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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2001 Commission File No. 001-14625
HOST MARRIOTT CORPORATION
Maryland 53-0085950
(State of Incorporation) (I.R.S. Employer
Identification Number)
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-9000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- --------------------------------------------------------- ---------------------------
Common Stock, $.01 par value (264,561,792 shares New York Stock Exchange
outstanding as of March 22, 2002) Chicago Stock Exchange
Purchase share rights for Series A Junior Participating Pacific Stock Exchange
Preferred Stock, $.01 par value Philadelphia Stock Exchange
Class A Preferred Stock, $.01 par value (4,160,000 shares New York Stock Exchange
outstanding as of March 22, 2002)
Class B Preferred Stock, $.01 par value (4,000,000 shares
outstanding as of March 22, 2002)
Class C Preferred Stock, $.01 par value (5,980,000 shares
outstanding as of March 22, 2002)
The aggregate market value of shares of common stock held by non-affiliates
at March 22, 2002 was $2,820,000,000.
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (ii) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
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FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K and the information incorporated by
reference herein include forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. We identify forward-looking statements in this annual report and
the information incorporated by reference herein by using words or phrases such
as "anticipate", "believe", "estimate", "expect", "intend", "may be",
"objective", "plan", "predict", "project" and "will be" and similar words or
phrases, or the negative thereof.
These forward-looking statements are subject to numerous assumptions, risks
and uncertainties. Factors which may cause our actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by us in those statements include, among
others, the following:
. national and local economic and business conditions, including the
effect of the terrorist attacks of September 11, 2001 on travel, that
will affect, among other things, demand for products and services at our
hotels and other properties, the level of room rates and occupancy that
can be achieved by such properties and the availability and terms of
financing and our liquidity;
. our ability to maintain the properties in a first-class manner,
including meeting capital expenditure requirements;
. our ability to compete effectively in areas such as access, location,
quality of accommodations and room rate structures;
. our ability to acquire or develop additional properties and the risk
that potential acquisitions or developments may not perform in
accordance with expectations;
. our degree of leverage which may affect our ability to obtain financing
in the future;
. our degree of compliance with current debt covenants;
. changes in travel patterns, taxes and government regulations which
influence or determine wages, prices, construction procedures and costs;
. government approvals, actions and initiatives, including the need for
compliance with environmental and safety requirements, and changes in
laws and regulations or the interpretation thereof;
. the effects of tax legislative action, including specified provisions of
the Work Incentives Improvement Act of 1999 as enacted on December 17,
1999 (we refer to this as the "REIT Modernization Act");
. our ability to continue to satisfy complex rules in order for us to
qualify as a REIT for federal income tax purposes, the ability of the
operating partnership to satisfy the rules to qualify as a partnership
for federal income tax purposes, and the ability of certain of our
subsidiaries to qualify as taxable REIT subsidiaries for federal income
tax purposes, and our ability and the ability of our subsidiaries to
operate effectively within the limitations imposed by these rules; and
. other factors discussed below under the heading ''Risk Factors'' and in
other filings with the Securities and Exchange Commission.
Although we believe the expectations reflected in our forward-looking
statements are based upon reasonable assumptions, we can give no assurance that
we will attain these expectations or that any deviations will not be material.
Except as otherwise required by the federal securities laws, we disclaim any
obligation or undertaking to publicly release any updates or revisions to any
forward-looking statement contained in this annual report on Form 10-K and the
information incorporated by reference herein to reflect any change in our
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
1
Items 1 & 2. Business and Properties
Introduction
We are a self-managed and self-administered real estate investment trust or
REIT that owns full-service hotel properties. As of March 1, 2002, we own 122
hotels representing approximately 58,000 rooms located throughout North
America. Most of our hotels are operated under brand names that are among the
most respected and widely recognized in the lodging industry--including the
Marriott, Ritz-Carlton, Four Seasons, Hilton, Hyatt and Swissotel brand names.
Our primary business objective is to provide superior total returns to our
shareholders through a combination of dividends, appreciation in net asset
value per share, and growth in funds from operations, or FFO, by focusing on
aggressive asset management and disciplined capital allocation. FFO is defined
by the National Association of Real Estate Investment Trusts as net income
computed in accordance with GAAP, excluding gains or losses from sales of
properties, plus real estate-related depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures.
We were formed in 1998 as a Maryland corporation as part of the conversion
of Host Marriott, a Delaware corporation, as a REIT. As part of this REIT
conversion, and Host Marriott's desire to re-incorporate in Maryland, we merged
with Host Marriott and retained the name. We conduct our operations as an
umbrella partnership REIT through our direct and indirect subsidiaries,
including Host Marriott, L.P., a Delaware limited partnership of which we are
the sole general partner and in which we hold approximately 92% of the
interests.
In this report, we refer to ourselves (excluding our subsidiaries) as "Host
REIT," to our predecessor Host Marriott, a Delaware corporation, as "Host
Marriott," and to Host Marriott, L.P. as the "operating partnership" or "Host
LP."
The address of our principal executive office is 10400 Fernwood Road,
Bethesda, Maryland, 20817. Our phone number is 301-380-9000.
The Lodging Industry
The lodging industry in the United States consists of both private and
public entities, which operate in an extremely diversified market under a
variety of brand names. Competition in the industry is based primarily on the
level of service, quality of accommodations, convenience of locations and room
rates. In order to cater to a wide variety of tastes and needs, the lodging
industry is broadly segmented into six categories: luxury, upper-upscale,
upscale, midscale (with and without food and beverage service) and economy.
Most of our hotels operate in urban markets in either the luxury lodging
segment (represented by such brand names as Ritz-Carlton and Four Seasons) and
the upper-upscale lodging segment (represented by such brand names as Marriott,
Hilton, Hyatt, Swissotel, Crowne Plaza, Doubletree, Renaissance and Westin).
Although the competitive position of each of our hotel properties varies by
market, we believe that our properties compare favorably to their competitive
set in their respective markets.
A common measure used by the industry to evaluate the operations of a hotel
is "Revenue per available room," or "RevPAR," which is defined as the product
of the average daily room rate charged and the average daily occupancy
achieved. RevPAR does not include food and beverage or other ancillary revenues
such as parking, telephone or other guest services generated by the property.
The lodging industry experienced significant RevPAR declines in 2001 compared
to 2000 due to the sluggish economy that was intensified by the September 11,
2001 terrorist attacks. We believe that the lodging industry will continue to
experience RevPAR declines at least through the first half of 2002. From 1991
through 1997, the upper-upscale sector of the lodging industry benefited from a
favorable supply/demand imbalance, driven in part by low construction levels
combined with high gross domestic product, or GDP, growth. However, beginning
in 1998, supply has
2
moderately outpaced demand, causing slight declines in occupancy rates in the
sector in which we operate, although room rates continued to increase through
2000. The relative balance between supply and demand growth in the industry and
the segments in which we operate may be influenced by a number of factors,
including growth of the economy, interest rates, unique local considerations
and the relatively long lead time to develop urban, convention and resort
hotels. The current amount of excess supply growth in the upper-upscale and
luxury portions of the full-service segment of the lodging industry has been
much less severe than that experienced in the lodging industry in other
economic downturns. Growth in room supply in the upper-upscale sector continued
in 2001, while room demand declined during the year. We believe that during
2002, the rate of supply growth will begin to decrease as the lack of
availability of development financing slows new construction. However, demand
decreased substantially in 2001 because of the economic recession, and the
decline was deepened by the terrorist attacks on September 11, 2001. We believe
that demand will remain below historical levels at least during the first half
of 2002, but should begin to grow toward the end of 2002 and continue in 2003
if the economy strengthens.
According to Smith Travel Research, RevPAR for hotels operating in the
upper-upscale and luxury segments decreased 12% for the year ended December 31,
2001 when compared to the year ended December 31, 2000. This decrease resulted
from decreases in occupancy and average daily rate for this period of 10% and
2%, respectively. Our portfolio of hotels has experienced an overall decline in
RevPAR that is consistent with the results of our segment as a whole.
Business Strategy
Our primary business objective is to provide superior total returns to our
shareholders through a combination of dividends, appreciation in net asset
value per share, and growth in FFO, a frequently used measure in the real
estate industry. In order to achieve this objective we employ the following
strategies:
. we acquire existing upper-upscale and luxury full-service hotels as
market conditions permit, including hotels operated by leading
management companies which satisfy our investment criteria such as
Marriott, Ritz-Carlton, Four Seasons, Hyatt, and Hilton. Such
acquisitions may be completed through various means including
transactions involving entities in which we are already a partner,
public and private portfolio transactions, single asset transactions,
and by entering into joint ventures when we believe our return on
investment will be maximized by doing so;
. we seek to maximize the value of our existing portfolio through
aggressive asset management, by working with the managers of our hotels
to reduce the operating costs of our hotels and increase revenues, as
well as by completing selective capital improvements and expansions that
are designed to improve operations;
. we selectively expand existing properties and develop new upper-upscale
and luxury full-service hotels operated by leading management companies
that we believe satisfy our investment criteria and employ transaction
structures which mitigate our risk; and
. we seek to recycle capital through opportunistic asset sales and
selective disposal of non-core assets, including older assets with
significant capital needs, assets that are at a competitive risk given
potential new supply, or assets in slower-growth markets.
Our acquisition strategy focuses on hotels operating in the upper-upscale
and luxury full-service segments of the market. We believe these market
segments will continue to offer opportunities over time to acquire assets at
attractive multiples of cash flow and at discounts to replacement value. Our
acquisition criteria continues to focus on:
. properties in locations that are difficult to duplicate with high costs
for market entry by prospective competitors, such as hotels located in
urban, airport and resort/convention locations;
3
. properties operated under premium brand names, such as Marriott,
Ritz-Carlton, Four Seasons, Hilton, and Hyatt; and
. underperforming hotels that can be improved by conversion to high
quality brands;
We believe we are well-qualified to pursue our acquisition and development
strategy. Management has extensive experience in acquiring and financing
lodging properties and believes its industry knowledge, relationships and
access to market information provide a competitive advantage with respect to
identifying, evaluating and acquiring lodging properties, as well as improving
and maintaining the quality of the hotel assets.
