Back to GetFilings.com
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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, 1999 Commission File No. 0-25087
HOST MARRIOTT, L.P.
Delaware 52-2095412
(State of Incorporation) (I.R.S. Employer Identification
Number)
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-9000
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------------------
Units of limited partnership interest (284,890,708 units outstanding as of
March 1, 2000)
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (ii) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Document Incorporated by Reference
Notice of 2000 Annual Meeting and Proxy Statement of Host Marriott Corporation
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K and the information incorporated by
reference into this annual report include forward-looking statements. We have
based these forward-looking statements on our current expectations and
projections about future events. We intend to identify forward-looking
statements in this prospectus and the information incorporated by reference
into this prospectus 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 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;
. 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 or 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 change 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 satisfy complex rules in order to qualify as a REIT for
federal income tax purposes and in order for the operating partnership to
qualify as a partnership for federal income tax purposes, and our ability
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. We disclaim any obligations 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.
Items 1 & 2. Business and Properties
Host Marriott, L.P., or the "Operating Partnership," is a limited
partnership owning full service hotel properties as part of an umbrella
partnership real estate investment trust with Host Marriott Corporation ("Host
REIT") as our sole general partner. We were formed as a Delaware limited
partnership in 1998 as a wholly owned subsidiary of Host Marriott Corporation,
a Delaware corporation, in connection with its efforts to
1
reorganize its business operations to qualify as a REIT for federal income tax
purposes. As part of this reorganization, which we refer to as the REIT
conversion, and which is described below in more detail, on December 29, 1998,
Host Marriott Corporation and various of its subsidiaries contributed to us
substantially all of their assets and we assumed substantially all of their
liabilities. As a result, we have succeeded to the hotel ownership business
formerly conducted by Host Marriott. Throughout this Form 10-K, activities
prior to December 29, 1998 represent the activities of our predecessor, Host
Marriott Corporation and its subsidiaries.
We and Host REIT were formed primarily to continue, in an UPREIT structure,
the full service hotel ownership business formerly conducted by Host Marriott
and its subsidiaries. Our primary business objective is to provide superior
total returns to our unitholders through a combination of distributions and
appreciation in unit price. In addition, we endeavor to:
. achieve long-term sustainable growth in "Funds from Operations" per unit,
as defined by the National Association of Real Estate Investment Trusts,
(i.e., net income computed in accordance with generally accepted
accounting principles, excluding gains or losses from debt restructuring,
sales of properties and other non-recurring items, plus real estate-
related depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures), and cash flow;
. increase asset values by selectively improving and expanding our hotels;
. acquire additional existing and newly developed upscale and luxury full
service hotels in targeted markets, primarily focusing on downtown hotels
in core business districts in major metropolitan markets and select
airport and resort/convention locations;
. develop and construct upscale and luxury full service hotels; and
. opportunistically pursue other real estate investments.
As of March 1, 2000, we own 122 hotels, containing approximately 58,000
rooms, located throughout the United States and Canada. The hotels are
generally operated under the Marriott, Ritz-Carlton, Four Seasons, Swissotel
and Hyatt brand names. These brand names are among the most respected and
widely recognized brand names in the lodging industry. The hotels are leased
by us and our subsidiaries to lessees, including Crestline and its
subsidiaries, and are managed on behalf of the lessees by subsidiaries of
Marriott International and other companies.
Host REIT is our sole general partner and manages all aspects of our
business. This includes decisions with respect to:
. sales and purchases of hotels;
. the financing of the hotels;
. the leasing of the hotels; and
. capital expenditures for the hotels subject to the terms of the leases
and the management agreements.
Host REIT, our sole general partner, is managed by a Board of Directors and
has no employees who are not also our employees.
Under current federal income tax law, REITs are restricted in their ability
to derive revenues directly from the operations of hotels. Therefore we lease
virtually all of our hotels to the lessees. See "--The Leases" below. The
lessees pay rent to us and our subsidiaries generally equal to a specified
minimum rent plus percentage rent based on specified percentages of different
categories of aggregate sales at the relevant hotels to the extent such
"percentage rent" would exceed the minimum rent. The lessees operate the
hotels pursuant to management agreements with the managers. Each of the
management agreements provides for certain base and incentive management fees,
plus reimbursement of specific costs, as further described below. See "--The
Management Agreements". Such fees and cost reimbursements are the obligation
of the lessees and not ours or our subsidiaries (although the obligation to
pay such fees could adversely affect the ability of the lessees to pay the
required rent to us or our subsidiaries).
2
The leases, through the sales percentage rent provisions, are designed to
allow us to participate in any growth above specified levels in room sales at
the hotels, which management expects can be achieved through increases in room
rates and occupancy levels. Although the economic trends affecting the hotel
industry will be the major factor in generating growth in lease revenues, the
abilities of the lessees and the managers will also have a material impact on
future sales growth.
In addition to external growth generated by new acquisitions, we intend to
carefully and periodically review our portfolio to identify opportunities to
selectively enhance existing assets to improve operating performance through
major capital improvements. Our leases and those of our subsidiaries do
provide us with the right to approve and finance major capital improvements.
Our primary focus is on the acquisition of upscale and luxury full service
hotel lodging properties. Since the beginning of 1994 through the date hereof,
we have acquired, directly and through our respective subsidiaries, 106 full
service hotels containing more than 48,000 rooms for an aggregate purchase
price of approximately $6.2 billion. Based upon data provided by Smith Travel
Research, we believe that our full service hotels outperform the industry's
average occupancy rate by a significant margin and averaged 77.7% occupancy
for both fiscal years 1999 and 1998 compared to a 69.1% and 69.4% average
occupancy for our competitive set for 1999 and 1998, respectively. "Our
competitive set" refers to hotels in the upscale and luxury full service
segment of the lodging industry, the segment which is most representative of
our full service hotels, and consists of Crowne Plaza; Doubletree; Hyatt;
Hilton; Radisson; Renaissance; Sheraton; Swissotel; Westin and Wyndham.
The relatively high occupancy rates of our hotels, along with increased
demand for full-service hotel rooms, have allowed the managers of our hotels
to increase average daily room rates by selectively raising room rates and by
minimizing, in specified cases, discounted group business, replacing it with
higher-rate group and transient business. As a result, on a comparable basis,
room revenue per available room ("REVPAR") for our full-service properties
increased approximately 4.1% in 1999.
Business Strategy
Our primary business objective is to provide superior total returns to our
unitholders through a combination of distributions and appreciation in unit
price. In order to achieve this objective and, therefore, enhance our equity
value, we employ the following strategies:
. Acquire existing upscale and luxury full-service hotels as market
conditions permit, including Marriott and Ritz-Carlton hotels and other
hotels operated by leading management companies such as Four Seasons and
Hyatt which satisfy our investment criteria, which acquisitions may be
completed through various means including by entering into joint ventures
when we believe our return on investment will be maximized by doing so;
. Develop selected new upscale and luxury full-service hotels, including
Marriott and Ritz-Carlton hotels and other hotels operated by leading
management companies such as Four Seasons and Hyatt which satisfy our
investment criteria and employ transaction structures which mitigate our
risk;
. Participate in the sales growth for each of our hotels through leases
which provide for the payment of rent based upon the lessees' gross hotel
sales in excess of specified thresholds; and
. Enhance existing hotel operations by completing selective capital
improvements which are designed to increase gross hotel sales or improve
operations.
Although competition for acquisitions has remained steady and the
availability of suitable acquisition candidates has been limited recently due
to market conditions, we believe that the upscale and luxury full-service
segments of the market will continue to offer opportunities over time to
acquire assets at attractive multiples of cash flow and at discounts to
replacement value, including underperforming hotels which can be improved by
conversion to the Marriott, Ritz-Carlton, or other high quality brands. Since
the beginning of fiscal year 1994, we have acquired 14 hotels which we have
converted to the Marriott brand. The vast majority of our hotel
3
properties are operated under the Marriott and Ritz-Carlton brands. In
general, based upon data provided by Smith Travel Research, we believe that
the Marriott brand has consistently outperformed the industry. Demonstrating
the strength of the Marriott brand name, our comparable properties, consisting
of 84 hotels, owned directly or indirectly by us for the entire 1999 and 1998
fiscal years, respectively, excluding two properties where significant
expansion at the hotels substantially affected operations during the two
fiscal years, generated a 31% and 29% REVPAR premium over our competitive set
for fiscal years 1999 and 1998, respectively. Accordingly, management
anticipates that any additional full service properties acquired in the future
and converted from other brands to the Marriott brand should achieve higher
occupancy rates and average room rates than has previously been the case for
those properties as the properties begin to benefit from Marriott's brand name
recognition, reservation system and group sales organization.
We have increased our pool of potential acquisition candidates by
considering acquisitions of select non-Marriott and non-Ritz-Carlton hotels
that offer long-term growth potential and are consistent with the overall
quality of our current portfolio. We will focus on upscale and luxury full
service properties in difficult to duplicate locations with high costs to
prospective competitors, such as hotels located in downtown, airport and
resort/convention locations, which are operated by quality managers. For
example, in December 1998, we consummated the Blackstone acquisition for
approximately $1.55 billion in a combination of cash, operating partnership
units, assumed debt and other consideration. The Blackstone acquisition
consisted of two Ritz-Carlton, two Four Seasons, one Grand Hyatt, three Hyatt
Regency and four Swissotel properties. In the future, we may also consider
opportunities to improve property operations by converting certain existing or
acquired hotels to these and other quality national brands. For example, we
are currently converting the resort property in Singer Island, Florida to the
Hilton brand, which is expected to be completed April 1, 2000.
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 hotel assets.
