Filed Pursuant to Rule 424(b)(3)
Registration Number 333-82444
PROSPECTUS
1,100,000 Shares
Host Marriott Corporation
Common Stock
This prospectus relates to up to 1,100,000 shares of our common stock that
may be sold by Summit Resources, Ltd.
We will not receive any proceeds upon the sale of the common stock covered
by this prospectus, but we will incur expenses in connection with the filing of
the registration statement of which this prospectus forms a part.
Our common stock is listed on the New York Stock Exchange under the trading
symbol "HMT."
Consider carefully the risk factors beginning on page 1 of this prospectus
and the discussion of material federal income tax consequences incorporated by
reference from our Form 8-K dated February 8, 2002 for factors relevant to an
investment in the common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
March 15, 2002
You should only rely on the information provided in or incorporated by
reference into this prospectus. We have not authorized any person to make a
statement that differs from what is in this prospectus or incorporated by
reference into this prospectus. If any person does make a statement that
differs from what is in this prospectus or incorporated by reference into this
prospectus, you should not rely on it. We are not making an offer to sell, nor
an offer to buy, the common stock in any state where the offer or sale is not
permitted. The information in this prospectus is complete and accurate as of
the date on the front cover, but the information may change after that date.
TABLE OF CONTENTS
Page
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RISK FACTORS....................... 1
FORWARD-LOOKING STATEMENTS......... 16
THE COMPANY........................ 17
THE OFFERING....................... 18
NO PROCEEDS TO THE COMPANY......... 18
TAX STATUS OF THE COMPANY.......... 18
SELLING SHAREHOLDER................ 19
PLAN OF DISTRIBUTION............... 20
LEGAL MATTERS...................... 21
EXPERTS............................ 21
ABOUT THIS PROSPECTUS.............. 21
WHERE YOU CAN FIND MORE INFORMATION 22
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To understand this common stock offering, you should read the entire
prospectus and the information incorporated by reference into this prospectus
carefully, including the risk factors beginning below on this page and the
material federal income tax consequences incorporated by reference to our Form
8-K dated February 8, 2002
On December 29, 1998, we reincorporated in Maryland in connection with our
conversion to a real estate investment trust, or "REIT". As used in this
prospectus, references to "we", "our", the "company" and "Host Marriott" and
similar references are to Host Marriott Corporation, a Maryland corporation,
and its consolidated subsidiaries (including the Operating Partnership, as
defined below) from and after December 29, 1998, and to Host Marriott
Corporation, a Delaware corporation, and its consolidated subsidiaries before
December 29, 1998, unless otherwise expressly stated or the context otherwise
requires. References to the "Operating Partnership" are to Host Marriott, L.P.
RISK FACTORS
Prospective investors should carefully consider, among other factors, the
material risks described below.
Risks of Ownership of Our Common Stock
There are limitations on the acquisition of our common stock and changes in
control. Our charter and bylaws, the partnership agreement of the Operating
Partnership, our shareholder rights plan 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 "Risk
Factors--Risks of Ownership of Our Common Stock--There are possible
adverse consequences of limits on ownership of our common stock" may have
the effect of precluding a change in control of us by a third party
without the consent of our Board of Directors, even if the change in
control would be in the interest of our shareholders, and even if the
change in control would not reasonably jeopardize our REIT status.
. Staggered board. Our Board of Directors consists of eight members but our
charter provides that our number of directors may be increased or
decreased according to our bylaws, provided that the total number of
directors is not less than three nor more than 13. Pursuant to our bylaws,
the number of directors will be fixed by our Board of Directors within the
limits in our charter. Our Board of Directors is divided into three
classes of directors. Directors for each class are chosen for a three-year
term when the term of the current class expires. The staggered terms for
directors may affect shareholders' ability to effect a change in control
of us, even if a change in control would be in the interest of our
shareholders. Currently, there are eight directors serving on our Board of
Directors.
. Removal of board of directors. Our charter provides that, except for any
directors who may be elected by holders of a class or series of shares of
capital stock other than our common stock, directors may be removed only
for cause and only by the affirmative vote of shareholders holding at
least two-thirds of our outstanding shares entitled to be cast for the
election of directors. Vacancies on the Board of Directors may be filled
by the concurring vote of a majority of the remaining directors and, in
the case of a vacancy resulting from the removal of a director by the
shareholders, by at least two-thirds of all the votes entitled to be cast
in the election of directors.
. Preferred shares; classification or reclassification of unissued shares of
capital stock without shareholder approval. Our charter provides that the
total number of shares of stock of all classes which we have authority to
issue is 800,000,000, initially consisting of 750,000,000 shares of common
stock and 50,000,000 shares of preferred stock, of which 14,140,000 shares
of preferred stock were issued and outstanding as of January 31, 2002. Our
Board of Directors has the authority, without a vote of shareholders, to
classify or reclassify any unissued shares of stock, including common
stock into
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preferred stock or vice versa, and to establish the preferences and rights
of any preferred or other class or series of shares to be issued. The
issuance of preferred shares or other shares having special preferences or
rights could delay or prevent a change in control even if a change in
control would be in the interests of our shareholders. Because our Board
of Directors has the power to establish the preferences and rights of
additional classes or series of shares without a shareholder vote, our
Board of Directors may give the holders of any class or series
preferences, powers and rights, including voting rights, senior to the
rights of holders of our common stock.