Our acquisition efforts since 1998 have been limited and primarily focused
on acquiring the interests of limited or joint venture partners, consolidating
our ownership of assets already included in the portfolio and purchasing the
lessee interests that were created as part of our REIT conversion. We are
exploring acquisitions with an emphasis on transactions that can be
accomplished, at least in part, through the issuance of operating partnership
units such that our overall debt ratios are improved. Recently, our
acquisitions have been limited due to the lack of availability of suitable
candidates that complement our portfolio of upper-upscale and luxury hotels and
provide an attractive return on our investments, increased price competition
for upper-upscale and luxury hotels, and capital limitations due to weak equity
markets for REIT stocks.We expect that lack of liquidity will ultimately cause
some property owners to make some of their properties available for sale;
however, the timing of these potential sales is uncertain. We believe that
acquisitions that meet our criteria will provide the highest and best use of
our capital.
Our asset management team, which consists of professionals with extensive
industry knowledge and relationships, focuses on maximizing the value of our
existing portfolio through working with our managers to reduce operating costs
at our hotels and to provide economic incentives to individual and business
travelers in selected markets in order to increase demand; monitoring property
and brand performance; pursuing expansion and repositioning opportunities;
overseeing capital expenditure budgets and forecasts; assessing return on
investment expenditure opportunities; and analyzing competitive supply
conditions in each market.
In addition to acquiring and maintaining superior assets, a key part of our
strategy is to have the hotels managed by leading management companies. As of
March 1, 2002, 101 of our 122 properties were managed by subsidiaries of
Marriott International as Marriott or Ritz-Carlton brand hotels and an
additional eight hotels are part of Marriott International's full-service hotel
system through franchise agreements. The remaining hotels are managed by
leading management companies including Four Seasons, Hyatt and Swissotel. In
general, we believe that these premium brands have consistently outperformed
the industry. Demonstrating the strength of our portfolio, our comparable
properties, consisting of 116 hotels, owned directly or indirectly by us for
the entire 2001 and 2000 fiscal years (excluding nine hotels with
non-comparable operating environments as a result of acquisitions,
dispositions, property damage, and expansion and development projects),
generated 24% and 26% RevPAR premiums over other similar brands in the
upper-upscale and luxury segment for fiscal years 2001 and 2000, respectively,
based on information from Smith Travel Research.
Operating Structure
We are managed by our board of directors and executive officers. We have no
employees who are not also employees of the operating partnership. Together
with the operating partnership, we continue, in an UPREIT structure, the
full-service hotel ownership business formerly conducted by Host Marriott and
its subsidiaries. We are the sole general partner of the operating partnership
and manage all aspects of the business of the operating partnership. This
includes decisions with respect to sales and purchases of hotels, the financing
of the operating partnership and its assets, the leasing of the hotels, and
capital expenditures for the hotels subject to the terms of the leases and the
management agreements. All of our hotels are owned by the operating partnership
or one or more of its subsidiaries.
4
Host Marriott and its subsidiaries and affiliates consummated a series of
transactions in order to qualify as a REIT for federal income tax purposes for
the fiscal year beginning January 1, 1999 (a process which we refer to as the
REIT conversion). During 1998, Host Marriott reorganized its hotels and certain
other assets so that they were owned by the operating partnership and its
subsidiaries. Host Marriott and its subsidiaries received a number of operating
partnership interests, or OP Units, equal to the number of then outstanding
shares of Host Marriott common stock, and the operating partnership and its
subsidiaries assumed substantially all of the liabilities of Host Marriott and
its subsidiaries. As a result of this reorganization, we are the sole general
partner in the operating partnership. OP Units owned by holders other than us
are redeemable at the option of the holders, generally commencing one year
after the issuance of their OP Units. Upon redemption of an OP Unit, a holder
would receive cash from the operating partnership in an amount equal to the
market value of one share of our common stock. However, in lieu of a cash
redemption by the operating partnership, we have the right to acquire any OP
Unit offered for redemption directly from the holder thereof in exchange for
one share of our common stock. As of December 31, 2001, we owned approximately
92% of the outstanding OP Units of Host LP.
Due to certain tax laws restricting REITs from deriving revenues directly
from the operations of hotels, as part of the REIT conversion, our hotel
properties were leased by the operating partnership and its subsidiaries to
third party lessees that, in turn, assumed or entered into agreements with
Marriott International and other hotel operators to conduct the day-to-day
management of the hotels. During 1999 and 2000, approximately 95% of our hotels
were leased to Crestline Capital Corporation and its subsidiaries.
The REIT Modernization Act, which was enacted in December 1999, amended the
tax laws to permit REITs, effective January 1, 2001, to lease hotels to a
subsidiary that qualifies as a taxable REIT subsidiary, and to own all of the
voting stock of such subsidiary. The earnings of the taxable REIT subsidiary
are subject to normal corporate level federal and state income taxes.
Effective January 1, 2001, a wholly owned taxable REIT subsidiary of Host
LP, HMT Lessee LLC (the "TRS") acquired from Crestline the equity interests in
the lessees of 112 of our hotels and the leasehold interests in four hotels for
$207 million in cash, including approximately $6 million of legal fees and
transfer taxes. In connection with that transaction, we recorded a
non-recurring, pre-tax loss related to the termination of the leases for
financial reporting purposes of $207 million during the fourth quarter of 2000,
net of an $82 million tax benefit which we have recorded as a deferred tax
asset, because for income tax purposes, the transaction is recorded as an
acquisition of leasehold interests that will be amortized over the remaining
term of the leases.
During June 2001, we completed two other transactions, which resulted in the
acquisition by the TRS of our remaining four leases held by third parties.
Effective June 16, 2001, we acquired the lease for the San Diego Marriott Hotel
and Marina by purchasing the lessee equity interest from Crestline for $2.7
million net of an income tax benefit of $1.8 million. Also in June 2001, in
connection with the acquisition from Wyndham International, Inc. of the
minority limited partnership interests in five partnerships holding seven
hotels, we acquired the leases for three hotels: the San Diego Marriott Mission
Valley, the Minneapolis Marriott Southwest, and the Albany Marriott.
Prior to the effectiveness of the REIT Modernization Act, the operating
partnership held a 95% non-voting interest in two taxable subsidiaries,
Rockledge Hotel Properties, Inc. ("Rockledge") and Fernwood Hotel Assets, Inc.
("Fernwood"), that held assets in which, under REIT rules, we could not own a
controlling interest. As a result of the effectiveness of the REIT
Modernization Act, we were able to acquire the remaining 5% economic interest
and 100% of the voting interest in these subsidiaries for $2 million. The
purchase was consummated in April of 2001, and, as a result, we now consolidate
these subsidiaries.
The acquisition of the leases through taxable REIT subsidiaries enables us
to better control our portfolio of hotels and was accretive to our earnings and
cash flow. There can be no guarantee, however, that we will benefit
5
from similar favorable results in the future. Further, on a consolidated basis
our results of operations will reflect the revenues and expenses, including
taxes paid by the taxable REIT subsidiaries, generated by these hotels rather
than rental income.
We also consolidate seven entities in which we have a controlling financial
interest. At December 31, 2001, these entities own, in the aggregate 8 hotels,
with $842 million in assets, and $400 million in debt, all of which is
non-recourse to Host Marriott. Our ownership in these entities varies from
50.5% to 97.5%.
Lodging Property Portfolio
Overview. Our lodging portfolio, as of March 1, 2002, consists of 122
upper-upscale and luxury full-service hotels containing approximately 58,000
rooms. Our hotel lodging properties represent quality upper-upscale and luxury
assets in the full-service segment and are operated under various premium
brands including Marriott, Ritz-Carlton, Four Seasons, Hyatt, and Swissotel.
The following chart details our portfolio by brand:
Number of
Brand Hotels Rooms
----- --------- ------
Marriott managed... 91 46,383
Marriott franchised 8 2,321
Ritz-Carlton....... 10 3,831
Hyatt.............. 4 2,214
Swissotel.......... 4 1,970
Four Seasons....... 2 608
Other brands....... 3 682
--- ------
122 58,009
=== ======
Our hotels average approximately 475 rooms. Twelve of our hotels have more
than 750 rooms. Hotel facilities typically include meeting and banquet
facilities, a variety of restaurants and lounges, swimming pools, gift shops
and parking facilities. Our hotels primarily serve business and pleasure
travelers and group meetings at locations that are generally well situated with
significant barriers to entry by competitors. These locations include downtown
areas of major metropolitan cities, airports and resort/convention locations
where there are limited or no development sites and suburban areas near
business corridors. The average age of the properties is 18 years, although
many of the properties have had substantial renovations or major additions.
To maintain the overall quality of our lodging properties, each property
undergoes refurbishments and capital improvements on a regularly scheduled
basis. Typically, refurbishing has been provided at intervals of five years,
based on an annual review of the condition of each property. For fiscal years
2001, 2000 and 1999 we spent $230 million, $271 million and $211 million,
respectively, on capital improvements to existing properties. As a result of
these expenditures, we expect to maintain high-quality rooms, restaurants and
meeting facilities at our properties. During the current economic downturn we
are conserving funds by temporarily suspending certain major capital
expenditures.
Acquisitions. Recently, our acquisitions have been limited due to the lack
of availability of suitable candidates that complement our portfolio of
upper-upscale and luxury hotels and provide an attractive return on our
investments, increased price competition for upper-upscale and luxury hotels,
and capital limitations due to weak equity markets for REIT stocks. During the
three-year period from 1996 through 1998, we acquired 77 full-service hotels,
but since 1998 our acquisitions have primarily focused on acquiring the
interests of limited or joint venture partners, consolidating our ownership of
assets already included in the portfolio and repurchasing the lessee interests
that were created as part of our REIT conversion. We believe that acquisitions
that meet our criteria will provide the highest and best use of our capital.
6
During 2001, we acquired outstanding minority interests in seven hotels from
Wyndham for $60 million. In addition, we acquired the voting interests
representing 5% of the equity interests in two previously non-controlled
subsidiaries for approximately $2 million. During 2000, we acquired a
non-controlling partnership interest in JWDC Limited Partnership, which owns
the 772-room J.W. Marriott Hotel in Washington, D.C., for $40 million and have
the option to purchase the outstanding interests beginning in 2002. Also during
2000, we invested with Marriott International in the Courtyard joint venture
described in "Business and Properties--Other Real Estate Investments." During
1999, our acquisitions were limited to the purchase of minority interests in
two hotels where we had previously acquired the controlling interests, for a
total consideration of approximately $14 million.
Through subsidiaries we currently own four Canadian and two Mexican
properties, with 2,548 rooms. International acquisitions are limited due to the
difficulty in meeting our stringent return criteria. However, we intend to
continue to evaluate acquisition opportunities in Canada and other
international locations. We will acquire international properties only when we
believe such acquisitions offer satisfactory returns after adjustments for
currency and country risks.