In September 1999, the board of directors of Host REIT approved the
repurchase, from time to time on the open market and/or in privately
negotiated transactions, of up to 22 million of the outstanding shares of Host
Marriott Corporation common stock, operating partnership units or Convertible
Preferred Securities convertible into a like number of shares of common stock.
Based on current market conditions, the Board of Host REIT believes that the
stock repurchase program reflects the best return on investment for its
shareholders. However, the Board of Host REIT will continue to look at
strategic acquisitions as well as evaluate Host REIT's stock repurchase
program based on changes in market conditions and Host REIT's stock price. The
stock repurchases may be financed through cash from operations, assets sales,
and other financing activities, such as the issuances of the Class A and Class
B Preferred Stock made during 1999. Such repurchases will be made at
management's discretion, subject to market conditions and may be suspended at
any time at our discretion. Through March 8, 2000, we spent, in the aggregate,
approximately $149 million to repurchase 10.5 million shares of common stock,
and 1.5 million shares of the Convertible Preferred Securities and 0.6 million
operating partnership units for a total reduction of 16.0 million equivalent
common shares on a fully diluted basis.
The REIT Conversion
During 1998, Host Marriott and its subsidiaries and affiliates consummated
a series of transactions intended to enable Host REIT to qualify as a REIT for
federal income tax purposes. As a result of these transactions, the hotels
formerly owned by Host Marriott and its subsidiaries and other affiliates are
now owned by us and our subsidiaries; we and our subsidiaries lease
substantially all of these hotels to Crestline Capital Corporation, and
Marriott International and other hotel operators conduct the day-to-day
management of the hotels pursuant to management agreements with Crestline.
Host REIT has elected to be treated as a REIT for federal income tax purposes
effective January 1, 1999. The important transactions comprising the REIT
conversion are summarized below.
4
During 1998, Host Marriott reorganized its hotels and certain other assets
so that they were owned by us and our subsidiaries. Host Marriott and its
subsidiaries received a number of OP Units equal to the number of then
outstanding shares of Host Marriott common stock, and we and our subsidiaries
assumed substantially all of the liabilities of Host Marriott and its
subsidiaries. As a result of this reorganization and the related transactions
described below, Host REIT is our sole general partner and, as of December 31,
1999, held approximately 78% of our outstanding OP Units. We and our
subsidiaries conduct our hotel ownership business. OP Units owned by holders
other than Host REIT are redeemable at the option of the holder, generally
commencing one year after the issuance of their OP Units. Upon redemption of
an OP Unit, the holder would receive from us cash in an amount equal to the
market value of one share of Host REIT common stock. However, in lieu of a
cash redemption by us, Host REIT has the right to acquire any OP Unit offered
for redemption directly from the holder thereof in exchange for either one
share of Host REIT common stock or cash in an amount equal to the market value
of one share of Host REIT common stock.
In connection with the REIT conversion, two taxable corporations were
formed in which we own approximately 95% of the economic interest but none of
the voting interest. We refer to these two subsidiaries as the non-controlled
subsidiaries. The non-controlled subsidiaries hold various assets and related
liabilities which were originally contributed by Host Marriott and its
subsidiaries to us, but whose direct ownership by Host REIT, us or our other
subsidiaries generally would jeopardize Host REIT's status as a REIT and our
status as a partnership for federal income tax purposes. These assets
primarily consist of interests in partnerships or other interests in three
hotels which are not leased, and specified furniture, fixtures and equipment--
also known as FF&E--used in the hotels. We have no control over the operation
or management of the hotels or other assets owned by the non-controlled
subsidiaries. The Host Marriott Statutory Employee/Charitable Trust acquired
all of the voting common stock of each non-controlled subsidiary,
representing, in each case, the remaining approximately 5% of the total
economic interests in each non-controlled subsidiary. The beneficiaries of the
Employee/Charitable Trust are a trust formed for the benefit of specified
employees of ours and the J. Willard and Alice S. Marriott Foundation.
Under current federal income tax law, REITs are restricted in their ability
to derive revenues from the operation of hotels. However, they can derive
rental income by leasing hotels. Therefore, we and our subsidiaries lease
virtually all of our hotel properties to subsidiaries of Crestline. The
lessees pay rent to us and our subsidiaries generally equal to the greater of
(1) a specified minimum rent or (2) rent based on specified percentages of
different categories of aggregate sales at the relevant hotels. Generally,
there is a separate lessee for each hotel property or there is a separate
lessee for each group of hotel properties that has separate mortgage financing
or has owners in addition to us and our wholly owned subsidiaries. The lessees
for all but four of our hotels are wholly owned subsidiaries of Crestline,
formed as limited liability companies, each of whose purpose is limited to
acting as lessee under an applicable lease. The limited liability company
agreement for each Crestline lessee provides that Crestline will have full
control over the management of the business of the lessee, except with respect
to certain decisions for which the consent of other members or the hotel
manager will be required. In addition, although the Crestline lessees are
wholly owned subsidiaries of Crestline, Marriott International or its
appropriate subsidiary has a non-economic voting interest on specific matters
pertaining to hotels which are managed by Marriott International or its
subsidiaries.
The leases, through the sales percentage rent provisions, are designed to
allow us and our subsidiaries to participate in any growth above specified
levels in room sales at the hotels, which management expects can be achieved
through increases in room rates and occupancy levels. Although the economic
trends affecting the hotel industry will be the major factor in generating
growth in lease revenues, the abilities of the lessees and the managers will
also have a material impact on future sales growth. Our leases have remaining
terms ranging from two to ten years, subject to earlier termination upon the
occurrence of contingencies that are specified in the leases. We may elect to
purchase each of the leases either upon a sale of a hotel to a third party or
upon the occurrence of certain changes in tax law such as those changes
included in the REIT Modernization Act (discussed below), for a purchase price
equal to the fair rental value of the lessee's interest in the lease over the
remaining term of such lease. Effective November 15, 1999, we amended
substantially all of our leases with Crestline to give Crestline the right to
renew each of these leases for up to four additional terms of seven years
5
each at a fair rental value, to be determined either by agreement between us
and Crestline or through arbitration at the time the renewal option is
exercised. Crestline is under no obligation to exercise these renewal options,
and we have the right to terminate the renewal options during time periods
specified in the amendments. In addition, the amendments provide that the fair
rental value payable by us to Crestline in connection with the purchase of a
lease as described above does not include any amounts relating to any renewal
period. Therefore, the fair rental value of a lease after expiration of the
initial term for such lease would be zero. We have received notices of
termination from Crestline on five leases, with effective dates ranging from
March through June 2000. We are currently negotiating for replacement leases
on those five hotels. We expect to be able to obtain replacement leases for
these leases without material impact to our future operations.
In December 1999, the REIT Modernization Act was passed, with most
provisions effective for taxable years beginning after December 31, 2000. The
REIT Modernization Act significantly amends the REIT laws applicable to us.
Among the changes, the REIT Modernization Act allows a REIT to own up to 100%
of the voting stock of one or more taxable REIT subsidiaries subject to
limitations on the value of those subsidiaries. The rents received from such
subsidiaries would not be disqualified from being "rents from real property"
by reason of our ownership interest in the subsidiary so long as the property
is operated on behalf of the taxable REIT subsidiary by an "eligible
independent contractor." This would enable us to lease our hotels to wholly
owned taxable subsidiaries if the hotels are operated and managed on behalf of
such subsidiaries by an independent third party. Under the REIT Modernization
Act, taxable REIT subsidiaries will be subject to federal income tax. Under
the law that is currently in effect, a REIT must satisfy three tests relating
to the nature of its assets:
. First, at least 75% of its total assets must be represented by real
estate assets.
. Second, no more than 25% of its total assets may be represented by
securities other than those in the 75% asset class.
. Third, within the 25% assets class, the value of any one issuer's
securities may not exceed 5% of its total assets and a REIT may not own
more than 10% of any one issuer's outstanding voting securities.
The third test will be modified in two respects by the REIT Modernization
Act:
. The 10% voting securities test will be expanded so that we will be
prohibited from owning more than 10% of the value of the outstanding
securities of any one issuer.
. We will be permitted to own securities of a subsidiary that exceed the 5%
value test and the new 10% vote or value test if the subsidiary elects to
be a taxable REIT subsidiary.
Under the REIT Modernization Act, beginning January 1, 2001, we could lease
our hotels to a subsidiary of ours that is a taxable corporation and that
elects to be treated as a "taxable REIT subsidiary". In addition, as a result
of passage of the REIT Modernization Act, we have the right to purchase the
leases from Crestline on or after January 1, 2001, for a price equal to their
fair market value, the amount of which could be significant. We intend to
evaluate our options regarding the Crestline leases and have not yet made a
decision whether or not to purchase those leases. Finally, under the REIT
Modernization Act, beginning January 1, 2001, the aggregate fair market values
of real and personal property will be used for purposes of determining rents
from real property. Currently, the aggregate tax bases of both real and
personal property are used for this purpose.
Recent Acquisitions, Developments and Dispositions
The pace of acquisitions changed significantly in 1999 from the previous
years. After three years of acquisitions numbering 36, 17, and 24 full service
hotels for 1998, 1997 and 1996, respectively, our 1999 acquisitions were
limited to completing the acquisition of minority interests in two hotels
where we had previously acquired the controlling interests for a total
consideration of approximately $14 million.
During the year we focused our energies on increasing the value of our
current portfolio with selective investments and expansions and new
developments. We plan to selectively develop new upscale and luxury full-
service hotels in major urban markets and convention/resort locations with
strong growth prospects, unique or difficult to duplicate sites, high costs
for prospective competitors for other new hotels and limited new supply.
