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