Dispositions. We will also consider from time to time selling hotels that
do not fit our long-term strategy or otherwise meet our ongoing investment
criteria, including, for example, hotels in some smaller or slower growth
markets, hotels that require significant future capital improvements and other
underperforming assets. We typically reinvest the net proceeds from any
property sales into upper-upscale and luxury hotels more consistent with our
strategy or otherwise apply such net proceeds in a manner consistent with our
investment strategy (which has included open market purchases of our common
stock, our convertible redeemable preferred securities and other securities).
Under the terms of our amended bank credit facility, which we entered into in
late 2001, we are required to use the net proceeds from any sale of hotel
properties to repay amounts due, if any, under our bank credit facility. As of
March 1, 2002, we have no borrowings under our credit facility. The following
table summarizes our dispositions from January 1, 1999 through March 1, 2002
(in millions, except number of rooms):
Pre-tax
Total Gain (Loss)
Property Location Rooms Consideration on Disposal
- -------- ---------------- ----- ------------- -----------
1999 Dispositions
Minneapolis/Bloomington Marriott........... Bloomington, MN 479 $ 35 $10
Saddle Brook Marriott...................... Saddle Brook, NJ 221 15 3
Marriott's Grand Hotel Resort and Golf Club Point Clear, AL 306 28 (2)
The Ritz-Carlton, Boston................... Boston, MA 275 119 15
El Paso Marriott........................... El Paso, TX 296 1 (2)
2001 Dispositions
Vail Marriott Mountain Resort.............. Vail, CO 349 50 15
Pittsburgh City Center Marriott............ Pittsburgh, PA 402 15 (3)
During January 2002, we transferred one of our non-core properties, the St.
Louis Marriott Pavilion hotel, to the mortgage lender. Due to the original
management agreement and debt structure of this partnership, we had not been
receiving any cash flow after payments of debt service from this property. In
the first quarter, we will write off the remaining $13 million of property and
equipment, eliminate $37 million of mortgage debt and related liabilities and
record a non-cash gain of approximately $22 million.
Development Projects. During 2000 and 2001, we focused our energies on
increasing the value of our current portfolio with selective investments,
expansions at existing hotels and a limited amount of new development projects.
Concurrent with the slowdown in the economy, we had evaluated the timing and
size of many of our capital projects. For 2001, we had anticipated spending
approximately $350 million in total capital expenditures, including $225
million in replacement and renewal expenditures. Subsequent to September 11,
7
however, we temporarily suspended certain major capital expenditures. As a
result of the actions taken, our capital expenditures for 2001, not including
new investments such as the Ritz-Carlton, Naples Golf Resort, were $230
million. Based on expected business conditions, we anticipate that our capital
spending will be approximately $185 million in 2002. Over the past three years,
our capital spending has focused on properly maintaining and enhancing the
values of our existing hotels. As a result of the regular attention we have
paid to maintaining our assets at a high standard and the high quality of our
assets, we believe that these capital reductions are achievable during this
period without materially affecting the long-term value of our portfolio. For
the four-year period beginning in 1998, we have spent $1.3 billion on capital
expenditures, including $798 million in replacement and renewal expenditures.
As the industry recovers, we plan to continue our strategy of pursuing capital
expenditure projects designed to enhance the value of our hotels.
In January 2002, we opened the 295-room Ritz-Carlton, Naples Golf Resort,
which is approximately 2 miles from our existing Ritz-Carlton, Naples hotel, at
a development cost of approximately $75 million. The golf resort has 15,000
square-feet of meeting space, four food and beverage outlets, and full access
to 36 holes of a Greg Norman-designed golf course surrounding the hotel. The
newly created golf resort, as well as the 50,000 square-foot world-class
beachfront spa facility, which opened in April 2001 at a cost of $26 million,
will operate in concert with the 463-room Ritz-Carlton, Naples and will offer
travelers an unmatched resort experience. Further, given the close proximity of
the properties to each other, we hope to benefit from cost efficiencies and the
ability to capture larger groups.
Also, during June 2001, we completed the addition of a 20,000 square foot
oceanfront spa to the Marriott Harbor Beach Resort at a development cost of $8
million.
During 2000, we completed construction of a 717-room full-service Marriott
hotel adjacent to the convention center in downtown Tampa, Florida. The hotel
(completed at a development cost of approximately $104 million, excluding a $16
million tax subsidy by the City of Tampa, Florida) opened for business on
February 19, 2000 and includes 45,000 square feet of meeting space, three
restaurants and a 30-slip marina as well as many other amenities.
At the Orlando World Center Marriott Resort, the addition of a 500-room
tower and 15,000 square feet of meeting space was placed in service in June
2000 at an approximate development cost of $88 million, making this hotel the
largest in the Marriott system with 2,000 rooms and over 200,000 square feet of
meeting space. We have also renovated the property's golf course, added a
multi-level parking deck, and upgraded and expanded several restaurants.
We also accomplished various projects to enhance revenues, control expenses
and enhance technology at the hotels. In 2001, we reached an agreement with a
national parking management company to act as an advisor to us regarding
methods to maximize revenues from the parking facilities throughout our entire
portfolio. During 2000, we added approximately 36,000 square feet of new
meeting space and 200 premium-priced rooms to the portfolio, and approved new
parking contracts at four of our properties. We authorized utility conservation
efforts including energy management strategies at five properties, the closing
of several unprofitable food and beverage outlets, and the development of a
program to review labor models. We also approved and implemented internet
connectivity solutions and in-room portal and entertainment options to better
meet the technology needs of our customers.
8
Portfolio Performance. The chart below sets forth performance information
for our comparable properties as of December 31, 2001:
2001 2000
------- -------
Comparable Full-Service Hotels(1)
Number of properties............. 116 116
Number of rooms.................. 53,580 53,580
Average daily rate............... $151.02 $156.50
Occupancy percentage............. 70.0% 77.7%
REVPAR........................... $105.71 $121.55
REVPAR % change.................. (13.0)% --
- --------
(1) Consists of 116 properties owned, directly or indirectly, by us for the
entire 2001 and 2000 fiscal years, respectively, excluding nine properties
with non-comparable operating environments as a result of acquisitions,
dispositions, substantial property damage, or major expansion and
development projects.
The chart below presents some performance information for our entire
portfolio of full-service hotels as of December 31, 2001:
2001(1) 2000 1999(2)
------- ------- -------
Portfolio of Full-Service Hotels
Number of properties............ 122 122 121
Number of rooms................. 58,385 58,370 57,086
Average daily rate.............. $151.68 $158.24 $149.51
Occupancy percentage............ 69.9% 77.6% 77.7%
REVPAR.......................... $105.96 $122.72 $116.13
- --------
(1) Includes the operating results of the New York World Trade Center Marriott
which was destroyed on September 11, 2001, the Vail Marriott Mountain
Resort and Pittsburgh City Center Marriott which were sold in December 2001
and the St Louis Pavilion Marriott which was transferred to the lender
during January of 2002.
(2) Includes the operating results for five properties, which were sold at
various times throughout 1999, through the date of sale.
The following table presents performance information for our comparable
properties by geographic region for 2001 and 2000:
As of
December 31, 2001 Year Ended December 31, 2001 Year Ended December 31, 2000
----------------- ------------------------------ ------------------------------
Average Average
No. of No. of Average Occupancy Average Occupancy
Properties Rooms Daily Rate Percentages RevPAR Daily Rate Percentages RevPAR
---------- ------ ---------- ----------- ------- ---------- ----------- -------
Comparable Full-Service
Hotels (1)
Atlanta................ 15 6,542 $150.80 65.0% $ 98.02 $151.11 72.7% $109.82
DC Metro............... 13 4,995 150.67 67.9 102.26 152.54 76.5 116.68
Florida................ 11 4,878 160.52 71.7 115.15 157.33 77.1 121.28
International.......... 4 1,636 102.04 71.8 73.28 108.26 74.8 80.94
Mid-Atlantic........... 9 6,221 189.43 77.5 146.77 209.40 81.8 171.23
Mountain............... 8 3,310 110.02 66.2 72.79 114.25 74.1 84.64
New England............ 6 2,279 144.62 66.2 95.78 158.21 77.8 123.11
North Central.......... 15 5,394 131.20 66.9 87.80 136.98 75.6 103.53
Pacific................ 23 11,812 163.96 68.9 112.98 169.60 80.7 136.83
South Central.......... 12 6,513 132.32 75.5 99.91 133.97 78.9 105.71
--- ------ ------- ---- ------- ------- ---- -------
All regions............ 116 53,580 $151.02 70.0% $105.71 $156.50 77.7% $121.55
=== ====== ======= ==== ======= ======= ==== =======
- --------
(1) Consists of 116 properties owned, directly or indirectly, by us for the
entire 2001 and 2000 fiscal years, respectively, excluding nine properties
with non-comparable operating environments as a result of acquisitions,
dispositions, substantial property damage, or major expansion and
development projects.
9
Our properties have reported annual increases in RevPAR in every year since
1993 except the year just ended. Based upon data provided by Smith Travel
Research, our comparable properties have an approximate 6 and 7 percentage
point occupancy premium for fiscal years 2001 and 2000, respectively, and an
approximate 24% and 26% RevPAR premium over similar brands in the upper-upscale
and luxury segments for fiscal years 2001 and 2000, respectively. We believe
the hotel brands in the upper-upscale and luxury full-service segment that are
most representative of our overall portfolio of full-service hotels are Ritz
Carlton; Marriott; Four Seasons; Crowne Plaza; Doubletree; Hyatt; Hilton;
Radisson; Renaissance; Sheraton; Westin; and Wyndham.
Historically, our hotels have experienced relatively high occupancy rates,
which along with strong demand for full-service hotel rooms have allowed the
managers of our hotels to increase average daily room rates by selectively
raising room rates for certain types of bookings and by minimizing, in
specified cases, discounted group business. For the year ended December 31,
2001, as a percentage of total rooms sold, transient business comprised 58% and
group business, including contract business, comprised 42%.