6
We intend to target only development projects that show promise of providing
financial returns that represent a premium to acquisitions. The largest of
these projects was the construction of a 717-room full service hotel adjacent
to the convention center in downtown Tampa, Florida. The hotel, which was
completed and opened for business on February 19, 2000, includes 45,000 square
feet of meeting space, three restaurants and a 30-slip marina as well as many
other amenities. The total development cost of the property was approximately
$104 million, excluding a $16 million tax subsidy provided by the City of
Tampa.
In April 1999 we completed a 210-room expansion of the Philadelphia
Marriott, through a renovation of the historic railroad headhouse building
adjacent to the property. The project was completed for approximately $37
million including a $7 million tax financing provided by the City of
Philadelphia.
Two other development projects, the Orlando World Center Marriott expansion
and the Ritz-Carlton Naples, Florida spa addition are currently under
construction. At the Orlando Marriott, the addition of a 500-room tower and
15,000 square feet of meeting space will make it the single largest hotel in
the Marriott system at 2000 rooms. We also have renovated the golf course,
added a multi-level parking deck, and upgraded and expanded several
restaurants. The Orlando World Center Marriott construction is expected to be
completed by mid-year 2000. Also under development is a 50,000 square-foot
world-class spa at the Ritz-Carlton, Naples. This project is anticipated to be
completed late in 2000. The combined approximate development cost for these
expansions is estimated to be approximately $107 million.
Two longer-term development projects are currently active with anticipated
completion in 2001. These are the construction of a 295-room Ritz-Carlton,
Naples, Golf Lodge and the 200-room expansion of the Memphis Marriott. The
construction of the Naples Golf Lodge near the 463-room Ritz-Carlton, Naples,
as well as the construction of the new spa facility, will offer travelers an
unmatched resort experience. The Memphis Marriott, which is located adjacent
to a newly-renovated convention center, was converted to the Marriott brand
upon acquisition in 1998 to capitalize on Marriott's brand name recognition.
The combined development costs for these projects is estimated to be
approximately $90 million.
In addition to investments in partnerships in which we already held
minority interests, we have been successful in adding properties to our
portfolio through partnership arrangements with either the seller of the
property or the incoming managers (typically Marriott International or a
Marriott franchisee). We have the financial flexibility and, due to our
existing private partnership investment portfolio, the administrative
infrastructure in place to accommodate such arrangements. We view this ability
as a competitive advantage and expect to enter into similar arrangements to
acquire additional properties in the future.
Through subsidiaries we currently own four Canadian properties, containing
1,636 rooms. We intend to continue to evaluate other attractive acquisition
opportunities in Canada. In addition, the overbuilding and economic stress
experienced in some European and Pacific Rim countries may eventually lead to
additional international acquisition opportunities. We will acquire
international properties only when we believe such acquisitions achieve
satisfactory returns after adjustments for currency and country risks.
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 suburban locations, hotels that require
significant capital improvement and other underperforming assets. The net
proceeds from these sales will be reinvested in upscale and luxury hotels more
consistent with our strategy or otherwise applied in a manner consistent with
our investment strategy (which may include the purchase of securities) at the
time of sale. The following table summarizes our 1999 dispositions (in
millions, except number of rooms):
Pre-tax
Total Gain (Loss)
Property Location Rooms Consideration on Disposal
- -------- -------- ----- ------------- -----------
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)
7
Hotel Lodging Industry
The lodging industry posted moderate gains in 1999 as higher average daily
rates drove strong increases in REVPAR, which measures daily room revenues
generated on a per room basis. This does not include food and beverage or
other ancillary revenues generated by the property. REVPAR represents the
product of the average daily room rate charged and the average daily occupancy
achieved. Previously, 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, during 1999 and
1998 supply moderately outpaced demand, causing slight declines in occupancy
rates in the upscale and luxury full-service segments in which we operate.
According to Smith Travel Research, supply in our brands' competitive set
increased 1.6% for the year ended December 31, 1999 while demand in our
competitive set increased 1.1%. At the same time, occupancy declined 0.4% in
our competitive set for the year ended December 31, 1999.
These declines in occupancy, however, were more than offset by increases in
average daily rates which generated higher REVPAR. According to Smith Travel
Research, for the year ended December 31, 1999, average daily rate and REVPAR
for our competitive set increased 3.0% and 2.5%, respectively, versus the same
period one year ago. The current amount of excess supply in the upper-upscale
and luxury portions of the full-service segment of the lodging industry is
relatively moderate and much less severe than that experienced in the lodging
industry in other occupancy downturns, in part because of the greater
financial discipline and lending practices imposed by financial institutions
and public markets today relative to those during the late 1980's.
Our hotels have outperformed 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 3.8% in 1999. The increase in
average daily rate helped generate a strong increase in comparable hotel
REVPAR of 4.1% for the same period. Furthermore, because our lodging
operations have a high fixed-cost component, increases in REVPAR generally
yield greater percentage increases in our consolidated earnings before
interest expense, income taxes, depreciation, amortization and other non-cash
items or EBITDA. While we do not benefit directly from increases in EBITDA
levels at our properties due to the structure of our leases, we should benefit
from such increases due to expected higher market valuations of our properties
based on such elevated EBITDA levels.
We believe that the current environment of excess new supply will most
likely continue over the next twelve to twenty-four months. However, the
relative balance between supply and demand growth 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. We believe that growth in room supply in upscale
and luxury full-service sub-markets in which we operate continue to exceed
room demand growth through the year 2001. There can be no assurance that
growth in supply will moderate or that REVPAR and EBITDA will continue to
improve.
Hotel Lodging Properties
Our lodging portfolio, as of March 1, 2000, consists of 122 upscale and
luxury full service hotels containing approximately 58,000 rooms. Our hotel
lodging properties represent quality upscale and luxury assets in the full
service segment. All but thirteen of our hotel properties are currently
operated under the Marriott or Ritz-Carlton brand names.
Our hotels average approximately 474 rooms. Thirteen 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 in downtown, airport, resort
convention and suburban locations throughout the United States. The
8
properties are generally well situated in locations where there are
significant barriers to entry by competitors including downtown areas of major
metropolitan cities at airports and resort/convention locations where there
are limited or no development sites. The average age of the properties is 16
years, although many of the properties have had more recent 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
1999, 1998 and 1997 we spent $197 million, $165 million and $129 million,
respectively, on capital improvements to existing properties. As a result of
these expenditures, we expect to maintain high quality rooms at our
properties.
We continue to benefit from our strategic alliance with Marriott
International. Marriott International serves as the manager for 99 of our 122
hotels and all but 13 are part of Marriott International's full-service hotel
system. The Marriott brand name has consistently delivered occupancy and
REVPAR premiums over other brands. Our properties have reported annual
increases in REVPAR since 1993. Based upon data provided by Smith Travel
Research, our comparable properties have more than a 9 percentage point
occupancy premium and an approximate 31% REVPAR premium over the competitive
set for 1999.
Comparable properties refer to properties that we owned for the same period
of time in each of the periods covered as adjusted to exclude properties where
significant disruptions to operations occurred due to expansions to the
properties.
The chart below sets forth performance information for our comparable
properties:
1999 1998
------- -------
Comparable Full-Service Hotels(1)
Number of properties....................................... 84 84
Number of rooms............................................ 40,868 40,868
Average daily rate......................................... $146.74 $141.41
Occupancy percentage....................................... 78.5% 78.2%
REVPAR..................................................... $115.13 $110.57
REVPAR % change............................................ 4.1% --
- --------
(1) Consists of 84 properties owned, directly or indirectly, by us for the
entire 1999 and 1998 fiscal years, respectively, after giving effect to
adjustments to remove two properties where significant expansion at the
hotels affected operations for the 1999 and 1998 fiscal years. These
properties, for the respective periods, represent the "comparable
properties."
The chart below presents some performance information for our hotels:
1999(1) 1998 1997
------- ------- -------
Number of properties............................ 121 126(2) 95
Number of rooms................................. 57,086 58,445(2) 45,718
Average daily rate.............................. $149.51 $140.36 $133.74
Occupancy percentage............................ 77.7% 77.7% 78.4%
REVPAR.......................................... $116.13 $109.06 $104.84
- --------
(1) The property statistics and operating results include operations for the
Minneapolis/Bloomington Marriott, the Saddle Brook Marriott, Marriott's
Grand Hotel Resort and Golf Club, the Ritz-Carlton, Boston, and the El
Paso Marriott, which were sold at various times throughout 1999, through
the date of sale.
(2) Number of properties and rooms is as of December 31, 1998 and includes 25
properties (9,965 rooms) acquired in that month.
9
The following table presents full service hotel information by geographic
region for 1999:
As of December 31, 1999 Year Ended December 31, 1999(1)
------------------------ --------------------------------------
Number Average Number Average Average
Geographic Region of Hotels of Guest Rooms Occupancy Daily Rate REVPAR
- ----------------- --------- -------------- ----------- ------------ -----------
Atlanta................. 11 486 74.7% $ 148.78 $ 111.12
Florida................. 12 531 77.1 149.75 115.51
Mid-Atlantic............ 17 364 75.8 132.80 100.69
Midwest................. 14 358 76.6 132.19 101.24
New York................ 10 716 84.0 203.16 170.70
Northeast............... 11 390 77.4 140.99 109.07
South Central........... 19 497 76.2 123.25 93.89
Western................. 27 491 78.2 154.26 120.60
---
Average--All regions.... 121 472 77.7 149.51 116.13
===
- --------
(1) The property statistics and operating results include operations for the
Minneapolis/Bloomington Marriott, the Saddle Brook Marriott, Marriott's
Grand Hotel Resort and Golf Club, the Ritz-Carlton, Boston, and the El
Paso Marriott, all sold at various times throughout 1999, through the date
of applicaple sale.
