SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 26, 2004.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-14625
HOST MARRIOTT CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
| Maryland |
53-0085950 | |
| (State of Incorporation) |
(I.R.S. Employer Identification No.) | |
| 6903 Rockledge Drive, Suite 1500, Bethesda, Maryland |
20817 | |
| (Address of Principal Executive Offices) |
(Zip Code) | |
(240) 744-1000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
x Yes ¨ No
The registrant had 321,897,490 shares of its $0.01 par value common stock outstanding as of April 30, 2004.
INDEX
PART I. FINANCIAL INFORMATION
| Page No. | ||||
| Item 1. |
Financial Statements (unaudited): | |||
|
Condensed Consolidated Balance Sheets— March 26, 2004 and December 31, 2003 |
3 | |||
|
Condensed Consolidated Statements of Operations— Quarter Ended March 26, 2004 and March 28, 2003 |
4 | |||
|
Condensed Consolidated Statements of Cash Flows— Quarter ended March 26, 2004 and March 28, 2003 |
5 | |||
| Notes to Condensed Consolidated Financial Statements | 7 | |||
| Item 2. |
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 12 | ||
| Item 3. |
Quantitative and Qualitative Disclosures about Market Risk | 27 | ||
| Item 4. |
Controls and Procedures | 27 | ||
| PART II. OTHER INFORMATION | ||||
| Item 2. |
Sale of Unregistered Securities | 28 | ||
| Item 6. |
Exhibits and Reports on Form 8-K | 28 | ||
2
CONDENSED CONSOLIDATED BALANCE SHEETS
March 26, 2004 and December 31, 2003
(in millions, except per share amounts)
| March 26, 2004 |
December 31, 2003 |
|||||||
| (unaudited) | ||||||||
| ASSETS |
||||||||
| Property and equipment, net |
$ | 7,020 | $ | 7,085 | ||||
| Assets held for sale |
— | 73 | ||||||
| Notes and other receivables |
54 | 54 | ||||||
| Due from managers |
79 | 62 | ||||||
| Investments in affiliates |
86 | 74 | ||||||
| Other |
383 | 364 | ||||||
| Restricted cash |
598 | 116 | ||||||
| Cash and cash equivalents |
526 | 764 | ||||||
| Total assets |
$ | 8,746 | $ | 8,592 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
| Debt |
||||||||
| Senior notes, including $490 million, net of discount, of Exchangeable Senior Debentures |
$ | 3,459 | $ | 3,180 | ||||
| Mortgage debt |
2,109 | 2,205 | ||||||
| Exchangeable Subordinated Debentures |
492 | — | ||||||
| Other |
100 | 101 | ||||||
| Total debt |
6,160 | 5,486 | ||||||
| Accounts payable and accrued expenses |
121 | 108 | ||||||
| Liabilities associated with assets held for sale |
— | 2 | ||||||
| Other |
151 | 166 | ||||||
| Total liabilities |
6,432 | 5,762 | ||||||
| Interest of minority partners of Host Marriott, L.P. |
124 | 130 | ||||||
| Interest of minority partners of other consolidated partnerships |
94 | 89 | ||||||
| Company-obligated mandatorily redeemable exchangeable preferred securities of a subsidiary whose sole assets are exchangeable subordinated debentures due 2026 (“Exchangeable Preferred Securities”) |
— | 475 | ||||||
| Shareholders’ equity |
||||||||
| Cumulative redeemable preferred stock (liquidation preference $354 million), 50 million shares authorized; 14.1 million shares issued and outstanding |
339 | 339 | ||||||
| Common stock, par value $.01, 750 million shares authorized; 321.6 million shares and 320.3 million shares issued and outstanding, respectively |
3 | 3 | ||||||
| Additional paid-in capital |
2,619 | 2,617 | ||||||
| Accumulated other comprehensive income |
26 | 28 | ||||||
| Deficit |
(891 | ) | (851 | ) | ||||
| Total shareholders’ equity |
2,096 | 2,136 | ||||||
| Total liabilities and shareholders’ equity |
$ | 8,746 | $ | 8,592 | ||||
See notes to condensed consolidated statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter Ended March 26, 2004 and March 28, 2003
(unaudited, in millions, except per share amounts)
| Quarter ended |
||||||||
| March 26, 2004 |
March 28, 2003 |
|||||||
| REVENUES |
||||||||
| Rooms |
$ | 473 | $ | 452 | ||||
| Food and beverage |
257 | 242 | ||||||
| Other |
50 | 52 | ||||||
| Total hotel sales |
780 | 746 | ||||||
| Rental income |
