subsequent to the events of September 11, 2001, our hotels recorded occupancy levels of 38% to 63% on a weekly basis. During that period, we had a very high level of cancellations primarily for events scheduled in the fourth quarter, which represented approximately $70 million in future revenues, and primarily affecting our larger convention hotels. While we do not believe that this period will be representative of the remainder -15-
HOST MARRIOTT CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION of the fourth quarter, we have been actively working with our managers to reduce substantially the operating costs of our hotels. These initiatives include reducing labor costs, streamlining staffing and service delivery, reducing hours of operations at hotel restaurants and consolidating operations by closing unused floors in hotels. In addition, based on our assessment of the current operating environment and to conserve capital, we have reduced or suspended all non-essential capital expenditure projects. As a result of these initiatives and a gradual return of the economy to more normal levels of business, we have begun to see modest improvements in occupancy and room rate, though they remain below prior year levels. However, given our estimates of lower operating levels in the fourth quarter, it is likely that our fourth quarter results will be significantly lower than the prior year. As described below, at the end of the third quarter, we had $210 million outstanding under our credit facility, which allows us to borrow up to $775 million, consisting of a $150 million term loan and a $625 million revolver. On September 18, 2001, we borrowed an additional $250 million under the revolver portion of the credit facility, reducing the available capacity to $315 million. The credit facility contains certain financial covenants related to, among other things, maintaining certain levels of tangible net worth and certain ratios of EBITDA to interest and fixed charges, total debt to EBITDA, unencumbered EBITDA interest coverage and unencumbered EBITDA as a percentage of total EBITDA. We are in compliance with all the covenants in our credit facility. We anticipate, however, that if adverse operating conditions continue, we will not comply with certain of the financial covenants for the twelve months ended December 31, 2001. We are currently in discussions with our banks to modify or waive these covenants, and we believe that we will be successful in these efforts. We believe that any waiver or modification may result in additional restrictions on our ability to issue debt or equity, pay dividends to certain holders of our capital stock, other than as required to maintain our status as a REIT, or to sell assets and may require that we provide additional security. We also have $2.8 billion of senior notes outstanding. The indenture under which the senior notes were issued contains financial covenants restricting our ability to incur indebtedness, grant liens on our assets, acquire or sell or make investments in other entities, and make certain distributions to our equity holders. We are in compliance with all the covenants in the indenture and believe that we will remain in compliance through year-end. In the event that we were not in compliance with any of the financial covenants set forth in the indenture, we would be prohibited from declaring or paying a dividend on our equity, other than distributions required to maintain our status as a REIT. Our dividend policy generally has been to distribute to our shareholders the amount necessary to maintain our status as a REIT, approximately 100% of taxable income. On September 19, 2001 we announced that the Board of Directors had declared cash dividends of $0.26 per common share and $0.625 per share of Preferred Stock, which were paid on October 12, 2001 to shareholders of record on September 28, 2001. As a result of the decline in operations, we believe that we have already distributed the amount of taxable income necessary for 2001 to qualify as a REIT and that our Board of Directors will likely suspend the fourth quarter dividend to common shareholders. Results of Operations During 2000, our revenues primarily represented rental income from Crestline and other third-party lessees. As a result of the previously discussed acquisition of the Crestline and Wyndham lessees by our TRS, beginning in 2001, our consolidated results of operations primarily reflect hotel-level revenues and operating costs and expenses. Therefore, our results for 2001 are not comparable to 2000 results. -16-