Prior to 1997, we divested virtually all of our limited-service hotel
properties through the sale and leaseback of 53 Courtyard properties and 18
Residence Inn properties. 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.
During 1999, limited-service properties represented less than 1% of our EBITDA
from hotel properties. Lease revenues for the 71 properties that we sub-lease
are reflected in our revenues in 1999, while gross property-level sales were
reflected previous to that.
The following table sets forth as of March 1, 2000, the location and number
of rooms relating to each of our 122 hotels. All of the properties are leased
to a subsidiary of Crestline and operated under Marriott brands by Marriott
International, unless otherwise indicated.
Location Rooms
- -------- -----
Arizona
Mountain Shadows Resort.................................................. 337
Scottsdale Suites........................................................ 251
The Ritz-Carlton, Phoenix................................................ 281
California
Coronado Island Resort(1)(2)............................................. 300
Costa Mesa Suites........................................................ 253
Desert Springs Resort and Spa............................................ 884
Fullerton(2)............................................................. 224
Hyatt Regency, Burlingame(3)............................................. 793
Manhattan Beach(1)(2)(4)(6).............................................. 380
Marina Beach(1)(2)....................................................... 368
Newport Beach............................................................ 570
Newport Beach Suites..................................................... 250
Ontario Airport(4)(6).................................................... 299
Sacramento Airport(2)(3)(7).............................................. 85
San Diego Marriott Hotel and Marina(2)(6)................................ 1,355
San Diego Mission Valley(6)(7)........................................... 350
San Francisco Airport.................................................... 684
San Francisco Fisherman's Wharf(4)....................................... 285
San Francisco Moscone Center(2).......................................... 1,498
San Ramon(2)............................................................. 368
Santa Clara(2)........................................................... 754
The Ritz-Carlton, Marina del Rey(2)...................................... 306
The Ritz-Carlton, San Francisco.......................................... 336
Torrance................................................................. 487
Location Rooms
- -------- -----
Colorado
Denver Southeast(2)...................................................... 595
Denver Tech Center(1).................................................... 625
Denver West(2)........................................................... 307
Marriott's Mountain Resort at Vail(1).................................... 349
Connecticut
Hartford/Farmington...................................................... 380
Hartford/Rocky Hill(2)................................................... 251
Florida
Fort Lauderdale Marina(2)................................................ 580
Harbor Beach Resort(2)(5)(6)............................................. 624
Jacksonville(2)(4)....................................................... 256
Miami Airport(2)......................................................... 782
Miami Biscayne Bay(2).................................................... 605
Orlando World Center..................................................... 1,503
Palm Beach Gardens(4).................................................... 279
Singer Island Holiday Inn(3)............................................. 222
Tampa Airport(2)......................................................... 295
Tampa Waterside.......................................................... 717
Tampa Westshore(2)....................................................... 309
The Ritz-Carlton, Amelia Island.......................................... 449
The Ritz-Carlton, Naples................................................. 463
Georgia
Atlanta Marriott Marquis(6).............................................. 1,671
Atlanta Midtown Suites(2)................................................ 254
Atlanta qNorcross........................................................ 222
10
Location Rooms
- -------- -----
Georgia (continued)
Atlanta Northwest........................................................ 400
Atlanta Perimeter(2)..................................................... 400
Four Seasons, Atlanta(3)................................................. 246
Grand Hyatt, Atlanta(3).................................................. 439
JW Marriott Hotel at Lenox(2)............................................ 371
Swissotel, Atlanta(3).................................................... 348
The Ritz-Carlton, Atlanta(2)............................................. 447
The Ritz-Carlton, Buckhead............................................... 553
Illinois
Chicago/Deerfield Suites................................................. 248
Chicago/Downers Grove Suites............................................. 254
Chicago/Downtown Courtyard............................................... 334
Chicago O'Hare(2)........................................................ 681
Chicago O'Hare Suites(2)................................................. 256
Swissotel, Chicago(3).................................................... 630
Indiana
South Bend(2)............................................................ 300
Louisiana
New Orleans.............................................................. 1,290
Maryland
Bethesda(2).............................................................. 407
Gaithersburg/Washingtonian Center........................................ 284
Massachusetts
Boston/Newton............................................................ 430
Hyatt Regency, Cambridge(3).............................................. 469
Swissotel, Boston(3)..................................................... 498
Michigan
The Ritz-Carlton, Dearborn............................................... 308
Detroit Livonia.......................................................... 224
Detroit Romulus.......................................................... 245
Detroit Southfield....................................................... 226
Minnesota
Minneapolis City Center(2)............................................... 583
Minneapolis Southwest(6)(7).............................................. 320
Missouri
Kansas City Airport(2)................................................... 382
New Hampshire
Nashua................................................................... 251
New Jersey
Hanover.................................................................. 353
Newark Airport(2)........................................................ 590
Park Ridge(2)............................................................ 289
New Mexico
Albuquerque(2)........................................................... 411
New York
Albany(6)(7)............................................................. 359
New York Marriott Financial Center....................................... 504
New York Marriott Marquis(2)............................................. 1,919
Marriott World Trade Center (1)(2)....................................... 820
Swissotel, The Drake(3).................................................. 494
Location Rooms
- -------- ------
North Carolina
Charlotte Executive Park(4)............................................. 298
Greensboro/Highpoint(2)................................................. 299
Raleigh Crabtree Valley................................................. 375
Research Triangle Park.................................................. 224
Ohio
Dayton.................................................................. 399
Oklahoma
Oklahoma City........................................................... 354
Oklahoma City Waterford(1)(4)(6)........................................ 197
Oregon
Portland................................................................ 503
Pennsylvania
Four Seasons, Philadelphia(3)........................................... 365
Philadelphia Convention Center(2)(6).................................... 1,410
Philadelphia Airport(2)................................................. 419
Pittsburgh City Center(1)(2)(4)(6)...................................... 400
Tennessee
Memphis(1)(2)........................................................... 403
Texas
Dallas/Fort Worth Airport............................................... 492
Dallas Quorum(2)........................................................ 547
Houston Airport(2)...................................................... 566
Houston Medical Center(2)............................................... 386
JW Marriott Houston..................................................... 503
Plaza San Antonio(1)(2)(4).............................................. 252
San Antonio Rivercenter(2).............................................. 999
San Antonio Riverwalk(2)................................................ 500
Utah
Salt Lake City(2)....................................................... 510
Virginia
Dulles Airport(2)....................................................... 370
Fairview Park(2)........................................................ 395
Hyatt Regency, Reston(3)................................................ 514
Key Bridge(2)........................................................... 588
Norfolk Waterside(2)(4)................................................. 404
Pentagon City Residence Inn............................................. 300
The Ritz-Carlton, Tysons Corner(2)...................................... 397
Washington Dulles Suites................................................ 254
Westfields(1)........................................................... 335
Williamsburg(1)......................................................... 295
Washington
Seattle SeaTac Airport.................................................. 459
Washington, DC
Washington Metro Center(1).............................................. 456
Canada
Calgary(1).............................................................. 380
Toronto Airport(6)...................................................... 423
Toronto Eaton Center(2)................................................. 459
Toronto Delta Meadowvale(3)............................................. 374
------
TOTAL.................................................................... 57,803
======
(1) This property was converted to the Marriott brand after acquisition.
(2) The land on which this hotel is built is leased under one or more long-term
lease agreements.
(3) This property is not operated under the Marriott brand and is not managed
by Marriott International.
(4) This property is operated as a Marriott franchised property.
(5) This property is leased to Marriott International.
(6) This property is not wholly owned by the operating partnership.
(7) This property is not leased to Crestline.
11
Investments in Affiliated Partnerships
We and certain of our subsidiaries also manage our partnership investments
and conduct the partnership services business. As previously discussed, in
connection with the REIT conversion, the non-controlled subsidiaries were
formed to hold various assets. The direct ownership of those assets by us or
Host REIT could jeopardize Host REIT's status as a REIT or our treatment as a
partnership for federal income tax purposes. Substantially all our general and
limited partner interests in partnerships owning 209 limited-service hotels
were held by the non-controlled subsidiaries at year end. Additionally, of the
20 full-service hotels in which we had general and limited partner interests
13 were acquired by us, two were sold, four were transferred to the non-
controlled subsidiary and one was retained. We executed a definitive agreement
regarding litigation for seven of these limited partnerships subsequent to
year end. See "--Legal Proceeding" below.
The managing general partner of the partnership is responsible for the day-
to-day management of the partnership operations, which generally includes
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.
The partnership hotels 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.
Cash distributions provided from these partnerships including distributions
related to partnerships sold, transferred or acquired in 1998 are tied to the
overall performance of the underlying properties and the overall level of
debt. All debt of these partnerships is nonrecourse to us and our
subsidiaries, except that we are contingently liable under various guarantees
of debt obligations of certain of the limited-service partnerships.
Marketing
As of March 1, 2000, 99 of our 122 hotel properties were managed by
subsidiaries of Marriott International as Marriott or Ritz-Carlton brand
hotels. Ten of the 23 remaining hotels are operated as Marriott brand hotels
under franchise agreements with Marriott International. The remaining hotels
are managed primarily by Hyatt, Four Seasons and Swissotel. In addition, we
are currently converting the resort property in Singer Island, Florida to the
Hilton brand, which is expected to be completed April 1, 2000.
We believe that our properties will continue to enjoy competitive
advantages arising from their participation in the Marriott, Ritz-Carlton,
Hyatt, Four Seasons, Swissotel, and Hilton hotel 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, Hyatt,
Swissotel, and Hilton. For example, the Marriott Rewards program membership
includes more than 7.5 million members.