The occupancy rates and average daily rates commanded by our properties in
2001 and 2000 exceeded both the industry as a whole and the upper-upscale and
luxury full-service segment. The attractive locations of our hotels, the
limited availability of new building sites for new construction of competing
full-service hotels, and the lack of availability of financing for new
full-service hotels has allowed us to maintain RevPAR and average daily rate
premiums over our competitors in these service segments. For our comparable
hotels, average daily rates increased 6.3% in 2000. The increase in average
daily rate helped generate a strong increase in comparable hotel RevPAR of 6.6%
for the same period. However, for 2001, operations for our comparable
properties declined with average occupancy and RevPAR decreasing 7.7 percentage
points and 13.0%, respectively. Furthermore, because our lodging operations
have a high fixed-cost component, increases/decreases in RevPAR generally yield
greater percentage increases/decreases in our earnings and cash flows. As a
result of the decline in operations in 2001, we have been working with our
managers to achieve cost reductions at the properties that have slowed the
decrease in operating margins. These cost reduction efforts have been
accelerated since the events of September 11. The efforts were successful based
on the ratio of RevPAR to EBITDA calculated for both the year and the fourth
quarter. While RevPAR declined 28% for the fourth quarter, margins were only
down 5.0 percentage points, resulting in a ratio of RevPAR to EBITDA decline of
only 1.4 times. Similarly, while RevPAR declined 13% for the full year, margins
were only down 2.9 percentage points, resulting in a ratio of RevPAR to EBITDA
decline of only 1.5 times. Although some of these savings will not be
permanent, we do believe that we have achieved meaningful long-term
efficiencies. Also, as a result of our acquisition in 2001 of the lessee
entities and/or leasehold interests, changes in earnings and cash flow at those
properties now have a direct effect on our consolidated earnings and cash
flows. See "Business and Properties--Operating Structure."
The economic trends affecting the hotel industry and the overall economy
will be a major factor in the company's ability to generate growth in hotel
revenues. Additionally, the abilities of the managers to curb operating costs
while continuing to maintain high quality hotels will have a material impact on
future hotel level sales and operating profit growth. If the current economic
conditions continue, operations may decline further in 2002.
Foreign Operations. During 2000 and 1999, our foreign operations consisted
of four full-service hotel properties located in Canada. Effective in the
second quarter of 2001, with the acquisition of a controlling voting interest
in Rockledge, we own a controlling interest in a partnership that owns two
full-service hotel properties in Mexico and, as a result, began consolidating
the operations of those hotel properties. During 2001, 2000, and 1999,
respectively, 98% of total revenues were attributed to sales within the United
States, and the remaining 2% of total revenues were attributed to foreign
countries.
Competition. We compete with other hotel owners through the ownership of
premium branded hotels in downtown/urban, airport, and resort locations. Our
competitors include Starwood Hotels and Resorts, Hilton Hotel Corporation,
Wyndham International, FelCor Lodging Trust, and MeriStar Hospitality
Corporation.
10
We believe that our properties will continue to enjoy competitive advantages
arising from their participation in the Marriott, Ritz-Carlton, Four Seasons,
Hilton, Hyatt and Swissotel hotel brand systems. The national marketing
programs and reservation systems of each of these managers, as well as the
advantages of strong customer preference for these upper-upscale and luxury
brands should also help these properties to maintain or increase their premium
over competitors in both occupancy and room rates. Repeat guest business is
enhanced by guest rewards programs offered by Marriott, Hilton, Hyatt and
Swissotel. Each of the managers maintains national reservation systems that
provide reservation agents with complete descriptions of the rooms available
and up-to-date rate information from the properties. Our website
(www.hostmarriott.com) currently permits users to connect to the Marriott,
Ritz-Carlton, Four Seasons, Hilton and Hyatt reservation systems to reserve
rooms in our hotels.
Seasonality. Our hotel sales have traditionally experienced moderate
seasonality. Additionally, hotel revenues in the fourth quarter reflect sixteen
weeks of results compared to twelve weeks for the first three quarters of the
fiscal year. As a result of the events of September 11, 2001 and the subsequent
decline in the economy, the fourth quarter 2001 dispersion rate was 6
percentage points below that of 1999 and 2000. During 1999 and 2000, the hotel
sales were not recorded in our revenues, as most of our hotels were leased to
third parties, however, hotel sales were used to calculate rental income.
Average hotel sales by quarter for the years 1999 through 2001 for our lodging
properties are as follows:
Year First Quarter Second Quarter Third Quarter Fourth Quarter
---- ------------- -------------- ------------- --------------
1999 22% 24% 21% 33%
2000 21 25 21 33
2001 24 27 22 27
------- -- -- -- --
Average 22% 25% 22% 31%
======= == == == ==
Hotel Properties. The following table sets forth the location and number of
rooms of our 122 hotels as of March 1, 2002. All of the properties are
currently leased to our wholly owned taxable REIT subsidiaries, unless
otherwise indicated. Each hotel is operated as a Marriott brand hotel unless
otherwise indicated by its name.
Location Rooms
-------- -----
Arizona
Mountain Shadows Resort............. 337
Scottsdale Suites................... 251
The Ritz-Carlton, Phoenix........... 281
California
Coronado Island Resort(1)........... 300
Costa Mesa Suites................... 253
Desert Springs Resort and Spa....... 884
Fullerton(1)........................ 224
Hyatt Regency, Burlingame........... 793
Manhattan Beach(1).................. 380
Marina Beach(1)..................... 370
Newport Beach....................... 586
Newport Beach Suites................ 254
Ontario Airport..................... 299
Sacramento Airport(3)............... 85
San Diego Hotel and Marina(1)(2).... 1,356
San Diego Mission Valley(2)......... 350
San Francisco Airport............... 684
San Francisco Fisherman's Wharf..... 285
San Francisco Moscone Center(1)..... 1,498
San Ramon(1)........................ 368
Santa Clara(1)...................... 755
The Ritz-Carlton, Marina del Rey(1). 304
The Ritz-Carlton, San Francisco..... 336
Torrance............................ 487
Location Rooms
-------- -----
Colorado
Denver Southeast(1).................. 590
Denver Tech Center................... 625
Denver West(1)....................... 305
Connecticut
Hartford/Farmington.................. 380
Hartford/Rocky Hill(1)............... 251
Florida
Fort Lauderdale Marina............... 580
Harbor Beach Resort(1)(2)(3)......... 637
Jacksonville(1)...................... 256
Miami Airport(1)..................... 782
Miami Biscayne Bay(1)................ 605
Orlando World Center Resort.......... 2,000
Palm Beach Gardens................... 279
Singer Island Hilton................. 223
Tampa Airport(1)..................... 295
Tampa Waterside...................... 717
Tampa Westshore(1)................... 309
The Ritz-Carlton, Amelia Island...... 449
The Ritz-Carlton, Naples............. 463
The Ritz-Carlton, Naples Golf Resort. 295
Georgia
Atlanta Marriott Marquis............. 1,671
Atlanta Midtown Suites(1)............ 254
Atlanta Norcross..................... 222
11
Location Rooms
-------- -----
Georgia (continued)
Atlanta Northwest................. 401
Atlanta Perimeter(1).............. 400
Four Seasons, Atlanta............. 244
Grand Hyatt, Atlanta.............. 438
JW Marriott Hotel at Lenox(1)..... 371
Swissotel, Atlanta................ 348
The Ritz-Carlton, Atlanta......... 444
The Ritz-Carlton, Buckhead........ 553
Illinois
Chicago/Deerfield Suites.......... 248
Chicago/Downers Grove Suites...... 254
Chicago/Downtown Courtyard........ 337
Chicago O'Hare.................... 681
Chicago O'Hare Suites(1).......... 256
Swissotel, Chicago................ 630
Indiana
South Bend(1)..................... 300
Louisiana
New Orleans....................... 1,290
Maryland
Bethesda(1)....................... 407
Gaithersburg/Washingtonian Center. 284
Massachusetts
Boston/Newton..................... 430
Hyatt Regency, Cambridge.......... 469
Swissotel, Boston................. 498
Michigan
The Ritz-Carlton, Dearborn........ 308
Detroit Livonia................... 224
Detroit Romulus................... 245
Detroit Southfield................ 226
Minnesota
Minneapolis City Center........... 583
Minneapolis Southwest(2).......... 321
Missouri
Kansas City Airport(1)............ 382
New Hampshire
Nashua............................ 251
New Jersey
Hanover........................... 353
Newark Airport(1)................. 591
Park Ridge(1)..................... 289
New Mexico
Albuquerque(1).................... 411
New York
Albany(2)......................... 359
New York Financial Center......... 504
New York Marquis(1)............... 1,944
Swissotel, The Drake.............. 494
North Carolina
Charlotte Executive Park.......... 298
Location Rooms
-------- ------
North Carolina (continued)
Greensboro/Highpoint(1)............... 299
Raleigh Crabtree Valley............... 375
Research Triangle Park................ 224
Ohio
Dayton................................ 399
Oklahoma
Oklahoma City......................... 354
Oklahoma City Waterford............... 197
Oregon
Portland.............................. 503
Pennsylvania
Four Seasons, Philadelphia............ 364
Philadelphia Convention Center(1)(2).. 1,408
Philadelphia Airport(1)............... 419
Tennessee
Memphis............................... 403
Texas
Dallas/Fort Worth Airport............. 492
Dallas Quorum(1)...................... 547
Houston Airport(1).................... 565
Houston Medical Center(1)............. 386
JW Marriott Houston................... 514
Plaza San Antonio(1).................. 252
San Antonio Rivercenter(1)............ 1,001
San Antonio Riverwalk(1).............. 512
Utah
Salt Lake City(1)..................... 510
Virginia
Dulles Airport(1)..................... 368
Fairview Park......................... 395
Hyatt Regency, Reston................. 514
Key Bridge(1)......................... 586
Norfolk Waterside(1).................. 404
Pentagon City Residence Inn........... 299
The Ritz-Carlton, Tysons Corner(1).... 398
Washington Dulles Suites.............. 254
Westfields............................ 335
Williamsburg.......................... 295
Washington
Seattle SeaTac Airport................ 459
Washington, DC
Washington Metro Center............... 456
Canada
Calgary............................... 380
Toronto Airport(2).................... 423
Toronto Eaton Center(1)............... 459
Toronto Delta Meadowvale.............. 374
Mexico
JW Marriott Hotel, Mexico City (2)(3). 312
Mexico City Airport Hotel (2)(3)...... 600
------
TOTAL................................... 58,009
======
- --------
(1) The land on which this hotel is built is leased under one or more long-term
lease agreements.
(2) This property is not wholly owned by the operating partnership.
(3) This property is not leased to the TRS.