HOST MARRIOTT CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 2001 Compared to 2000 Revenues. Revenues increased $621 million for the twelve weeks ended September 7, 2001 when compared to the twelve weeks ended September 8, 2000, and increased $2,117 million for the thirty-six weeks ended September 7, 2001, when compared to the thirty-six weeks ended September 8, 2000. As discussed above, our revenues and operating profit are not comparable to 2000, due to the acquisition of the Lessee Entities by our TRS. The table below presents gross hotel sales for the twelve weeks ended and the thirty-six weeks ended September 7, 2001 and September 8, 2000. For 2000, gross hotel sales were used as the basis for calculating rental income. The data is presented in order to facilitate an investor's understanding and comparative analysis of the operations of our properties. <TABLE> <CAPTION> Twelve Weeks Ended Thirty-six Weeks Ended ------------------------------------ ------------------------------------ September 7, September 8, September 7, September 8, 2001 2000 2001 2000 ---------------- ---------------- --------------- ----------------- (in millions) (in millions) <S> <C> <C> <C> <C> Hotel sales Rooms........................... $ 596 $ 656 $1,906 $1,979 Food and beverage............... 240 258 830 862 Other........................... 72 71 226 224 ----- ----- ------ ------ Total hotel sales............. $ 908 $ 985 $2,962 $3,065 ===== ===== ====== ====== </TABLE> The $103 million decrease in hotel sales for the thirty-six weeks ended September 7, 2001 reflects the decrease in REVPAR for our comparable properties of 6.1% to $114.02, partially offset by incremental revenues provided by the 500-room expansion at Orlando Marriott, which was placed in service in June 2000, and the addition of three hotels as a result of the consolidation of Rockledge and Fernwood as of March 24, 2001. Comparable REVPAR for the third quarter of 2001 decreased by 11.9% to $103.45 compared to the same quarter in 2000 due to the recent slowdown in the economy. The decrease is attributable to a decrease in occupancy of 5.9 percentage points and a 5% decrease in room rates during the quarter. As a result of decreased hotel sales, our hotel managers implemented cost cutting measures and revenue enhancement programs at the property level during the second quarter in order to stabilize house profit. These measures include increasing labor efficiency particularly at the managerial level and in the food and beverage area at the hotels, reducing discretionary expenses in rooms, food and beverage, and repairs and maintenance and reducing energy consumption. These cost cutting measures served to stabilize the profit margins during the second and third quarters, however, due to continued declines in REVPAR during the third quarter, profit margins decreased 2.3 and 1.7 percentage points for the third quarter and year- to-date 2001, respectively. Rental income decreased $208 million, or 92%, to $19 million for the third quarter of 2001 versus the third quarter of 2000, reflecting the purchase of 116 of the Crestline lease entities by our wholly owned TRS effective January 1, 2001 and the purchase of four additional lessee entities (three of the lessee entities were purchased from Wyndham, while the other was purchased from Crestline) effective June 16, 2001. As discussed in Note 2 to the condensed consolidated financial statements, percentage rental revenues from third-party lessees of $18 million and $366 million for the thirty-six weeks ended September 7, 2001 and September 8, 2000, respectively, were deferred on the balance sheet as deferred -17-
HOST MARRIOTT CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION rent. For the third quarter of 2001 and 2000, $3 million and $75 million of rental income was deferred. Percentage rent will be recognized as income only as specified hotel sales thresholds are achieved. Depreciation and Amortization. Depreciation and amortization increased $12 million or 16% for the third quarter of 2001 versus the third quarter of 2000 and increased $42 million, or 19% year-to-date, primarily reflecting an increase in depreciable assets. The increase in depreciation expense reflects the consolidation of three hotels and other equipment as a result of the purchase of the voting interest in Rockledge and Fernwood as discussed in Note 6. The transaction caused an increase in depreciable assets of $206 million. It is also the result of $379 million in capital expenditures in 2000 and $204 million in capital expenditures in the first three quarters of 2001. Hotel Operating Costs and Expenses. As discussed above, 2001 hotel revenues and operating costs are not comparable with 2000. During 2000, Crestline and Wyndham, as lessees, paid specified direct property-level costs including management fees, which reduced the net rent payment to us under the terms of the leases. During 2001, these costs are borne by us and are included