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. Marriott's reservation system
also features connectivity to airline reservation systems, providing travel
agents with access to available rooms inventory for all Marriott and Ritz-
Carlton lodging properties. In addition, software at Marriott's centralized
reservations centers enables agents to immediately identify the nearest
Marriott or Ritz-Carlton brand property with available rooms when a caller's
first choice is fully occupied. Our website (www.hostmarriott.com) currently
permits users to connect to the Marriott, Ritz-Carlton, Hyatt, Four Seasons,
and Swissotel reservation systems to reserve rooms in our hotels.
Competition
Our hotels compete with several other major lodging brands in each segment
in which they operate. Competition in the industry is based primarily on the
level of service, quality of accommodations, convenience
12
of locations and room rates. Although the competitive position of each of our
hotel properties differs from market to market, we believe that our properties
compare favorably to their competitive set in the markets in which they
operate on the basis of these factors. The following table presents key
participants in segments of the lodging industry in which we compete:
Segment Representative Participants
------- ---------------------------
Luxury Full-Service Ritz-Carlton; Four Seasons
Upscale Full-Service Crown Plaza; Doubletree; Hyatt; Hilton; Marriott Hotels,
Resort and Suites; Radisson; Renaissance; Sheraton;
Swissotel; Westin; Wyndham
Seasonality
Our hotel revenues have traditionally experienced significant 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. Average hotel sales by quarter over the three years 1997 through 1999
for our lodging properties are as follows:
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
22% 23% 22% 33%
Other Real Estate Investments
We have lease and sublease activity relating primarily to Host Marriott's
former restaurant operations. Additionally, we have lease activity related to
certain office space that we own in Atlanta, Chicago, and San Francisco which
is included in other revenues in our statements of operations. Prior to the
REIT conversion, we owned 12 undeveloped parcels of vacant land, totaling
approximately 83 acres, originally purchased primarily for the development of
hotels or senior living communities. These parcels are now owned by one of the
non-controlled subsidiaries.
Employees
Currently, we have approximately 188 management employees, and
approximately 15 other employees which 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 have good relations with labor unions and have not
experienced any material business interruptions as a result of labor disputes.
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.
The Leases
In order for Host REIT to qualify as a REIT and for us to be treated as a
partnership for income tax purposes, neither we nor Host REIT may operate the
hotels or related properties. Accordingly, we lease the hotels
13
to lessees, which are primarily wholly owned indirect subsidiaries of
Crestline. The following is a brief summary of the general terms of the leases
a form of which has been filed with the Commission.
. Lessees. There generally is a separate lessee for each hotel or group of
hotels that is owned by us or our subsidiaries. Each lessee is a Delaware
limited liability company, whose purpose is limited to acting as lessee
under the applicable lease(s). For those hotels where it is the manager,
Marriott International or a subsidiary has a noneconomic membership
interest in the lessee entitling it to certain voting rights but no
economic rights. The operating agreements for such lessees provide that
the Crestline member of the lessee has full control over the management
of the business of the lessee, except with respect to specific decisions
for which the consent of both members are required. Upon any termination
of the applicable management agreement, these special voting rights of
Marriott International or its subsidiary will cease.
. Lease Terms. Each lease has a fixed term ranging generally from seven to
ten years (depending upon the lease), subject to earlier termination upon
the occurrence of specified contingencies described in the lease.
Effective November 15, 1999, we amended substantially all of our leases
with Crestline to give Crestline the right to renew each of these leases
for up to four additional terms of seven years each at a fair rental
value, to be determined either by agreement between us and Crestline or
through arbitration at the time the renewal option is exercised.
Crestline is under no obligation to exercise these renewal options, and
we have the right to terminate the renewal options during time periods
specified in the amendments. In addition, the amendments provide that the
fair rental value payable by us to Crestline in connection with the
purchase of a lease as described above does not include any amounts
relating to any renewal period. Therefore, the fair rental value of a
lease after expiration of the initial term for such lease would be zero.
. Termination of the Leases upon Changes in Tax Laws. In the event that
changes in the federal income tax laws such as those included in the REIT
Modernization Act allow the lessors, or subsidiaries or affiliates of the
lessors, to directly operate the hotels without jeopardizing Host REIT's
status as a REIT, the lessors have the right to terminate all, but not
less than all, of the leases (excluding leases of hotels that must still
be leased following the tax law change) in return for paying the lessees
the fair market value of the remaining terms of the leases
. Minimum Rent; Percentage Rent. Each lease requires the lessee to pay
minimum rent in a fixed dollar amount specified in each lease per annum
plus to the extent it exceeds minimum rent, percentage rent based upon
specified percentages of aggregate sales from the applicable hotel,
including room sales, food and beverage sales and other income in excess
of specified thresholds. The amount of minimum rent and the percentage
rent thresholds are to be adjusted each year. The annual adjustment with
respect to minimum rent equals a percentage of any increase in the
Consumer Price Index during the previous twelve months. Neither minimum
rent nor percentage rent thresholds will be decreased because of the
annual adjustment.
. Lessee Expenses. Each lessee is responsible for paying all of the
expenses of operating the applicable hotel(s), including all personnel
costs, utility costs and general repair and maintenance of the hotel(s).
The lessee also is responsible for all fees payable to the applicable
manager, including base and incentive management fees, chain services
payments and franchise or system fees, with respect to periods covered by
the term of the lease. The lessee is not obligated to bear the cost of
any capital improvements or capital repairs to the hotels or the other
expenses borne by the lessor, as described below.
. Lessor Expenses. The lessor is responsible for the following expenses:
real estate taxes, personal property taxes, casualty insurance on the
structures, ground lease rent payments, required expenditures for FF&E
and capital expenditures. The consent of the lessor is required for any
capital expenditures or a change in the amount of the FF&E reserve
payment.
. Crestline Guarantee. Crestline and some of its subsidiaries have entered
into a limited guarantee of the lease and management agreement
obligations of each lessee. For each of four identified "pools" of
hotels, the cumulative limit of the guarantee at any time is 10% of the
aggregate rents under all leases in such pool paid with respect to the
preceding thirteen full accounting periods (with an annualized amount
14
based upon the minimum rent for those leases that have not been in effect
for thirteen full accounting periods). In the event of a payment default
under any lease or failure of Crestline to maintain specified minimum net
worth or debt service coverage ratios, the obligations under the
guarantees of leases in each pool are secured by excess cash flow of each
lessee in such pool. Such excess cash flow will be collected, held in a
cash collateral account, and disbursed in accordance with agreed cash
management procedures.
. Working Capital. Each lessor sold the existing working capital (including
Inventory and Fixed Asset Supplies (as defined in the Uniform System of
Accounts for Hotels) and receivables due from the manager, net of
accounts payable and accrued expenses) to the applicable lessee upon the
commencement of the lease at a price equal to the fair market value of
such assets. The purchase price was represented by a note evidencing a
loan that bears interest at a rate per year equal to the "long-term
applicable federal rate" in effect on the commencement of the lease.
Interest owed on the working capital loan is due simultaneously with each
periodic rent payment and the amount of each payment of interest will be
credited against such rent payment. The principal amount of the working
capital loan will be payable upon termination of the lease.
. Termination of Leases upon Disposition of Full Service Hotels. In the
event the applicable lessor enters into an agreement to sell or otherwise
transfer any full-service hotel free and clear of the applicable lease,
the lessor must pay the lessee a termination fee equal to the fair market
value of the lessee's leasehold interest in the remaining term of the
lease. Alternatively, the lessor would be entitled to substitute a
comparable hotel or hotels for any hotel that is sold or sell the hotel
subject to the lease subject to the lessee's reasonable approval. In
addition, the lessors collectively and the lessees collectively each have
the right to terminate up to twelve leases without being required to pay
any fee or other compensation as a result of such termination, but the
lessors are permitted to exercise such right only in connection with
sales of hotels to an unrelated third party or the transfer of a hotel to
a joint venture in which the operating partnership does not have a two-
thirds or greater interest. We have received notices of termination from
Crestline on five leases, with effective dates ranging from March through
June 2000, which we are currently negotiating. We expect to be able to
obtain replacement leases for these leases without material impact to our
future operations.
. Assignment of Lease. A lessee is permitted to sublet all or part of the
hotel or assign its interest under its lease, without the consent of the
lessor, to any wholly owned and controlled single purpose subsidiary of
Crestline, provided that Crestline continues to meet the minimum net
worth test and all other requirements of the lease. Transfers to other
parties are permitted if approved by the lessor.
. Subordination to Qualifying Mortgage Debt. The rights of each lessee are
expressly subordinate to qualifying mortgage debt and any refinancing
thereof.
. Personal Property Limitation. If a lessor reasonably anticipates that the
average tax basis of the items of the lessor's FF&E and other personal
property that are leased to the applicable lessee will exceed 15% of the
aggregate average tax basis of the real and personal property subject to
the applicable lease the lessor would acquire any replacement FF&E that
would cause the applicable limits to be exceeded, and immediately
thereafter the lessee would be obligated either to acquire such excess
FF&E from the lessor or to cause a third party to purchase such FF&E. The
annual rent under the applicable lease would then be reduced in
accordance with a formula based on market leasing rates for the excess
FF&E. Beginning January 1, 2001, the average aggregate fair market values
of both real and personal property will be used for purposes of
determining rents from real property as opposed to the aggregate tax
bases.
. Change in Manager. A lessee is permitted to change the manager or the
brand affiliation of a hotel only with the approval of the applicable
lessor, which approval may not be unreasonably withheld.