12
Other Real Estate Investments
In addition to our 122 full-service hotels, we maintain investments in
general and/or limited partner interests in partnerships that in the aggregate
own 3 full-service hotels and 158 limited service hotels, as well as other real
estate investments, the operations of which we do not consolidate. During 2001,
our EBITDA from these partnership investments was less than 1% of our total
EBITDA. Typically, we and certain of our subsidiaries manage our investments
and, through a combination of general and limited partnership and limited
liability company interests, conduct the venture's or partnership's business.
As of December 31, 2001, the combined balance sheets of these investments
included approximately $1.7 billion in assets and $1.3 billion in debt,
principally mortgages. All partnership investments in which we do not own a
controlling interest are accounted for using the equity method, and
accordingly, we do not consolidate the debt or assets on our balance sheet. All
of the debt of these partnerships is non-recourse to us and our
subsidiaries.
The hotels owned by the partnerships are currently operated under management
agreements with Marriott International or its subsidiaries. As the general
partner, we oversee and monitor Marriott International and its subsidiaries'
performance pursuant to these agreements. Additionally, we are responsible for
the payment of partnership obligations from partnership funds, preparation of
financial reports and tax returns and communications with lenders, limited
partners and regulatory bodies. As the general partner, we are reimbursed for
the cost of providing these services subject to limitations in certain cases.
Cash distributions provided from these partnerships are tied to the overall
performance of the underlying properties and the overall level of debt.
Distributions from these partnerships to us were $8.8 million in 2001 and $1.3
million in 2000. There were no distributions in 1999.
On March 1, 2002, we mailed a consent solicitation to the limited partners
of Marriott Residence Inn Limited Partnership, in which we own a 1% general
partnership interest, relating to the sale of the partnership to a third party.
The partnership owns 15 Residence Inn hotels. We have received sufficient votes
as of March 20, 2002 to approve the sale subject to the normal and customary
closing conditions, and we anticipate the sale to close during the second
quarter of 2002. Additionally, we are currently in discussions to sell the
Marriott Residence Inn II Limited Partnership, which owns 23 Residence Inn
hotels, including our 1% general partnership interest. The proceeds to us from
the sale of these partnerships, if any, would not be material.
Effective August 16, 2001, we sold our limited partnership interests in the
Fairfield Inn Limited Partnership for an immaterial amount and withdrew as
general partner, eliminating any further role in the partnership. Additionally,
Mutual Benefit/Marriott Hotel Associates L.P., a partnership in which we are
the general partner and the owner of the Richmond Marriott Hotel, filed for
Chapter 11 bankruptcy protection in the December 2001. We are currently in
discussions with the City of Richmond, other independent parties, and the
primary lender regarding restructuring the partnership.
As a result of the consolidation of Rockledge during March 2001, Host
Marriott owns a 49% interest in the partnership that owns the 36-hole Greg
Norman-designed golf course surrounding our Ritz-Carlton, Naples Golf Resort.
As previously discussed, during 2000 we acquired a non-controlling interest in
the partnership that owns the 772- room J.W. Marriott Hotel in Washington, D.C.
for $40 million. The partnership has $95 million in debt that is non-recourse
to Host Marriott.
Courtyard Joint Venture. In March 2000, Rockledge formed a joint venture
with Marriott International to acquire and hold the partnership interests in
the Courtyard by Marriott Limited Partnership ("CBM I") and Courtyard by
Marriott II Limited Partnership ("CBM II"), which together own 120 Courtyard by
Marriott properties totaling 17,559 rooms. The formation of the joint venture
and the acquisition of the CBM I and CBM II partnership interests was effected
as part of a settlement of litigation brought against Host Marriott and
Marriott International by CBM I and CBM II limited partners. For our 50%
interest in the joint venture the Company and Rockledge contributed $90 million
and the CBM I and CBM II partnership interests that we already owned. The joint
venture acquired the partnership interests in CBM I and CBM II for an aggregate
payment in cash of $372 million, which was funded by our cash contribution
together with Marriott
13
International's cash contribution and $200 million of non-recourse mezzanine
debt provided by Marriott International to the joint venture. Additionally, the
joint venture has approximately $735 million of debt, all of which is
non-recourse to and not guaranteed by Host Marriott, that consists of the
following: 1) The $287 million mortgage maturing April 2012 requiring monthly
payments of principal and interest at a fixed interest rate of 7.865% which is
secured by the 50 hotels owned by CBM I. 2) The $127 million senior notes
maturing February 2008 requiring semiannual interest payments at a fixed
interest rate of 10.75%. The notes are secured by a first priority pledge of
CBM II of its general and limited partnership interests. 3) The $321 million
multi-class commercial mortgage pass-through certificates maturing January 2013
requiring monthly payments of principal and interest at weighted average
interest rate of 7.8%, which is secured by first priority mortgage liens on the
69 hotels owned by CBM II. Each of the joint venture's 120 hotels is operated
by Marriott International pursuant to long-term management agreements. Since we
do not control the Courtyard joint venture, we record our investment using the
equity method of accounting.
HPT Leases. Prior to 1997, we divested certain limited-service hotel
properties through the sale and leaseback of 53 Courtyard properties and 18
Residence Inn properties to Hospitality Properties Trust ("HPT"). The Courtyard
and Residence Inn properties are subleased to subsidiaries of Crestline under
sublease agreements and are managed by Marriott International under long-term
management agreements. Revenues for these 71 properties of $77 million, $83
million and $80 million for 2001, 2000 and 1999, respectively, are reflected in
our rental income. Rental payments to HPT totaled $72 million, $74 million and
$71 million, for 2001, 2000 and 1999, respectively.
Other Real Estate Activities. We conduct lease activity related to
approximately 249,000 square feet of office space in four buildings that we own
in Atlanta, Chicago and San Francisco which is included in rental income in our
statements of operations. Additionally, we have lease and sublease activity
relating to Host Marriott's former restaurant operations for which we remain
contingently liable. As of December 31, 2001, the expected sublease rental
income for the restaurant operations exceeded our contingent lease liability.
We also have guarantees related to certain divested restaurant properties. The
guarantees totaled $57 million and $68 million as of December 31, 2001 and
2000, respectively. We consider the likelihood of any payments under any of
these lease guarantees or contingencies to be remote.
During 2001, we recorded interest on a note relating to the 1994 sale of 26
Fairfield Inns under the cost recovery method.
For a more detailed discussion of our other real estate investments, which
includes a summary of the outstanding debt balances of our affiliates, see Note
4 to the Consolidated Financial Statements, "--Investments in and Receivables
from Affiliates."
Environmental and Regulatory Matters
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under, or in such property. Such laws may impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. In addition, certain environmental laws and
common law principles could be used to impose liability for release of
asbestos-containing materials, and third parties may seek recovery from owners
or operators of real properties for personal injury associated with exposure to
released asbestos-containing materials. Environmental laws also may impose
restrictions on the manner in which property may be used or business may be
operated, and these restrictions may require expenditures. In connection with
our current or prior ownership or operation of hotels, we may be potentially
liable for any such costs or liabilities. Although we are currently not aware
of any material environmental claims pending or threatened against us, we can
offer no assurance that a material environmental claim will not be asserted
against us.
14
Material Agreements
Our hotels are managed and operated by third parties pursuant to management
agreements with our subsidiaries to which we have leased our hotels. The
initial term of our management agreements is generally 15 to 20 years in length
with multiple renewal terms. As of March 1, 2002, 101 of our hotels are managed
by Marriott International or its affiliates as Marriott or Ritz-Carlton hotels.
The following is a brief summary of the material terms typical to our current
management agreements, an example of which has been filed with the Securities &
Exchange Commission as an exhibit to this report.
. General. Under each management agreement, the manager provides complete
management services to the applicable lessee with respect to management
of such lessee's hotels.
. Operational services. The managers have sole responsibility and
exclusive authority for all activities necessary for the day-to-day
operation of the hotels, including establishing all room rates,
processing reservations, procuring inventories, supplies and services,
providing periodic inspection and consultation visits to the hotels by
the managers' technical and operational experts and promoting and
publicizing of the hotels. The manager receives compensation in the form
of a base management fee and an incentive management fee, typically
calculated as percentages of gross revenues and operating profits,
respectively. The incentive management fee typically is paid only after
an agreed upon return has been paid to our lessee subsidiary from the
remaining profit to the hotel.
. Executive supervision and management services. The managers provide all
managerial and other employees for the hotels, review the operation and
maintenance of the hotels, prepare reports, budgets and projections,
provide other administrative and accounting support services to the
hotel, such as planning and policy services, financial planning,
divisional financial services, risk planning services, product planning
and development, employee planning, corporate executive management,
legislative and governmental representation and certain in-house legal
services; and protect trademarks, trade-names and service marks. The
manager also provides a national reservations system.
. Chain services. The management agreements require the manager to
furnish chain services that are furnished generally on a central basis.
Such services include: (1) the development and operation of computer
systems and reservation services, (2) regional management and
administrative services, regional marketing and sales services, regional
training services, manpower development and relocation costs of regional
personnel and (3) such additional central or regional services as may
from time to time be more efficiently performed on a regional or group
level. Costs and expenses incurred by the manager in providing such
services are allocated among all hotels managed by the manager or its
affiliates.
. Working capital and fixed asset supplies. Our management agreements
typically require us to maintain working capital for each hotel and to
fund the cost of fixed asset supplies such as linen and other similar
items. We are also responsible for providing funds to meet the cash
needs for the hotel operations of the hotels if at any time the funds
available from hotel operations are insufficient to meet the financial
requirements of the hotels.
. FF&E replacements. The management agreements generally provide that
once each year the manager will prepare a list of furniture, fixtures
and equipment (FF&E) to be acquired and certain routine repairs to be
performed in the next year and an estimate of the funds that are
necessary therefor, subject to our review or approval. Under the
agreement, we are required to provide to the manager all necessary FF&E
for the operation of the hotels (including funding any required FF&E
replacements). For purposes of funding the FF&E replacements, a
specified percentage of the gross revenues of the hotel is deposited by
the manager in an escrow account (typically 5%). However, for 38 of our
hotels, we have entered into an agreement with Marriott International to
allow us to fund such expenditures directly as incurred from a
consolidated account subject to maintaining a balance of the greater of
$15 million or 40% of the total contributions made in the prior year to
the reserve account at all times in the account used for such
expenditures.