in our condensed consolidated results of operations. Corporate Expenses. Corporate expenses were flat for the third quarter of 2001 and decreased $3 million year-to-date from prior year levels. Minority Interest Expense (Benefit). For the twelve weeks and thirty-six weeks ended September 7, 2001 and September 8, 2000, respectively, we recognized minority interest expense (benefit) of $0 million and $(4) million, and $26 million and $(26) million, respectively. The variance is due in part to the decrease in the minority interest ownership from 22% in the third quarter of 2000 to 8% in the third quarter of 2001, and reflects the OP Unitholders' share in our results of operations. Assuming the Blackstone OP Units had been converted at January 1, 2001, the year-to-date minority interest expense would have been $21 million, or a decrease of $5 million. Interest Expense. Interest expense increased 4% to $104 million in the third quarter of 2001 and increased 6% to $311 million year-to-date, primarily due to the issuance in October of 2000 of $250 million of 91/4% Series F Senior Notes, which was primarily used to fund the purchase of the Crestline lessee entities and for general corporate purposes. Net Income (Loss). Our net loss was $7 million for the third quarter of 2001 compared to $17 million for the third quarter of 2000. Our year-to-date income was $74 million compared to a net loss of $127 million in for the same period in 2000. The increases in net income primarily reflect the acquisition of the Crestline and Wyndham Lessee Entities effective January 1, 2001 and June 16, 2001, thereby eliminating amounts paid to Crestline and Wyndham as lessees for 120 of our properties and the effect of the reduction of the deferral of contingent rent, which went from $75 million to $3 million for third quarter 2000 compared to third quarter 2001 and $366 million to $18 million year-to-date 2000 compared to year-to-date 2001. Net Income (Loss) Available to Common Shareholders. The net loss available to common shareholders was $16 million for the third quarter of 2001 and the net income available to common shareholders was $51 million year-to-date, an increase of $6 million and $189 million over the same periods in 2000, respectively. The increase primarily reflects the previously discussed reduction of the deferral of contingent rent. These results were partially offset by the $4 million gain on the repurchase of the Convertible Preferred Securities recorded during the first quarter of 2000 and an increase in dividends of preferred stock due to the issuance of Class C preferred stock during second quarter 2001. -18-
HOST MARRIOTT CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FFO and EBITDA --------------- We consider Comparative Funds From Operations ("Comparative FFO"), which consists of Funds From Operations, as defined by the National Association of Real Estate Investment Trusts, adjusted for significant non-recurring items detailed in the chart below, and our consolidated earnings before interest expense, income taxes, depreciation, amortization and other non-cash items (including contingent rent) ("EBITDA") to be indicative measures of our operating performance due to the significance of our long-lived assets. Comparative FFO and EBITDA are also useful in measuring our ability to service debt, fund capital expenditures and expand our business. Furthermore, management believes that Comparative FFO and EBITDA are meaningful disclosures that will help shareholders and the investment community to better understand our financial performance, including comparing our performance to other real estate investment trusts. However, Comparative FFO and EBITDA as presented may not be comparable to amounts calculated by other companies. This information should not be considered as an alternative to net income, operating profit, cash from operations, or any other operating or liquidity performance measure prescribed by accounting principles generally accepted in the United States. Cash expenditures for various long-term assets, interest expense (for EBITDA purposes only) and income taxes have been, and will be incurred which are not reflected in the EBITDA and Comparative FFO presentations. Comparative FFO available to common shareholders decreased $24 million, or 24%, to $75 million for the third quarter of 2001 over the third quarter of 2000, and decreased $2 million or 1%, to $322 million year-to-date. The following is a reconciliation of the income (loss) from operations before extraordinary items to Comparative FFO (in millions): <TABLE> <CAPTION> Twelve Weeks Ended Thirty-six Weeks Ended ----------------------------- ----------------------------- September 7, September 8, September 7, September 8, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Funds from Operations Income (loss) from operations before extraordinary items................................................ $ (6) $ (17) $ 75 $ (124) Depreciation and amortization.......................... 86 74 262 220 Other real estate activities........................... (1) (1) -- (2) Partnership adjustments................................ 3 2 35 (26) ------------ ------------ ------------ ------------ Funds from operations of Host LP........................ 82 58 372 68 Effect on funds from operations of SAB 101............. 3 75 18 366 Effective impact of lease repurchase................... 5 -- 8 -- ------------ ------------ ------------ ------------ Comparative funds from operations of Host LP............ 90 133 398 434 Dividends on preferred stock........................... (9) (5) (23) (15) ------------ ------------ ------------ ------------ Comparative funds from operations of Host LP available to common unitholders........................ 81 128 375 419 Comparative funds from operations of minority partners of Host LP........................................... (6) (29) (53) (95) ------------ ------------ ------------ ------------ Comparative funds from operations available to common shareholders of Host REIT....................... $ 75 $ 99 $ 322 $ 324 ============ ============ ============ ============ </TABLE> We are the sole general partner in the Operating Partnership and as of September 7, 2001 and September 8, 2000 held approximately 92% and 78%, respectively, of the outstanding OP Units. The $6 million and $29 million, and $53 million and $95 million, deducted for the twelve weeks and thirty-six weeks ended September 7, 2001 and September 8, 2000, respectively, represent the Comparative FFO attributable to the interests in the Operating Partnership held by those minority partners. OP Units owned by holders other than us are redeemable at the option of the holder, generally commencing one year after the -19-
HOST MARRIOTT CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION issuance of their OP Units. Upon redemption of an OP Unit, the holder would receive from the Operating Partnership cash in an amount equal to the market value of one share of our common stock, or at our option, a share of our common stock. EBITDA decreased $38 million, or 17%, to $185 million in the third quarter of 2001, and decreased $12 million, or 2%, to $697 million, year-to-date over the comparable periods in 2000. Hotel EBITDA was $192 million and $157 million for the third quarters of 2001 and 2000, which does not include deferred rental income of $3 million and $75 million, respectively, and $718 million and $390 million year-to-date, which does not include deferred rental income of $18 million and $366 million, respectively. As previously discussed, 2001 Hotel EBITDA primarily reflects the revenues and expenses generated by the hotels whereas 2000 Hotel EBITDA primarily reflects rental income from lessees. The following schedule presents our EBITDA as well as a reconciliation of EBITDA to the income (loss) from operations before extraordinary items (in millions): <TABLE> <CAPTION> Twelve Weeks Ended Thirty-six Weeks Ended ------------------------------- ------------------------------- September 7, September 8, September 7, September 8, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> EBITDA Hotels............................................... $ 192 $ 157 $ 718 $ 390 Office buildings and other investments............... 2 2 11 5 Interest income...................................... 5 9 25 26 Corporate and other expenses......................... (12) (7) (40) (38) Effect on revenue of SAB 101......................... 3 75 18 366 ------------- ------------- ------------- ------------- EBITDA of Host LP....................................... 190 236 732 749 Distributions to minority interest partners of Host LP.................................................. (5) (13) (35) (40) ------------- ------------- ------------- ------------- EBITDA of Host REIT..................................... $ 185 $ 223 $ 697 $ 709 ============= ============= ============= ============= </TABLE> <TABLE> <CAPTION> Twelve Weeks Ended Thirty-six Weeks Ended -------------------------------- ------------------------------ September 7, September 8, September 7, September 8, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> EBITDA of Host REIT..................................... $ 185 $ 223 $ 697 $ 709 Effect on revenue of SAB 101............................ (3) (75) (18) (366) Interest expense........................................ (104) (100) (311) (293) Dividends on Convertible Preferred Securities........... (7) (8) (22) (22) Depreciation and amortization........................... (87) (75) (266) (224) Minority interest (expense) benefit..................... -- 4 (26) 26 Income taxes............................................ -- (4) (15) (7) Distributions to minority interest partners of Host LP.. 5 13 35 40 Lease repurchase expense................................ -- -- (5) -- Other non-cash charges, net............................. 5 5 6 13 ------------- ------------- ------------- ------------- Income (loss) from operations before extraordinary items............................................ $ (6) $ (17) $ 75 $ (124) ============= ============= ============= ============= </TABLE> Distributions to minority holders of OP Units were $5 million and $13 million, respectively, for the twelve weeks ended September 7, 2001 and September 8, 2000, and $35 million and $40 million for the thirty-six weeks ended September 7, 2001 and September 8, 2000. These OP Units are convertible at any time at the discretion of the holder. These OP Units would be converted into cash or our common stock at our option. Our interest coverage, defined as EBITDA divided by cash interest expense, was 2.3 times and 2.5 times for the 2001 and 2000 thirty-six week periods, respectively, and 2.4 times for full year 2000. The ratio of -20-
HOST MARRIOTT CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION earnings to fixed charges was 1.3 to 1.0 through the third quarter of 2001 versus a deficiency of earnings to fixed charges of $145 million through the third quarter of 2000, which was primarily due to the deferral of contingent rental revenue of $366 million. We reported a ratio of earnings to fixed charges of 1.2 to 1.0 for the full year 2000. Cash Flows and Financial Condition We reported a decrease in cash and cash equivalents of $131 million during the thirty-six weeks ended September 7, 2001 compared to a decrease of $89 million during the thirty-six weeks ended September 8, 2000. Cash from operations was $182 million through the third quarter of 2001 and $398 million through the third quarter of 2000. The $216 million decrease in cash from operations primarily relates to the cash used to purchase the Crestline Lessee Entities. Excluding the lease purchases, operating cash flow from operations would have been $390 million, or a decrease of 2% when compared to 2000. Cash used in investing activities was $258 million and $307 million through the third quarter of 2001 and 2000, respectively. Cash used in investing activities through the third quarter includes capital expenditures and other investments of $204 million and $271 million for 2001 and 2000, respectively, mostly related to renewal and replacements on existing properties and new development projects. Property and equipment balances include $118 million and $135 million for construction in progress as of September 7, 2001 and December 31, 2000, respectively. The balance as of September 7, 2001 primarily relates to the development of the Ritz-Carlton, Naples Golf Resort and various other expansion and development projects. On April 1, 2001, the 50,000 square foot world-class spa at The Ritz-Carlton, Naples was placed in service at an approximate development cost of $23 million. Cash used in financing activities was $55 million through the third quarter of 2001 and $180 million through the third quarter of 2000. Cash from financing activities through the third quarter of 2001 includes $275 million of debt issuances and $144 million from the issuance of cumulative redeemable preferred stock. Cash was used in financing activities primarily for the payment of $207 million in dividends and the repayment and prepayment of $267 million in debt. During the first quarter of 2001, the Company borrowed $115 million under the revolver portion of the bank credit facility (the "revolver") to partially fund the acquisition of the Crestline Lessee Entities as well as for general corporate purposes, which was fully repaid in the second quarter of 2001. During the third quarter, we borrowed $60 million under the revolver to purchase minority interests in various hotels from Wyndham. During the fourth quarter, we borrowed an additional $250 million under the revolver. As of October 19, 2001, $150 million and $310 million are outstanding under the term and revolving loan portions of the bank credit facility, respectively, and the additional available capacity under the revolver is $315 million. On September 19, 2001, we announced that the Board of Directors had declared cash dividends of $0.26 per common share and $0.625 per share of Preferred Stock, which were paid on October 12, 2001 to shareholders of record on September 28, 2001. On March 27, 2001, we sold approximately 6.0 million shares of 10% Class C preferred stock ("Class C Preferred Stock") with a par value of $0.01 for net proceeds of $144 million. Holders of the Class C Preferred Stock are entitled to receive cumulative cash dividends at a rate of 10% per annum of the $25 per share liquidation preference. Dividends are payable quarterly in arrears commencing April 15, 2001, on which date a pro rata dividend of $0.03 per share was distributed. Beginning March 27, 2006, we have the option to redeem the Class C Preferred Stock for $25.00 per share, plus accrued and unpaid dividends to the date of redemption. -21-