The Management Agreements
All of our hotels are subject to management agreements for the operation of
the properties. The original terms of the management agreements are generally
15 to 20 years in length with multiple optional renewal terms. The following
is a brief summary of the general terms of the management agreements a form of
which has been
15
filed with the Commission. The lessees lease the hotels from us or our
subsidiaries. Upon leasing the hotels, the lessees assumed substantially all
of the obligations of such subsidiaries under the management agreements
between those entities and the subsidiaries of Marriott International and
other companies that currently manage the hotels. As a result of their
assumptions of obligations under the management agreements, the lessees have
substantially all of the rights and obligations of the "owners" of the hotels
under the management agreements for the period during which the leases are in
effect (including the obligation to pay the management and other fees
thereunder) and hold us harmless with respect thereto. Our subsidiaries remain
liable for all obligations under the management agreements.
. General. Under each management agreement related to a Marriott
International-managed hotel, the manager provides complete management
services to the applicable lessees in connection with its 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 establishment of all room rates, the processing of
reservations, procurement of inventories, supplies and services, periodic
inspection and consultation visits to the hotels by the managers'
technical and operational experts and promotion and publicity of the
hotels. The manager receives compensation from the lessee in the form of
a base management fee and an incentive management fee, which are normally
calculated as percentages of gross revenues and operating profits,
respectively.
. 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, 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 the "Marriott" trademark and other tradenames 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 or regional
basis to hotels in the Marriott hotel system. 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 in providing such services are allocated among all hotels in the
Marriott hotel system managed by the manager or its affiliates and each
applicable lessee is required to reimburse the manager for its allocable
share of such costs and expenses.
. Working capital and fixed asset supplies. The lessee is required to
maintain working capital for each hotel and fund the cost of fixed asset
supplies, which principally consist of linen and similar items. The
applicable lessee also is responsible for providing funds to meet the
cash needs for the operations of the hotels if at any time the funds
available from operations are insufficient to meet the financial
requirements of the hotels.
. Use of affiliates. The manager employs the services of its affiliates to
provide certain services under the management agreements. Certain of the
management agreements provide that the terms of any such employment must
be no less favorable to the applicable lessee, in the reasonable judgment
of the manager, than those that would be available from the manager.
FF&E replacements. The management agreements generally provide that once
each year the manager will prepare a list of FF&E to be acquired and certain
routine repairs that are normally capitalized to be performed in the next year
and an estimate of the funds necessary therefor. Under the terms of the
leases, the lessor is required to provide to the applicable lessee 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 (generally
16
5%) of the gross revenues of the hotel is deposited by the manager into a book
entry account. These amounts are treated under the leases as paid by the
lessees to the lessor and will be credited against their rental obligations.
Under each lease, the lessor is responsible for the costs of FF&E
replacements and for decisions with respect thereto (subject to its
obligations to the lessee under the lease).
. 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. Such estimate must be submitted to
the lessor and the lessee for their approval. 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 or in
accordance with Marriott standards. The cost of the foregoing is paid
from the FF&E reserve account; to the extent that there are insufficient
funds in such account, the operating partnership is required to pay any
shortfall.
. Service marks. During the term of the management agreements, the service
mark, such as "Marriott" and other symbols, logos and service marks
currently used by the manager and its affiliates, may be used in the
operation of the hotels. Marriott International (or its applicable
affiliates), Hyatt, Swissotel, and Four Seasons intend to retain their
legal ownership of these marks. 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. Certain 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 as specified in the specific management
agreement. Under the leases, the responsibility for the payment of any
such termination fee as between the lessee and the lessor depends upon
the cause for such termination.
. 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 the lessee based upon the shortfall in such
criteria.
Assignment of management agreements. The management agreements applicable
to each hotel have been assigned to the applicable lessee for the term of the
lease of such hotel. The lessee is obligated to perform all of the obligations
of the lessor under the management agreement during the term of its lease,
other than specified retained obligations including, without limitation,
payment of real property taxes, property casualty insurance and ground rent,
and maintaining a reserve fund for FF&E replacements and capital expenditures,
for which the lessor retains responsibility. Although the lessee has assumed
obligations of the lessor under the management agreement, the lessor is not
released from its obligations and, if the lessee fails to perform any
obligations, the manager will be entitled to seek performance by or damages
from the lessor. If the lease is terminated for any reason, any new or
successor lessee must meet certain requirements for an approved lessee or
otherwise be acceptable to Marriott International.
Non-competition agreements
Pursuant to a non-competition agreement entered into in connection with the
leases, Crestline has agreed, among other things, that until the earlier of
December 31, 2008 and the date on which it is no longer a lessee for more than
25% of the number of the hotels owned by us on December 29, 1998, it will not
(1) own, operate or otherwise control (as owner or franchisor) any full-
service hotel brand or franchise, or purchase, finance or otherwise invest in
full-service hotels, or act as an agent or consultant with respect to any of
the foregoing activities, or lease or manage full-service hotels (other than
hotels owned by us) if its economic return therefrom would be more similar to
returns derived from ownership interests in such hotels except for
acquisitions of
17
property used in hotels as to which a subsidiary of Crestline is the lessee,
investments in full-service hotels which represent an immaterial portion of a
merger or similar transaction or a minimal portfolio investment in another
entity, limited investments (whether debt or equity) in full-service hotels as
to which a subsidiary of Crestline is the lessee or activities undertaken with
respect to its business of providing asset management services to hotel
owners, or (2) without our consent, manage any of the hotels owned by us,
other than to provide asset management services.
We have agreed with Crestline, among other things, that, (1) until December
31, 2003, we will not purchase, finance or otherwise invest in senior living
communities, or act as an agent or consultant with respect to any of the
foregoing activities (except for acquisitions of communities which represent
an immaterial portion of a merger or similar transaction or for minimal
portfolio investments in other entities) and (2) until the earlier of December
31, 2008 and the date on which subsidiaries of Crestline are no longer lessees
for more than 25% of the number of the hotels owned by Host Marriott on
December 29, 1998, we will not lease, as tenant or subtenant, limited- or
full-service hotel properties from any "real estate investment trust" within
the meaning of Sections 856 through 859 of the Internal Revenue Code where it
will not be the operator or manager of the hotel (other than through a
contractual arrangement with a non-affiliated party) and where its rental
payments qualify as "rents from real property" within the meaning of Section
856(d) of the Internal Revenue Code, or purchase, finance or otherwise invest
in persons or entities which engage in any of the foregoing activities, or act
as an agent or consultant with respect to any of the foregoing activities
(except for acquisitions of entities which engage in any of the foregoing
activities where the prohibited activities represent an immaterial portion of
a merger or similar transaction, or minimal portfolio investments in other
entities which engage in any of the foregoing activities, or certain leasing
arrangements existing on December 29, 1998 or entered into in the future
between us and certain other related parties, or by our management of any
hotels in which it has an equity interest). In addition, both Crestline and we
have agreed not to hire or attempt to hire any of the other company's senior
employees at any time prior to December 31, 2000.
We entered into a noncompetition agreement with Marriott International that
defines our rights and obligations with respect to certain businesses operated
by each of us. Crestline became an additional party to this agreement at the
time its shares were distributed to our stockholders. At that time, we also
entered into an agreement with Crestline under which we agreed with Crestline
about the allocation between us of the rights to engage in certain activities
permitted under the agreement with Marriott International. In general, until
October 8, 2000, we and our subsidiaries are prohibited from entering into or
acquiring any business that competes with the hotel management business (i.e.,
managing, operating or franchising full-service or limited-service hotels) as
conducted by Marriott International. Pursuant to this agreement, we cannot (1)
operate any hotel under a common name with any other hotel we operate or with
any hotel operated by Crestline, (2) have a manager (other than Marriott
International or one of its affiliates) manage any limited-service hotel for
us under a common name with any other limited-service hotel managed by such
manager for use or for Crestline, (3) have a manager (other than Marriott
International or one of its affiliates) manage more than the greater of (a) 10
full-service hotels under a common name which is a brand other than "Delta,"
"Four Seasons," "Holiday Inn," "Hyatt" and "Swissotel" (the "Existing Brands")
or (b) 25% of any system operated by such manager under a common name which is
not an Existing Brand, (4) have a manager (other than Marriott International
or one of its affiliates) manage more than the greater of (a) 5 full-service
hotels under a common name which is an Existing Brand or (b) 12.5% of any
system operated by such manager under a common name which is an Existing
Brand, (5) franchise as franchisor any limited-service hotel under a common
name with any other limited-service hotel for which we or Crestline is a
franchisor or (6) franchise as franchisor more than 10 full-service hotels
under a common name.
Risk Factors
The following risk factors should be considered by prospective investors
who should carefully consider the material described below.
18
Risks relating to redemption of OP Units
A holder who redeems OP Units may have adverse tax effects. A holder of OP
Units who redeems OP Units will be treated for tax purposes as having sold the
OP Units. The sale will be taxable and the holder will be treated as realizing
an amount equal to the sum of the value of the common stock or cash the holder
receives plus the amount of operating partnership nonrecourse liabilities
allocable to the redeemed OP Units. It is possible that the amount of gain the
holder recognizes could exceed the value of the common stock the holder
receives. It is even possible that the tax liability resulting from this gain
could exceed the value of the common stock or cash the holder receives.
If a holder of OP Units redeems OP Units, the original receipt of the OP
Units may be subject to tax. If a holder of OP Units redeems OP Units,
particularly within two years of receiving them, there is a risk that the
original receipt of the OP Units may be treated as a taxable sale under the
"disguised sale" rules of the Internal Revenue Code. Subject to several
exceptions, the tax law generally provides that a partner's contribution of
property to a partnership and a simultaneous or subsequent transfer of money
or other consideration from the partnership to the partner will be presumed to
be a taxable sale. In particular, if money or other consideration is
transferred by a partnership to a partner within two years of the partner's
contribution of property, the transactions are presumed to be a taxable sale
of the contributed property unless the facts and circumstances clearly
establish that the transfers are not a sale. On the other hand, if two years
have passed between the original contribution of property and the transfer of
money or other consideration, the transactions will not be presumed to be a
taxable sale unless the facts and circumstances clearly establish that they
should be.