15
. Building alterations, improvements and renewals. The management
agreements require the manager to prepare an annual estimate of the
expenditures necessary for major repairs, alterations, improvements,
renewals and replacements to the structural, mechanical, electrical,
heating, ventilating, air conditioning, plumbing and vertical
transportation elements of each hotel. In addition to the foregoing, the
management agreements generally provide that the manager may propose
such changes, alterations and improvements to the hotel as are required,
in the manager's reasonable judgment, to keep the hotel in a
competitive, efficient and economical operating condition.
. Sale of the hotel. Most of the management agreements limit our ability
to sell, lease or otherwise transfer the hotels unless the transferee is
not a competitor of the manager, and unless the transferee assumes the
related management agreements and meets specified other conditions.
. Service marks. During the term of the management agreements, the
service mark, symbols and logos currently used by the manager, such as
Marriott International, Ritz-Carlton, Four Seasons, Hyatt and Swissotel,
may be used in the operation of the hotel. Any right to use the service
marks, logo and symbols and related trademarks at a hotel will terminate
with respect to that hotel upon termination of the management agreement
with respect to such hotel.
. Termination fee. Most of the management agreements provide that if the
management agreement is terminated prior to its full term due to
casualty, condemnation or the sale of the hotel, the manager would
receive a termination fee.
. Termination for failure to perform. Most of the management agreements
may be terminated based upon a failure to meet certain financial
performance criteria, subject to the manager's right to prevent such
termination by making specified payments to us based upon the shortfall
in such criteria.
We are currently negotiating with Marriott International certain changes to
the management and other agreements for our Marriott-managed hotels. If made,
the changes, which remain subject to the consent of various lenders to the
properties and other third parties, would be effective as of December 29, 2001.
There can be no assurance that the negotiations will be successful, that the
changes will be made in substantially the form described below or that we will
receive the necessary consents to implement the amendments. The amendments to
the management agreements that are under discussion include the following:
. Providing additional approval rights relating to the annual operating
budgets and FF&E estimates;
. Reducing certain expenses to the properties and lowering our working
capital requirements;
. Clarifying the circumstances and conditions under which Marriott
International and its affiliates may earn a profit on transactions with
the hotels, in addition to the amounts that Marriott International earns
through its base and incentive management fees;
. Enhancing territorial restrictions for certain hotels;
. Reducing the incentive management fees that we pay on our portfolio of
Marriott-managed hotels;
. Expanding the pool of hotels that are subject to an existing agreement
that allows us to sell certain assets without a Marriott International
management agreement, and revising the method for determining the number
of hotels that may be sold without a Marriott International management
agreement or a franchise agreement, and, in each case, without the
payment of a termination fee; and
. Terminating Marriott International's right to purchase up to 20% of each
class of our outstanding voting shares upon certain changes of control
and clarifying existing provisions in the management agreements that
limit our ability to sell a hotel or our company to a competitor of
Marriott International.
Employees
Our Board of Directors and executive officers manage us and we have no
employees who are not employees of the operating partnership. Currently, the
operating partnership has 199 employees at March 1, 2002, including
16
approximately 14 employees who are covered by a collective bargaining agreement
that is subject to review and renewal on a regular basis. We believe that we
and our managers generally have good relations with labor unions and have not
experienced any material business interruptions as a result of labor disputes.
Risk Factors
Prospective investors should carefully consider, among other factors, the
material risks described below.
Risks of Ownership of Our Common Stock
There are limitations on the acquisition of our common stock and changes in
control. Our charter and bylaws, the partnership agreement of the Operating
Partnership, our shareholder rights plan, 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 our shareholders or otherwise be in their best interests, including
the following:
Ownership limit. The 9.8% ownership limit described under "Risk
Factors--Risks of Ownership of Our Common Stock--There are possible adverse
consequences of limits on ownership of our common stock" may have the effect
of precluding a change in control of us by a third party without the consent
of our Board of Directors, even if the change in control would be in the
interest of our shareholders, and even if the change in control would not
reasonably jeopardize our REIT status.
Staggered board. Our Board of Directors consists of eight members but
our charter provides that our number of directors may be increased or
decreased according to our bylaws, provided that the total number of
directors is not less than three nor more than 13. Pursuant to our bylaws,
the number of directors will be fixed by our Board of Directors within the
limits in our charter. Our Board of Directors is divided into three classes
of directors. Directors for each class are chosen for a three-year term when
the term of the current class expires. The staggered terms for directors may
affect shareholders' ability to effect a change in control of us, even if a
change in control would be in the interest of our shareholders.
Removal of board of directors. Our charter provides that, except for any
directors who may be elected by holders of a class or series of shares of
capital stock other than our common stock, directors may be removed only for
cause and only by the affirmative vote of shareholders holding at least
two-thirds of our outstanding shares entitled to be cast for the election of
directors. Vacancies on the Board of Directors may be filled by the
concurring vote of a majority of the remaining directors and, in the case of
a vacancy resulting from the removal of a director by the shareholders, by
at least two-thirds of all the votes entitled to be cast in the election of
directors.
Preferred shares; classification or reclassification of unissued shares
of capital stock without shareholder approval. Our charter provides that
the total number of shares of stock of all classes which we have authority
to issue is 800,000,000, initially consisting of 750,000,000 shares of
common stock and 50,000,000 shares of preferred stock, of which 14,140,000
shares of preferred stock were issued and outstanding as of March 1, 2002.
Our Board of Directors has the authority, without a vote of shareholders, to
classify or reclassify any unissued shares of stock, including common stock
into preferred stock or vice versa, and to establish the preferences and
rights of any preferred or other class or series of shares to be issued. The
issuance of preferred shares or other shares having special preferences or
rights could delay or prevent a change in control even if a change in
control would be in the interests of our shareholders. Because our Board of
Directors has the power to establish the preferences and rights of
additional classes or series of shares without a shareholder vote, our Board
of Directors may give the holders of any class or series preferences, powers
and rights, including voting rights, senior to the rights of holders of our
common stock.
Consent rights of the limited partners. Under the partnership agreement
of the operating partnership, we generally will be able to merge or
consolidate with another entity with the consent of partners holding
17
percentage interests that are more than 50% of the aggregate percentage
interests of the outstanding limited partnership interests entitled to vote
on the merger or consolidation, including any limited partnership interests
held by us, as long as the holders of limited partnership interests either
receive or have the right to receive the same consideration as our
shareholders. We, as holder of a majority of the limited partnership
interests, would be able to control the vote. Under our charter, holders of
at least two-thirds of our outstanding shares of common stock generally must
approve the merger or consolidation.
Maryland business combination law. Under the Maryland General
Corporation Law, specified "business combinations," including specified
issuances of equity securities, between a Maryland corporation and any
person who owns 10% or more of the voting power of the corporation's then
outstanding shares, or an "interested shareholder," or an affiliate of the
interested shareholder are prohibited for five years after the most recent
date in which the interested shareholder becomes an interested shareholder.
Thereafter, any of these specified business combinations must be approved by
80% of outstanding voting shares, and by two-thirds of voting shares other
than voting shares held by an interested shareholder unless, among other
conditions, the corporation's common shareholders receive a minimum price,
as defined in the Maryland General Corporation Law, for their shares and the
consideration is received in cash or in the same form as previously paid by
the interested shareholder. We are subject to the Maryland business
combination statute.
Maryland control share acquisition law. Under the Maryland General
Corporation Law, "control shares" acquired in a "control share acquisition"
have no voting rights except to the extent approved by a vote of two-thirds
of the votes entitled to be cast on the matter, excluding shares owned by
the acquiror and by officers or directors who are employees of the
corporation. "Control shares" are voting shares which, if aggregated with
all other 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. We are subject to these control
share provisions of Maryland law, subject to an exemption for Marriott
International pursuant to its purchase right discussed below. See "Risk
Factors--Risks of Ownership of Our Common Stock--There are limitations on
the acquisition of our common stock and changes in control--Marriott
International purchase right."
Merger, consolidation, share exchange and transfer of our
assets. Pursuant to our charter, subject to the terms of any outstanding
class or series of capital stock, we can merge with or into another entity,
consolidate with one or more other entities, participate in a share exchange
or transfer our assets within the meaning of the Maryland General
Corporation Law if approved (1) by our Board of Directors in the manner
provided in the Maryland General Corporation Law and (2) by our shareholders
holding two-thirds of all the votes entitled to be cast on the matter,
except that any merger of us with or into a trust organized for the purpose
of changing our form of organization from a corporation to a trust requires
only the approval of our shareholders holding a majority of all votes
entitled to be cast on the merger. Under the Maryland General Corporation
Law, specified mergers may be approved without a vote of shareholders and a
share exchange is only required to be approved by a Maryland corporation by
its Board of Directors. Our voluntary dissolution also would require
approval of shareholders holding two-thirds of all the votes entitled to be
cast on the matter.
Amendments to our charter and bylaws. Our charter contains provisions
relating to restrictions on transferability of our common stock, the
classified Board of Directors, fixing the size of our Board of Directors
within the range set forth in our charter, removal of directors and the
filling of vacancies, all of which may be amended only by a resolution
adopted by the Board of Directors and approved by our shareholders holding
two-thirds of the votes entitled to be cast on the matter. As permitted
under the Maryland General Corporation Law, our charter and bylaws provide
that directors have the exclusive right to amend our bylaws. Amendments of
this provision of our charter also would require action of our Board of
Directors and approval by shareholders holding two-thirds of all the votes
entitled to be cast on the matter.
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Marriott International purchase right. As a result of our spin-off of
Marriott International in 1993, Marriott International has the right to
purchase up to 20% of each class of our outstanding voting shares at the
then fair market value when specific change of control events involving us
occur, subject to specified limitations to protect our REIT status. The
Marriott International purchase right may have the effect of discouraging a
takeover of us, because any person considering acquiring a substantial or
controlling block of our common stock will face the possibility that its
ability to obtain or exercise control would be impaired or made more
expensive by the exercise of the Marriott International purchase right. In
connection with our negotiations with Marriott International on changes to
our management agreements, we are discussing terminating this right and
clarifying existing provisions in the management agreements that currently
limit our ability to sell a hotel or the company to a competitor of Marriott
International.