29 | 27 | ||||||
| Other income |
— | 2 | ||||||
| Total revenues |
809 | 775 | ||||||
| OPERATING COSTS AND EXPENSES |
||||||||
| Rooms |
119 | 111 | ||||||
| Food and beverage |
190 | 180 | ||||||
| Hotel departmental expenses |
216 | 206 | ||||||
| Management fees |
32 | 32 | ||||||
| Other property-level expenses |
69 | 70 | ||||||
| Depreciation and amortization |
83 | 84 | ||||||
| Corporate expenses |
13 | 13 | ||||||
| Total operating costs and expenses |
722 | 696 | ||||||
| OPERATING PROFIT |
87 | 79 | ||||||
| Interest income |
3 | 3 | ||||||
| Interest expense, including interest expense for the Exchangeable Subordinated Debentures in 2004 |
(118 | ) | (110 | ) | ||||
| Net gains on property transactions |
1 | 1 | ||||||
| Minority interest income (expense) |
(3 | ) | 1 | |||||
| Equity in losses of affiliates |
(5 | ) | (6 | ) | ||||
| Dividends on Exchangeable Preferred Securities |
— | (7 | ) | |||||
| LOSS BEFORE INCOME TAXES |
(35 | ) | (39 | ) | ||||
| Benefit for income taxes |
3 | 4 | ||||||
| LOSS FROM CONTINUING OPERATIONS |
(32 | ) | (35 | ) | ||||
| Income from discontinued operations |
1 | 1 | ||||||
| NET LOSS |
(31 | ) | (34 | ) | ||||
| Less: Dividends on preferred stock |
(9 | ) | (9 | ) | ||||
| NET LOSS AVAILABLE TO COMMON SHAREHOLDERS |
$ | (40 | ) | $ | (43 | ) | ||
| BASIC AND DILUTED LOSS PER COMMON SHARE: |
||||||||
| Continuing operations |
$ | (.12 | ) | $ | (.16 | ) | ||
| Discontinued operations |
— | — | ||||||
| BASIC AND DILUTED LOSS PER COMMON SHARE |
$ | (.12 | ) | $ | (.16 | ) | ||
See notes to condensed consolidated statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarter Ended March 26, 2004 and March 28, 2003
(unaudited, in millions)
| Quarter ended |
||||||||
| March 26, 2004 |
March 28, 2003 |
|||||||
| OPERATING ACTIVITIES |
||||||||
| Net loss |
$ | (31 | ) | $ | (34 | ) | ||
| Adjustments to reconcile to cash provided by operations: |
||||||||
| Depreciation and amortization |
83 | 84 | ||||||
| Discontinued operations: |
||||||||
| Gain on dispositions |
(1 | ) | — | |||||
| Depreciation |
— | 4 | ||||||
| Amortization of deferred financing costs |
6 | 4 | ||||||
| Income taxes |
(7 | ) | (27 | ) | ||||
| Net gains on property transactions |
(1 | ) | (1 | ) | ||||
| Equity in losses of affiliates |
5 | 6 | ||||||
| Minority interest expense (income) |
3 | (1 | ) | |||||
| Changes in other assets |
(24 | ) | (7 | ) | ||||
| Changes in other liabilities |
5 | (15 | ) | |||||
| Cash provided by operations |
38 | 13 | ||||||
| INVESTING ACTIVITIES |
||||||||
| Proceeds from sale of assets, net |
95 | 25 | ||||||
| Capital expenditures: |
||||||||
| Renewals and replacements |
(45 | ) | (41 | ) | ||||
| Development |
(5 | ) | (1 | ) | ||||
| Other investments |
— | (2 | ) | |||||
| Cash provided by (used in) investing activities |
45 | (19 | ) | |||||
| FINANCING ACTIVITIES |
||||||||
| Issuance of the Exchangeable Senior Debentures, net of financing costs |
484 | — | ||||||
| Scheduled principal repayments |
(13 | ) | (10 | ) | ||||
| Debt prepayments |
(300 | ) | (25 | ) | ||||
| Dividends on preferred stock |
(9 | ) | (9 | ) | ||||
| Distributions to minority interests |
(1 | ) | (1 | ) | ||||
| Change in restricted cash |
(482 | ) | 3 | |||||
| Cash used in financing activities |
(321 | ) | (42 | ) | ||||
| DECREASE IN CASH AND CASH EQUIVALENTS |
(238 | ) | (48 | ) | ||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
764 | 361 | ||||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 526 | $ | 313 | ||||
See notes to condensed consolidated statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarter Ended March 26, 2004 and March 28, 2003
(unaudited, in millions)
Supplemental disclosure of noncash investing and financing activities:
During the first quarters of 2004 and 2003, we issued approximately 600,000 shares and 200,000 shares, respectively, of common stock upon the conversion of operating partnership units of Host Marriott, L.P. held by minority partners valued at approximately $7 million and $1 million, respectively.