Differences between an investment in shares of common stock and OP Units
may affect redeeming holders of OP Units. If a holder of OP Units elects to
redeem OP Units, we will determine whether the holder receives cash or shares
of our common stock in exchange for the OP Units. Although an investment in
shares of our common stock is substantially similar to an investment in OP
Units, there are some differences between ownership of OP Units and ownership
of common stock. These differences include form of organization, management
structure, voting rights, liquidity and federal income taxation, some of which
may be material to investors.
There are possible differing fiduciary duties of Host REIT, as the general
partner, and the Board of Directors of Host REIT. Host REIT, as our general
partner, and the Board of Directors of Host REIT, respectively, owe fiduciary
duties to their constituent owners. Although some courts have interpreted the
fiduciary duties of the Board of Directors in the same way as the duties of a
general partner in a limited partnership, it is unclear whether, or to what
extent, there are differences in such fiduciary duties. It is possible that
the fiduciary duties of the directors of Host REIT to its shareholders may be
less than those of Host REIT, as our general partner to the holders of OP
Units.
Risks of ownership of Host REIT common stock
There are limitations on the acquisition of Host REIT common stock and
changes in control. Host REIT's charter and bylaws, our partnership agreement,
Host REIT's shareholder rights plan and the Maryland General Corporation Law
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 "--Possible
adverse consequences of limits on ownership of Host REIT common stock"
below may have the effect of precluding a change in control of us by a
third party without the consent of Host REIT's Board of Directors, even if
such change in control would be in the interest of our unitholders, and
even if such change in control would not reasonably jeopardize Host REIT's
status as a REIT.
Staggered board. Host REIT's charter provides that its Board of
Directors will consist of eight members and can be increased or decreased
after that according to Host REIT's bylaws, provided that the
19
total number of directors is not less than three nor more than 13. Pursuant
to Host REIT's bylaws, the number of directors will be fixed by Host REIT's
Board of Directors within the limits in Host REIT's charter. Host REIT's
Board of Directors is divided into three classes of directors. Directors
for each class are chosen for a three-year term when the term of the
current class expires. The staggered terms for directors may affect
shareholders' ability to effect a change in control of Host REIT, even if a
change in control would be in the interest of our unitholders.
Removal of board of directors. Host REIT's charter provides that, except
for any directors who may be elected by holders of a class or series of
shares of capital stock other than Host REIT common stock, directors may be
removed only for cause and only by the affirmative vote of shareholders
holding at least two-thirds of Host REIT's outstanding shares entitled to
be cast for the election of directors. Vacancies on the Board of Directors
may be filled by the concurring vote of a majority of the remaining
directors and, in the case of a vacancy resulting from the removal of a
director by the shareholders, by at least two-thirds of all the votes
entitled to be cast in the election of directors.
Preferred shares; classification or reclassification of unissued shares
of capital stock without shareholder approval. Host REIT's charter provides
that the total number of shares of stock of all classes which it has
authority to issue is 800,000,000, initially consisting of 750,000,000
shares of common stock and 50,000,000 shares of preferred stock, of which
8,160,000 have been issued. Host REIT's Board of Directors has the
authority, without a vote of shareholders, to classify or reclassify any
unissued shares of stock, including common stock into preferred stock or
vice versa, and to establish the preferences and rights of any preferred or
other class or series of shares to be issued. The issuance of preferred
shares or other shares having special preferences or rights could delay or
prevent a change in control even if a change in control would be in the
interests of our unitholders. Because Host REIT's Board of Directors has
the power to establish the preferences and rights of additional classes or
series of shares without a shareholder vote, its 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 its common
stock.
Consent rights of the limited partners. Under our partnership agreement,
Host REIT generally will be able to merge or consolidate with another
entity with the consent of partners holding percentage interests that are
more than 50% of the aggregate percentage interests of the outstanding
limited partnership interests entitled to vote on the merger or
consolidation, including any limited partnership interests held by Host
REIT, as long as the holders of limited partnership interests either
receive or have the right to receive the same consideration as Host REIT's
shareholders. Host REIT, as holder of a majority of the limited partnership
interests, would be able to control the vote. Under Host REIT's charter,
holders of at least two-thirds of its 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 such business combination must be approved by 80% of
outstanding voting shares, and by two-thirds of voting shares other than
voting shares held by an interested shareholder unless, among other
conditions, the corporation's common shareholders receive a minimum price,
as defined in the Maryland General Corporation Law, for their shares and
the consideration is received in cash or in the same form as previously
paid by the Interested Shareholder. Host REIT is subject to the Maryland
business combination statute.
Maryland control share acquisition law. Under the Maryland General
Corporation Law, "control shares" acquired in a "control share acquisition"
have no voting rights except to the extent approved by a vote of two-thirds
of the votes entitled to be cast on the matter, excluding shares owned by
the acquiror and by officers or directors who are employees of the
corporation. "Control shares" are voting shares which, if aggregated with
all other such shares previously acquired by the acquiror or in respect of
which the acquiror is able to exercise or direct the exercise of voting
power (except solely by virtue of a revocable proxy),
20
would entitle the acquiror to exercise voting power in electing directors
within one of the following ranges of voting power: (1) one-fifth or more but
less than one-third, (2) one-third or more but less than a majority or (3) a
majority or more of the voting power. Control shares do not include shares the
acquiring person is then entitled to vote as a result of having previously
obtained shareholder approval. A "control share acquisition" means the
acquisition of control shares, subject to specified exceptions. Host REIT is
subject to these control share provisions of Maryland law, subject to an
exemption for Marriott International pursuant to its purchase right. See
"Risks of ownership of Host REIT's Common Stock--Marriott International
purchase right."
Merger, consolidation, share exchange and transfer of Host REIT's
assets. Pursuant to Host REIT's 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 its assets within the meaning of the Maryland
General Corporation Law if approved (1) by Host REIT's Board of Directors in
the manner provided in the Maryland General Corporation Law and (2) by its
shareholders holding two-thirds of all the votes entitled to be cast on the
matter, except that any merger of Host REIT with or into a trust organized for
the purpose of changing its form of organization from a corporation to a trust
requires only the approval of its shareholders holding a majority of all votes
entitled to be cast on the merger. Under the Maryland General Corporation Law,
specific mergers without a vote of shareholders and a share exchange is only
required to be approved by a Maryland successor by its Board of Directors.
Host REIT's voluntary dissolution also would require approval of shareholders
holding two-thirds of all the votes entitled to be cast on the matter.
Amendments to Host REIT's charter and bylaws. Host REIT's charter contains
provisions relating to restrictions on transferability of Host REIT's common
stock, the classified Board of Directors, fixing the size of Host REIT's Board
of Directors within the range set forth in its charter, removal of directors
and the filling of vacancies, all of which may be amended only by a resolution
adopted by the Board of Directors and approved by Host REIT's shareholders
holding two-thirds of the votes entitled to be cast on the matter. As
permitted under the Maryland General Corporation Law, Host REIT's charter and
bylaws provide that directors have the exclusive right to amend Host REIT's
bylaws. Amendments of this provision of Host REIT's charter also would require
action of Host REIT's Board of Directors and approval by shareholders holding
two-thirds of all the votes entitled to be cast on the matter.
Marriott International purchase right. As a result of Host Marriott's spin-
off of Marriott International in 1993, Marriott International has the right to
purchase up to 20% of each class of Host REIT's outstanding voting shares at
the then fair market value when specific change of control events involving
Host REIT occurs, subject to specified limitations to protect Host REIT's
status. The Marriott International purchase right may have the effect of
discouraging a takeover of Host REIT, because any person considering acquiring
a substantial or controlling block of Host REIT's common stock will face the
possibility that its ability to obtain or exercise control would be impaired
or made more expensive by the exercise of the Marriott International purchase
right.
Shareholder rights plan. Host REIT adopted a shareholder rights plan which
provides, among other things, that when specified events occur, our
shareholders will be entitled to purchase from Host REIT a newly created
series of junior preferred shares, subject to Host REIT's ownership limit. The
preferred share purchase rights are triggered by the earlier to occur of (1)
ten days after the date of a public announcement that a person or group acting
in concert has acquired, or obtained the right to acquire, beneficial
ownership of 20% or more of Host REIT's outstanding shares of common stock or
(2) ten business days after the commencement of or announcement of an
intention to make a tender offer or exchange offer, the consummation of which
would result in the acquiring person becoming the beneficial owner of 20% or
more of Host REIT's outstanding common stock. The preferred share purchase
rights would cause substantial dilution to a person or group that attempts to
acquire Host REIT on terms not approved by Host REIT's Board of Directors.