Shareholder rights plan. We adopted a shareholder rights plan which
provides, among other things, that when specified events occur, our
shareholders will be entitled to purchase from us a newly created series of
junior preferred shares, subject to our ownership limit described below. The
preferred share purchase rights are triggered by the earlier to occur of (1)
ten days after the date of a public announcement that a person or group
acting in concert has acquired, or obtained the right to acquire, beneficial
ownership of 20% or more of our outstanding shares of common stock or (2)
ten business days after the commencement of or announcement of an intention
to make a tender offer or exchange offer, the consummation of which would
result in the acquiring person's becoming the beneficial owner of 20% or
more of our outstanding common stock. The preferred share purchase rights
would cause substantial dilution to a person or group that attempts to
acquire us on terms not approved by our Board of Directors.
There are possible adverse consequences of limits on ownership of our common
stock. To maintain our qualification as a REIT for federal income tax
purposes, not more than 50% in value of our outstanding shares of capital stock
may be owned, directly or indirectly, by five or fewer individuals, as defined
in the Internal Revenue Code to include some entities. In addition, a person
who owns, directly or by attribution, 10% or more of an interest in a tenant of
ours, or a tenant of any partnership in which we are a partner, cannot own,
directly or by attribution, 10% or more of our shares without jeopardizing our
qualification as a REIT. Primarily to facilitate maintenance of our
qualification as a REIT for federal income tax purposes, the ownership limit
under our charter prohibits ownership, directly or by virtue of the attribution
provisions of the Internal Revenue Code, by any person or persons acting as a
group, of more than 9.8% of the issued and outstanding shares of our common
stock, subject to an exception for shares of our common stock held prior to 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 our outstanding shares after
the REIT conversion, and prohibits ownership, directly or by virtue of the
attribution provisions of the Internal Revenue Code, by any person, or persons
acting as a group, of more than 9.8% of the issued and outstanding shares of
any class or series of our preferred shares. Together, these limitations are
referred to as the "ownership limit." Our Board of Directors, in its sole and
absolute discretion, may waive or modify the ownership limit with respect to
one or more persons who would not be treated as "individuals" for purposes of
the Internal Revenue Code if 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
our 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 our status as a REIT for federal income tax purposes
(for example, by causing any of our tenants to be considered a "related party
tenant" for purposes of the REIT qualification rules). Common stock acquired or
held in violation of the ownership limit will be transferred automatically to a
trust for the benefit of a designated charitable beneficiary, and the person
who acquired 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 our common stock to a person who, as a
result of the transfer, violates the ownership limit may be void under certain
circumstances, and, in any event, would deny that person any of the economic
benefits of owning shares of our common stock in excess of the ownership limit.
The ownership limit may have the effect of delaying, deferring
19
or preventing a change in control and, therefore, could adversely affect the
shareholders' ability to realize a premium over the then-prevailing market
price for our common stock in connection with such transaction.
We depend on external sources of capital for future growth. As with other
REITs, but unlike corporations generally, our ability to reduce our debt and
finance our growth largely must be funded by external sources of capital
because we generally will have to distribute to our shareholders at least 90%
of our taxable income in order to qualify as a REIT, including taxable income
we recognize for tax purposes but with regard to which we do not receive
corresponding cash. Our access to external capital will depend upon a number of
factors, including general market conditions, the market's perception of our
growth potential, our current and potential future earnings, cash distributions
and the market price of our common stock.
Shares of our common stock that are or become available for sale could
affect the price for shares of our common stock. Sales of a substantial number
of shares of our common stock, or the perception that sales could occur, could
adversely affect prevailing market prices for our common stock. In addition,
holders of units of limited partnership interest in the Operating Partnership
(referred to as "OP Units") who redeem their OP Units and receive common stock
upon redemption will be able to sell those shares freely, unless the person is
our affiliate and resale of the affiliate's shares is not covered by an
effective registration statement. As of December 31, 2001, there were
approximately 21.6 million OP Units outstanding (not including OP Units held
directly or indirectly by us), all of which are currently redeemable. Further,
a substantial number of shares of our common stock have been and will be issued
or reserved for issuance from time to time under our employee benefit plans,
including shares of our common stock reserved for options, and these shares of
common stock would be available for sale in the public markets from time to
time pursuant to exemptions from registration or upon registration. Moreover,
the issuance of additional shares of our common stock by us in the future would
be available for sale in the public markets. We can make no prediction about
the effect that future sales of our common stock would have on the market price
of our common stock.
Our earnings and cash distributions will affect the market price of shares
of our common stock. We believe that the market value of a REIT's equity
securities is based primarily upon the market's perception of the REIT's growth
potential and its current and potential future cash distributions, whether from
operations, sales, acquisitions, development or refinancings, and is
secondarily based upon the value of the underlying assets. For that reason,
shares of our common stock may trade at prices that are higher or lower than
the net asset value per share. To the extent we retain operating cash flow for
investment purposes, working capital reserves or other purposes rather than
distributing the cash flow to shareholders, these retained funds, while
increasing the value of our underlying assets, may negatively affect the market
price of our common stock. Our failure to meet the market's expectation with
regard to future earnings and cash distributions would likely adversely affect
the market price of our common stock.
Market interest rates may affect the price of shares of our common
stock. We believe that one of the factors that investors consider important in
deciding whether to buy or sell shares of a REIT is the distribution rate on
the shares, considered as a percentage of the price of the shares, relative to
market interest rates. If market interest rates increase, prospective
purchasers of REIT shares may expect a higher distribution rate. Thus, higher
market interest rates could cause the market price of our shares to go down.
Risks of Operation
Our revenues and the value of our properties are subject to conditions
affecting the lodging industry. Our revenues and the value of our properties
are subject to conditions affecting the lodging industry. These include:
. changes in the national, regional and local economic climate
. changes in business and pleasure travel
20
. local conditions such as an oversupply of hotel properties or a
reduction in demand for hotel rooms
. the attractiveness of our hotels to consumers and competition from
comparable hotels
. the quality, philosophy and performance of the managers of our hotels
. changes in room rates and increases in operating costs due to inflation
and other factors and
. the need to periodically repair and renovate our hotels.
As a result of the effects of the economic recession and the September 11,
2001 terrorist attacks, the lodging industry has experienced a significant
decline in business caused by a reduction in travel for both business and
pleasure. We currently expect that the decline in operating levels will
continue in 2002. Additionally, as a result of the September 11 terrorist
attacks and the collapse of the World Trade Center Towers, our New York World
Trade Center Marriott hotel was destroyed. We also sustained considerable
damage to a second property, the New York Marriott Financial Center hotel.
Room revenues of our hotels decreased during 2001 as a result of the
continuing economic recession. For the year ended December 31, 2001 our
comparable RevPAR decreased 13.0% due to a decrease in occupancy of 7.7
percentage points to 70.0% combined with a decline in the average room rate of
3.5% to $151.02.
During the 4-week period subsequent to the events of September 11, 2001, our
hotels recorded average weekly occupancy rates of 38% to 63%. During that
period, we had a very high level of large group cancellations which represented
approximately $70 million in future revenue primarily affecting our luxury and
larger convention hotels. This period was not representative of the remainder
of the fourth quarter. However, our results from operations for the fourth
quarter of 2001 did reflect a 28.3% decline in RevPAR when compared to the
fourth quarter of 2000. We have been actively working with the managers of our
hotels to reduce the operating costs of our hotels, as well as to provide
economic incentives to individuals and business travelers in selected markets
to increase demand. In addition, based on our assessment of the current
operating environment and to conserve capital, we have reduced or suspended
certain capital expenditure projects.
As a result of a gradual return to more normal levels of business, we have
begun to see modest improvements in occupancy and average room rates, though
they remain below prior year levels. However, our fourth quarter results for
2001 were significantly lower than the fourth quarter of 2000. There can be no
assurance that the current economic recession will not continue for an extended
period of time and that it will not significantly affect our operations.
If, as a result of conditions such as those referenced above affecting the
lodging industry, our assets do not generate income sufficient to pay our
expenses, we will be unable to service our debt and maintain our properties.
Thirty-one of our hotels and assets related thereto are subject to mortgages
in an aggregate amount of approximately $2.3 billion. If these hotels do not
produce adequate cash flow to service the debt represented by such mortgages,
the mortgage lenders could foreclose on such assets and we would lose such
assets; however, the debt is non-recourse to Host LP. If the cash flow on such
properties were not sufficient to provide us with an adequate return, we could
opt to allow such foreclosure rather than making necessary mortgage payments
with funds from other sources.
Our expenses may remain constant even if our revenue drops. The expenses of
owning property are not necessarily reduced when circumstances like market
factors and competition cause a reduction in income from the property. Because
of the effects of the September 11, 2001 terrorist attacks and the current
economic recession, we are working with our managers to substantially reduce
the operating costs of our hotels. In addition, based on our assessment of the
current operating environment, and in order to conserve capital, we have
21
reduced or suspended certain capital expenditure projects. Nevertheless, our
financial condition could be adversely affected by the following costs:
. interest rate levels
. debt service levels (including on loans secured by mortgages)
. the availability of financing
. the cost of compliance with government regulation, including zoning and
tax laws and
. changes in governmental regulations, including those governing usage,
zoning and taxes.
If we are unable to reduce our expenses to reflect our current reduction in
revenue and the reduction that we expect in the future, our business will be
adversely affected.
We do not control our hotel operations, and we are dependent on the managers
of our hotels. Because federal income tax laws restrict REITs and their
subsidiaries from operating a hotel, we do not manage our hotels. Instead, we
retain third-party managers including, among others, Marriott International,
Hyatt, Four Seasons and Swissotel, to manage our hotels pursuant to management
agreements. Our income from the hotels may be adversely affected if the
managers fail to provide quality services and amenities and competitive room
rates at our hotels or fail to maintain the quality of the hotel brand names.
While HMT Lessee LLC, a taxable REIT subsidiary of ours that is the lessee of
substantially all of our full-service properties, monitors the hotel managers'
performance, we have limited specific recourse if we believe that the hotel
managers are not performing adequately. Underperformance by our hotel managers
could adversely affect our results of operations.
Our relationships with our hotel managers are primarily contractual in
nature, although certain of our managers owe fiduciary duties to us under
applicable law. We are in discussions with various managers of our hotels
regarding their performance under management agreements for our hotels. We have
had, and continue to have, differences with the managers of our hotels over
their performance and compliance with the terms of our agreements. We generally
resolve issues with our managers through discussions and negotiations. However,
if we are unable to reach satisfactory results through discussions and
negotiations, we also occasionally may engage in litigation with our managers.
For example, we are currently engaged in litigation with Swissotel, the manager
of four of our hotels. If we fail to reach satisfactory resolution with respect
to any disputes, the operation of our hotels could be adversely affected.