HOST MARRIOTT CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Effective January 1, 2001, each of Rockledge Hotel Properties, Inc. and Fernwood Hotel Assets, Inc. (the "Non-Controlled Subsidiaries") elected to be a TRS and in April 2001, the Operating Partnership acquired the voting interests in the Non-Controlled Subsidiaries held by the Host Marriott Statutory Employee/Charitable Trust for approximately $2 million, which is also permitted as a result of the REIT Modernization Act. Subsequent to the acquisition, on a consolidated basis our results of operations reflect the revenues and expenses generated by the two taxable corporations, and our consolidated balance sheets include the various assets, consisting of three additional full-service properties, one located in St. Louis, Missouri, and two located in Mexico City, Mexico, as well as certain joint venture interests, held by the two taxable corporations, which were approximately $356 million of assets and $262 million of liabilities, including $54 million of third party debt ($26 million of which matures in 2001), respectively, as of March 23, 2001. On February 7, 2001, May 7, 2001 and May 29, 2001, Blackstone and affiliates ("Blackstone") converted 12.5 million, 10.0 million and 18.2 million OP Units, respectively, to common shares and immediately sold them to an underwriter for sale on the open market. As a result of the transactions, Blackstone now owns approximately 1% of the outstanding OP Units of the Operating Partnership and we increased our ownership in the Operating Partnership to 92%. We received no proceeds as a result of the transactions. Item 3. Quantitative and Qualitative Disclosures about Market Risk Our borrowings under the bank credit facility are sensitive to changes in interest rates. The interest rate on this debt obligation, which was $150 million at both September 7, 2001 and December 31, 2000, is based on various LIBOR terms plus 200 basis points. The weighted average interest rate for this financial instrument is 5.9% for the thirty-six weeks ended September 7, 2001 and 9.0% for the year ended December 31, 2000. As discussed in Note 5 to the condensed consolidated financial statements, the mortgage loan on the Ritz- Carlton, Amelia Island hotel was prepaid in full on August 31, 2001. On August 30, 2001, a Canadian subsidiary of the Company entered into a financing agreement pursuant to which it borrowed $96.6 million at a variable rate of LIBOR plus 275 basis points. In addition, the subsidiary entered into currency forward contracts as discussed further in Note 5 to the condensed consolidated financial statements. The weighted average interest rate for this financial instrument is 6.4% for the thirty-six weeks ended September 7, 2001. -22-
PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is involved in routine litigation and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and which collectively are not expected to have a material adverse effect on the business, financial condition or results of operations of the Company. Item 6. Exhibits and Reports (a) Exhibits A complete listing of exhibits required is given in the Exhibit Index that precedes the exhibits filed with this report. (b) Reports on Form 8-K Not applicable -23-
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HOST MARRIOTT CORPORATION October 22, 2001 /s/ Donald D. Olinger ---------------- --------------------- Date Donald D. Olinger Senior Vice President and Corporate Controller (Chief Accounting Officer) -24-
Exhibit Index Description ------------- ----------- Exhibit 10.41 First Amendment to Amended and Restated Pledge and Security Agreement dated as of March 1, 2001 and Amended and Restated as of August 5, 1998, and amended and restated as of May 31, 2000. Exhibit 10.42 Second Amendment and Waiver of Amended and Restated Credit Agreement dated as of March 1, 2001, and amended and restated as of August 5, 1998, and further amended and restated May 31, 2000, and further amended and restated October 27, 2000. Exhibit 10.43 Amended and Restated Subsidiaries Guaranty dated as of August 5, 1998 and amended and restated as of May 31, 2000. Exhibit 10.44 Amended and Restated Pledge and Security Agreement dated as of August 5, 1998 and amended and restated as of May 31, 2000.