See notes to condensed consolidated statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization
Host Marriott Corporation, a Maryland corporation operating through an umbrella partnership structure, is primarily the owner of hotel properties. We operate as a self-managed and self-administered real estate investment trust, or REIT, with our operations conducted solely through Host Marriott, L.P., or the operating partnership, or Host LP, and its subsidiaries. We are the sole general partner of the operating partnership and as of March 26, 2004, owned approximately 93% of the partnership interests in the operating partnership, which are referred to as OP units.
2. Summary of Significant Accounting Policies
We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America, or GAAP, in the accompanying unaudited condensed consolidated financial statements. We believe the disclosures made are adequate to prevent the information presented from being misleading. However, the unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2003.
In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary to present fairly our financial position as of March 26, 2004 and the results of our operations and cash flows for quarter ended March 26, 2004 and March 28, 2003. Interim results are not necessarily indicative of full year performance because of the impact of seasonal and short-term variations.
Certain reclassifications, primarily as a result of new accounting standards relating to the disposition of assets, have been made to the prior period financial statements to conform to the current presentation.
Reporting Periods
The results we report in our consolidated statement of operations are based on results reported to us by our hotel managers. These hotel managers use different reporting periods. Marriott International, Inc., the manager of the majority of our properties, uses a fiscal year ending on the Friday closest to December 31 and reports twelve weeks of operations for the first three quarters and sixteen or seventeen weeks for the fourth quarter of the year for its Marriott-managed hotels. In contrast, other managers of our hotels, such as Hyatt, report results on a monthly basis. In addition, Host Marriott, as a REIT, is required by tax laws to report results on the calendar year. As a result, we elected to adopt the reporting period used by Marriott International modified so that our fiscal year always ends on December 31 to comply with REIT rules. Our first three quarters of operations end on the same day as Marriott International but our fourth quarter ends on December 31.
Two consequences of the reporting cycle we have adopted are: (1) quarterly start dates will usually differ between years, except for the first quarter which always commences on January 1, and (2) our first and fourth quarters of operations and year-to-date operations may not include the same number of days as reflected in prior years. For example, the first quarter of 2004 ended on March 26 and the first quarter of 2003 ended on March 28. As a result, the first quarter of 2004 includes 86 days of operations, including February 29, 2004, while the first quarter of 2003 includes 87 days of operations.
In addition, for results reported by hotel managers using a monthly reporting period (approximately one-fourth of our full-service hotels), the month of operation that ends after our fiscal quarter-end is included in our results of operations in the following fiscal quarter. For these hotels, operations for the entire month of March are reported in our second fiscal quarter. Accordingly, our results of operations include results from hotel managers reporting results on a monthly basis as follows: first quarter (January, February), second quarter (March to May), third quarter (June to August), and fourth quarter (September to December). The first quarter of 2004 includes 60 days of operations for our monthly hotels compared to 59 days of operations for the first quarter of 2003 because there were 29 days in February 2004.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Principles of Consolidation
We consolidate entities (in the absence of other factors determining control) when we own over 50% of the voting shares of another company or, in the case of partnership investments, when we own a majority of the general partnership interest. The control factors we consider include the ability of minority shareholders or other partners to participate in or block management decisions. Additionally, if we determine that we are an owner in a variable interest entity within the meaning of the Financial Accounting Standards Board, or FASB, Revised Interpretation No. 46, “Consolidation of Variable Interest Entities” and that our variable interest will absorb a majority of the entity’s expected losses if they occur, receive a majority of the entity’s expected residual returns if they occur, or both, then we will consolidate the entity. All material intercompany transactions and balances have been eliminated.
Restricted Cash
Restricted cash includes reserves for debt service, real estate taxes, insurance, furniture and fixtures as well as cash collateral and excess cash flow deposits which are the result of mortgage debt agreement restrictions and provisions. As of March 26, 2004, restricted cash also includes the $484 million in net proceeds from the issuance of the $500 million of 3.25% exchangeable senior debentures of Host LP due April 15, 2024 (the Exchangeable Senior Debentures), as these funds were held by a trustee and were utilized, along with available cash, to redeem $494 million of our 77/8% Series B senior notes on April 15, 2004. See the discussion in footnote 4.
Accounting for Stock-based Compensation
We maintain two stock-based employee compensation plans. Prior to 2002, we accounted for those plans in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Effective January 1, 2002, we adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” and applied it prospectively to all employee awards granted, modified or settled after January 1, 2002. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all of our outstanding and unvested awards in each period.
| Quarter ended |
||||||||
| March 26, 2004 |
March 28, 2003 |
|||||||
| (in millions, except per share amounts) |
||||||||