Our relationship with Marriott International may result in conflicts of
interest. Marriott International, a public hotel management company, and its
affiliates, manages or franchises 110 of our 122 hotels. In addition, Marriott
International manages and in some cases may own or be invested in hotels that
compete with our hotels. As a result, Marriott International may make decisions
regarding competing lodging facilities that it manages that would not
necessarily be in our best interests. Richard E. Marriott is our Chairman of
the Board and has served as a director of Marriott International since 1993. He
has announced his intention to not stand for reelection for the Board of
Directors of Marriott International in May 2002. His brother, J.W. Marriott,
Jr. has been a member of our Board of Directors since 1964 and has announced
that he will not stand for reelection at the end of his term in May 2002. J.W.
Marriott, Jr. also serves as a director and an executive officer, of Marriott
International. J.W. Marriott, Jr. and Richard E. Marriott beneficially owned,
as determined for securities law purposes, as of January 31, 2002,
approximately 12.7% and 12.3%, respectively, of the outstanding shares of
common stock of Marriott International. As a result, J.W. Marriott, Jr. and
Richard E. Marriott have potential conflicts of interest as our directors when
making decisions regarding Marriott International, including decisions relating
to the management agreements involving the hotels and Marriott International's
management of competing lodging properties.
Our Board of Directors follows policies and procedures intended to limit the
involvement of J.W. Marriott, Jr. and Richard E. Marriott in conflict
situations, including requiring them to abstain from voting as directors on
22
matters which present a conflict between the companies. If appropriate, these
policies and procedures will apply to other directors and officers.
We have substantial leverage. We have a significant amount of indebtedness
that could have important consequences. It currently requires us to dedicate a
substantial portion of our cash flow from operations to payments on our
indebtedness, which reduces the availability of our cash flow to fund working
capital, capital expenditures, expansion efforts, distributions to our
shareholders and other general purposes. Additionally, it could:
. limit our ability in the future to undertake refinancings of our debt or
obtain financing for expenditures, acquisitions, development or other
general business purposes on terms and conditions acceptable to us, if
at all, or
. affect adversely our ability to compete effectively or operate
successfully under adverse economic conditions.
If our cash flow and working capital were not sufficient to fund our
expenditures or service our indebtedness, we would have to raise additional
funds through:
. the sale of our equity
. the incurrence of additional permitted indebtedness or
. the sale of our assets.
We cannot assure you that any of these sources of funds would be available
to us or, if available, would be on terms that we would find acceptable or in
amounts sufficient for us to meet our obligations or fulfill our business plan.
For example, under the terms of our bank credit facility, the proceeds from
these activities must be used to repay amounts outstanding and may not be
otherwise available for our use.
There is no charter or by-law restriction on the amount of debt we may
incur. There are no restrictions in our organizational documents that limit
the amount of indebtedness that we may incur. However, our existing debt
instruments contain restrictions on the amount of indebtedness that we may
incur. If we became more highly leveraged, our debt service payments would
increase and our cash flow and our ability to service our debt and other
obligations might be adversely affected.
The terms of our debt place restrictions on us and our subsidiaries,
reducing operational flexibility and creating default risks. The documents
governing the terms of our senior notes and bank credit facility contain
covenants that place restrictions on us and our subsidiaries. The activities
upon which such restrictions exist include, but are not limited to:
. acquisitions, merger and consolidations
. the incurrence of additional debt
. the creation of liens
. the sale of assets
. capital expenditures
. raising capital
. the payment of dividends and
. transactions with affiliates.
In addition, certain covenants in our bank credit facility require us and
our subsidiaries to meet financial performance tests. The restrictive covenants
in the indenture, the bank credit facility and the documents
23
governing our other debt (including our mortgage debt) will reduce our
flexibility in conducting our operations and will limit our ability to engage
in activities that may be in our long-term best interest. Our failure to comply
with these restrictive covenants could result in an event of default that, if
not cured or waived, could result in the acceleration of all or a substantial
portion of our debt or a significant increase in the interest rates on our
debt, either of which could adversely affect our operations and ability to
maintain adequate liquidity.
As a result of the effects on our business of the economic recession and the
events of September 11, 2001, we anticipate that in the future we may fail to
comply with certain financial covenants under the documents governing certain
of our indebtedness. As a result of the effects on our business of the economic
recession and the events of September 11, 2001, we have entered into an
amendment to our bank credit facility, effective November 19, 2001, which among
other things:
. adjusts certain financial covenants so as to require us to meet less
stringent levels in respect of (a) a minimum consolidated interest
coverage ratio and a minimum unsecured interest coverage ratio until
September 6, 2002 and (b) the maximum leverage ratio through August 15,
2002
. suspends until September 6, 2002 the minimum fixed charge coverage ratio
test that we must meet
. limits draws under the revolver portion of our bank credit facility to
(a) $50 million in the first quarter of 2002 and (b) up to $25 million
in the second quarter of 2002 (but only if draws in the second quarter
of 2002 do not cause the aggregate amount drawn in 2002 and then
outstanding to exceed $25 million) and
. increases the interest rate based on higher leverage levels.
In addition, the amendment imposes restrictions and requirements through
August 15, 2002 which include, among others:
. restricting our ability to pay dividends on our equity securities and
our convertible debt obligations unless projections indicate such
payment is necessary to maintain our REIT status and/or unless we are
below certain leverage levels
. restricting our ability to incur additional indebtedness and requiring
that we apply all net proceeds of permitted incurrences of indebtedness
to repay outstanding amounts under the bank credit facility
. requiring us to apply all net proceeds from capital contributions to the
Operating Partnership or from sales of equity by us to repay outstanding
amounts under the bank credit facility
. requiring us to use all net proceeds from the sale of assets to repay
indebtedness under the bank credit facility
. restricting our ability to make acquisitions and investments unless the
asset to be acquired has a leverage ratio of 3.5 to 1.0 or below
. restricting our investments in subsidiaries and
. restricting our capital expenditures.
The amendment also permits us (i) to retain in escrow any casualty insurance
proceeds that we receive from insurance policies covering the New York World
Trade Center Marriott and the New York Marriott Financial Center until such
proceeds are applied toward the restoration of the New York Marriott Financial
Center and the construction of a new hotel that replaces the New York World
Trade Center Marriott, or (ii) to apply such insurance proceeds to the payment
of amounts due to certain third parties, including the New York World Trade
Center Marriott ground lessor, mortgage lender and Marriott International as
manager. Any proceeds (other than business interruption insurance proceeds) not
so used would be used to repay amounts outstanding under the bank credit
facility. The amendment also allows us to include business interruption
proceeds that we receive for the New York World Trade Center Marriott and the
New York Marriott Financial Center hotels in our calculation of consolidated
EBITDA for purposes of our financial covenants.
24
We intend to amend or replace the bank credit facility prior to August 15,
2002. There can be no assurance that we will be able to amend or replace the
bank credit facility on terms any more favorable than those currently in
effect, if at all. Any default under the bank credit facility or any successor
credit facility that results in an acceleration of its final stated maturity
could constitute an event of default under the indenture with respect to all
outstanding series of senior notes issued thereunder.
We are currently in compliance with the terms and restrictive covenants of
our bank credit facility. As a result of entering into the recent amendment,
and obtaining the relief from the financial covenants described above, we
expect to remain in compliance with our bank credit facility through at least
August 15, 2002, the date after which our maximum leverage ratio will return to
the levels that were in effect prior to this amendment. We anticipate that, if
adverse operating conditions continue at currently forecasted levels, we will
not be able to comply with the leverage ratio applicable after August 15, 2002
or other financial tests applicable at the end of our third quarter of 2002
(September 6, 2002). If we fail to comply with the leverage ratio or any other
covenant of the bank credit facility, we would be in default under the bank
credit facility to the extent we had an outstanding balance. As of December 31,
2001 we had no amounts outstanding under our bank credit facility.
Under the indenture pursuant to which nearly all of our outstanding senior
notes were issued, we and our restricted subsidiaries are generally prohibited
from incurring additional indebtedness unless, at the time of such incurrence,
we would satisfy the requirements set forth in the indenture. One of these
requirements is that, after giving effect to any such new incurrence, on a pro
forma basis, our consolidated coverage ratio cannot be less than 2.0 to 1.0. As
a result of the effects on our business of the economic recession and the
September 11, 2001 terrorist attacks, we anticipate that any consolidated
coverage ratio that is calculated under the indenture after the end of our
first quarter 2002 may be less than 2.0 to 1.0. If this occurs, then we will be
prohibited from incurring indebtedness and from issuing disqualified stock
under the indenture other than the indebtedness that we and our restricted
subsidiaries are specifically permitted to incur under certain exceptions to
this prohibition set forth in the indenture. Our failure to maintain a
consolidated coverage ratio of greater than or equal to 2.0 to 1.0 could limit
our ability to engage in activities that may be in our long-term best interest.
Our management agreements could impair the sale or financing of our
hotels. Under the terms of the management agreements, we generally may not
sell, lease or otherwise transfer the hotels unless the transferee is not a
competitor of the manager, and the transferee assumes the related management
agreements and meets specified other conditions. Our ability to finance,
refinance or sell any of the properties may, depending upon the structure of
such transactions, require the manager's consent. If the manager does not
consent, we would be prohibited from financing, refinancing or selling the
property without breaching the management agreement.
The acquisition contracts relating to some hotels limit our ability to sell
or refinance those hotels. For reasons relating to federal income tax
considerations of the former and current owners of approximately 20 of our
full-service hotels, we agreed to restrictions on selling some hotels or
repaying or refinancing the mortgage debt on those hotels for varying periods
depending on the hotel. We anticipate that, in specified circumstances, we may
agree to similar restrictions in connection with future hotel acquisitions. As
a result, even if it were in our best interests to sell or refinance the
mortgage debt on these hotels, it may be difficult or impossible to do so
during their respective lock-out periods.
Our ground lease payments may increase faster than the revenues we receive
on the hotels. As of January 31, 2002, 45 of our hotels are subject to ground
leases (including the New York World Trade Center Marriott hotel ground lease
which is still in effect). These ground leases generally require increases in
ground rent payments every five years. Our ability to service our debt could be
adversely affected to the extent that our revenues do not increase at the same
or a greater rate as the increases under the ground leases. In addition, if we
were to sell a hotel encumbered by a ground lease, the buyer would have to
assume the ground lease, which could result in a lower sales price. Moreover,
to the extent that such ground leases are not renewed at their expiration, our
revenues could be adversely affected.
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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, i