There are possible adverse consequences of limits on ownership of our
common stock. To maintain Host REIT's qualification as a REIT for federal
income tax purposes, not more than 50% in value of its outstanding shares of
capital stock may be owned, directly or indirectly, by five or fewer
individuals, as defined in the
21
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 Host REIT's shares without
jeopardizing its qualification as a REIT. Primarily to facilitate maintenance
of its qualification as a REIT for federal income tax purposes, the ownership
limit under Host REIT's charter prohibits ownership, directly or by virtue of
the attribution provisions of the Internal Revenue Code, by any person or
persons acting as a group of more than 9.8% of the issued and outstanding
shares of Host REIT's common stock, subject to an exception for shares of its
common stock held prior to the REIT conversion so long as the holder would not
own more than 9.9% in value of its outstanding shares, and prohibits
ownership, directly or by virtue of the attribution provisions of the Internal
Revenue Code, by any person, or persons acting as a group, of more than 9.8%
of the issued and outstanding shares of any class or series of Host Marriott's
preferred shares. Together, these limitations are referred to as the
"ownership limit." The 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 it is satisfied, based upon information required to
be provided by the party seeking the waiver and upon an opinion of counsel
satisfactory to the Board of Directors, that ownership in excess of this limit
will not cause a person who is an individual to be treated as owning shares in
excess of the ownership limit, applying the applicable constructive ownership
rules, and will not otherwise jeopardize Host REIT's status as a REIT for
federal income tax purposes for example, by causing any of our tenants or any
of the partnerships, including Crestline and the lessees, 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 such common stock in violation of the
ownership limit will not be entitled to any distributions thereon, to vote
such shares of common stock or to receive any proceeds from the subsequent
sale thereof in excess of the lesser of the price paid therefor or the amount
realized from such sale. A transfer of shares of Host REIT's common stock to a
person who, as a result of the transfer, violates the ownership limit may be
void under certain circumstances, and, in any event, would deny that person
any of the economic benefits of owning shares of our common stock in excess of
the ownership limit. The ownership limit may have the effect of delaying,
deferring or preventing a change in control and, therefore, could adversely
affect the shareholders' ability to realize a premium over the then-prevailing
market price for Host REIT's common stock in connection with such transaction.
We depend on external sources of capital for future growth. As with other
REITs, but unlike corporations generally, Host REIT's and our ability to
reduce our debt and finance our growth largely must be funded by external
sources of capital because Host REIT generally will have to distribute to its
shareholders 95% of its taxable income in order to qualify as a REIT,
including taxable income which does not generate corresponding cash. This
distribution requirement will be reduced to 90% for taxable years after
December 31, 2000. In order to make its distributions to shareholders, Host
REIT must receive distributions from us. Our access to external capital will
depend upon a number of factors, including general market conditions, the
market's perception of our growth potential, our current and potential future
earnings, cash distributions and the market price of Host REIT's common stock.
Currently, our access to external capital has been limited to the extent that
Host REIT's common stock is trading at what we believe is a significant
discount to its estimated net asset value.
Shares of Host REIT common stock that are or become available for sale
could affect the price for its shares of common stock. Sales of a substantial
number of Host REIT's shares of common stock, or the perception that sales
could occur, could adversely affect prevailing market prices for its common
stock. In addition, holders of OP Units who redeem their OP Units and receive
Host REIT common stock will be able to sell their shares freely after they are
received, unless the person is our affiliate. There are currently
approximately 64.0 million OP Units outstanding held by someone other than
Host REIT, substantially all of which are currently redeemable. Further, a
substantial number of shares of Host REIT common stock have been and will be
issued or reserved for issuance from time to time under our employee benefit
plans, including shares by Host REIT common stock reserved for options, and
these shares of common stock would be available for sale in the public markets
from time to time pursuant to exemptions from registration or upon
registration. Moreover, the issuance of additional shares of Host REIT of
common stock in the future would be available for sale in the public
22
markets. We can make no prediction about the effect that future sales of Host
REIT common stock would have on the market price of its common stock.
Our earnings and cash distributions will affect the market price of shares
of Host REIT common stock. We believe that the market value of a REIT's equity
securities is based primarily upon the market's perception of the REIT's
growth potential and its current and potential future cash distributions,
whether from operations, sales, acquisitions, development or refinancings, and
is secondarily based upon the value of the underlying assets. For that reason,
shares of Host REIT common stock may trade at prices that are higher or lower
than the net asset value per share or per OP Unit. To the extent we retain
operating cash flow for investment purposes, working capital reserves or other
purposes rather than distributing such cash flow to our unitholders, including
Host REIT, these retained funds, while increasing the value of our underlying
assets, may not correspondingly increase the market price of Host REIT common
stock. Our failure to meet the market's expectation with regard to future
earnings and cash distributions would likely adversely affect the market price
of Host REIT common stock.
Market interest rates may affect the price of shares of Host REIT common
stock. One of the factors that investors consider important in deciding
whether to buy or sell shares of a REIT is the distribution rate on such
shares, considered as a percentage of the price of such shares, relative to
market interest rates. If market interest rates increase, prospective
purchasers of REIT shares may expect a higher distribution rate. Thus, higher
market interest rates could cause the market price of Host REIT shares to go
down.
Risks of operation
We do not control our hotel operations, and we are dependent on the
managers and lessees of our hotels. Because federal income tax laws currently
restrict REITs and "publicly traded" partnerships from deriving revenues
directly from operating a hotel, we operate none of our hotels. Instead, we
lease virtually all of our hotels to subsidiaries of Crestline which, in turn,
retain managers to manage our hotels pursuant to management agreements. Thus,
we are dependent on the lessees but, under the hotel leases, we have little
influence over how the lessees operate our hotels. Similarly, we are dependent
on the managers, principally Marriott International, but we have little
influence over how the managers manage our hotels. We have very limited
recourse if we believe that the hotel managers do not maximize the revenues
from our hotels, which in turn will maximize the rental payments we receive
under the leases. We may seek redress under most leases only if the lessee
violates the terms of the lease and then only to the extent of the remedies
set forth in the lease.
Each lessee's ability to pay rent accrued under its lease depends to a
large extent on the ability of the hotel manager to operate the hotel
effectively and to generate gross sales in excess of its operating expenses.
Our rental income from the hotels may therefore 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.
Although the lessees have primary liability under the management agreements
while the leases are in effect, we remain liable under the management
agreements for all obligations that the lessees do not perform. We may
terminate a lease if the lessee defaults under a management agreement, but
terminating the lease could, unless another suitable lessee is found, impair
Host REIT's ability to qualify as a REIT for federal income tax purposes and
our ability to qualify as a partnership for federal income tax purposes if we
are a "publicly traded partnership" unless another suitable lessee is found.
As described below, Host REIT's inability to qualify as a REIT or our
inability to qualify as a partnership for federal income tax purposes would
have a material adverse effect on us.
We do not control the assets held by the non-controlled subsidiaries. We
own economic interests in several taxable corporations, which we refer to as
"non-controlled subsidiaries," that hold various assets which, under our
credit facility may not exceed, in the aggregate, 15% of the value of our
assets. The assets held by the non-controlled subsidiaries consist primarily
of interests in partnerships that own hotels that are not leased to third
parties, hotels that are not leased to third parties, some FF&E used in our
hotels and some international hotels. If we owned these assets, it could
jeopardize Host REIT's REIT status and/or our status as a partnership for
federal income tax purposes. Although we own approximately 95% of the total
economic interests of the non-controlled subsidiaries, we own none of the
voting stock of the non-controlled subsidiaries. The Host
23
Marriott Statutory Employee/Charitable Trust, the beneficiaries of which are
(1) a trust formed for the benefit of a number of our employees and (2) the J.
Willard and Alice S. Marriott Foundation, owns all of the voting common stock,
representing approximately 5% of the total economic interests in such the
controlled subsidiaries. The Host Marriott Statutory Employee/Charitable Trust
elects the directors who are responsible for overseeing the operations of the
non-controlled subsidiaries. The directors are currently our employees,
although this is not required. As a result, we have no control over the
operation or management of the hotels or other assets owned by the non-
controlled subsidiaries, even though we depend upon the non-controlled
subsidiaries for a portion of our revenues. Also, the activities of the non-
controlled subsidiaries could cause us to be in default under our principal
credit facilities.
We are dependent upon the ability of Crestline and the lessees to meet
their rent obligations. The lessees' rent payments are the primary source of
our revenues. Crestline guarantees the obligations of its subsidiaries under
the hotel leases, but Crestline's liability is limited to a relatively small
portion of the aggregate rent obligation of its subsidiaries. The ability of
Crestline and each of its subsidiaries to meet its obligations under the
leases will determine the amount of our revenue and our ability to meet our
obligations. We have no control over Crestline or any of its subsidiaries and
cannot assure you that Crestline or any of its subsidiaries will have
sufficient assets, income and access to financing to enable them to satisfy
their obligations under the leases or to make payments of fees under the
management agreements. Although the lessees have primary liability under the
management agreements while the leases are in effect, we and our subsidiaries
remain liable under the management agreements for all obligations that the
lessees do not perform. Because of our dependence on Crestline, our credit
rating will be affected by its creditworthiness.
Our relationships with Marriott International and Crestline may result in
conflicts of interest.
Marriott International, a public hotel management company, manages a
significant number of our hotels. In addition, Marriott International manages
hotels that compete with our hotels. As a result, Marriott International may
make decisions regarding competing lodging facilities which it manages that
would not necessarily be in our best interests. J.W. Marriott, Jr. is a member
of Host REIT's Board of Directors and his brother, Richard E. Marriott, is
Host REIT's Chairman of the Board. Both J.W. Marriott, Jr. and Richard E.
Marriott serve as directors, and J.W. Marriott, Jr. also serves as an officer,
of Marriott International. J.W. Marriott, Jr. and Richard E. Marriott also
beneficially own, as determined for securities law purposes, as of January 31,
2000, approximately 10.8% and 10.6%, respectively, of the outstanding shares
of common stock of Marriott International. In addition, J.W. Marriott, Jr. and
Richard E. Marriott own, as of January 31, 2000, approximately 5.1% and 4.8%,
respectively, of the outstanding shares of common stock of Crestline. Neither
J.W. Marriott, Jr. or Richard E. Marriott serves as an officer or director of
Crestline. As a result, J.W. Marriott, Jr. and Richard E. Marriott have
potential conflicts of interest as Host REIT directors when making decisions
regarding Marriott International, including decisions relating to the
management agreements involving the hotels, Marriott Internationa