. Consent rights of the limited partners. Under the partnership agreement
of the Operating Partnership, we generally will be able to merge or
consolidate with another entity with the consent of partners holding
percentage interests that are more than 50% of the aggregate percentage
interests of the outstanding limited partnership interests entitled to
vote on the merger or consolidation, including any limited partnership
interests held by us, as long as the holders of limited partnership
interests either receive or have the right to receive the same
consideration as our shareholders. We, as holder of a majority of the
limited partnership interests, would be able to control the vote. Under
our charter, holders of at least two-thirds of our outstanding shares of
common stock generally must approve the merger or consolidation.
. Maryland business combination law. Under the Maryland General Corporation
Law, specified "business combinations," including specified issuances of
equity securities, between a Maryland corporation and any person who owns
10% or more of the voting power of the corporation's then outstanding
shares, or an "interested shareholder," or an affiliate of the interested
shareholder are prohibited for five years after the most recent date in
which the interested shareholder becomes an interested shareholder.
Thereafter, any of these specified business combinations must be approved
by 80% of outstanding voting shares, and by two-thirds of voting shares
other than voting shares held by an interested shareholder unless, among
other conditions, the corporation's common shareholders receive a minimum
price, as defined in the Maryland General Corporation Law, for their
shares and the consideration is received in cash or in the same form as
previously paid by the interested shareholder. We are subject to the
Maryland business combination statute.
. Maryland control share acquisition law. Under the Maryland General
Corporation Law, "control shares" acquired in a "control share
acquisition" have no voting rights except to the extent approved by a vote
of two-thirds of the votes entitled to be cast on the matter, excluding
shares owned by the acquiror and by officers or directors who are
employees of the corporation. "Control shares" are voting shares which, if
aggregated with all other voting shares previously acquired by the
acquiror or over which the acquiror is able to exercise or direct the
exercise of voting power (except solely by virtue of a revocable proxy),
would entitle the acquiror to exercise voting power in electing directors
within one of the following ranges of voting power: (1) one-fifth or more
but less than one-third, (2) one-third or more but less than a majority or
(3) a majority or more of the voting power. Control shares do not include
shares the acquiring person is then entitled to vote as a result of having
previously obtained shareholder approval. A "control share acquisition"
means the acquisition of control shares, subject to specified exceptions.
We are subject to these control share provisions of Maryland law, subject
to an exemption for Marriott International pursuant to its purchase right
discussed below. See "Risk Factors--Risks of Ownership of Our Common
Stock--There are limitations on the acquisition of our common stock and
changes in control--Marriott International purchase right."
. Merger, consolidation, share exchange and transfer of our
assets. Pursuant to our charter, subject to the terms of any outstanding
class or series of capital stock, we can merge with or into another
entity, consolidate with one or more other entities, participate in a
share exchange or transfer our assets within the meaning of the Maryland
General Corporation Law if approved (1) by our Board of Directors in the
manner provided in the Maryland General Corporation Law and (2) by our
shareholders holding two-thirds of all the votes entitled to be cast on
the matter, except that any merger of us with or into a trust organized
for the purpose of changing our form of organization from a corporation to
a trust requires only the approval of our shareholders holding a majority
of all votes entitled to be cast on the merger. Under the Maryland General
Corporation Law, specified mergers may be approved without a vote of
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shareholders and a share exchange is only required to be approved by a
Maryland corporation by its Board of Directors. Our voluntary dissolution
also would require approval of shareholders holding two-thirds of all the
votes entitled to be cast on the matter.
. Amendments to our charter and bylaws. Our charter contains provisions
relating to restrictions on transferability of our common stock, the
classified Board of Directors, fixing the size of our Board of Directors
within the range set forth in our charter, removal of directors and the
filling of vacancies, all of which may be amended only by a resolution
adopted by the Board of Directors and approved by our shareholders holding
two-thirds of the votes entitled to be cast on the matter. As permitted
under the Maryland General Corporation Law, our charter and bylaws provide
that directors have the exclusive right to amend our bylaws. Amendments of
this provision of our charter also would require action of our Board of
Directors and approval by shareholders holding two-thirds of all the votes
entitled to be cast on the matter.
. Marriott International purchase right. As a result of our spin-off of
Marriott International in 1993, Marriott International has the right to
purchase up to 20% of each class of our outstanding voting shares at the
then fair market value when specific change of control events involving us
occur, subject to specified limitations to protect our REIT status. The
Marriott International purchase right may have the effect of discouraging
a takeover of us, because any person considering acquiring a substantial
or controlling block of our common stock will face the possibility that
its ability to obtain or exercise control would be impaired or made more
expensive by the exercise of the Marriott International purchase right.
. Shareholder rights plan. We adopted a shareholder rights plan which
provides, among other things, that when specified events occur, our
shareholders will be entitled to purchase from us a newly created series
of junior preferred shares, subject to our ownership limit described
below. The preferred share purchase rights are triggered by the earlier to
occur of (1) ten days after the date of a public announcement that a
person or group acting in concert has acquired, or obtained the right to
acquire, beneficial ownership of 20% or more of our outstanding shares of
common stock or (2) ten business days after the commencement of or
announcement of an intention to make a tender offer or exchange offer, the
consummation of which would result in the acquiring person's becoming the
beneficial owner of 20% or more of our outstanding common stock. The
preferred share purchase rights would cause substantial dilution to a
person or group that attempts to acquire us on terms not approved by our
Board of Directors.
There are possible adverse consequences of limits on ownership of our common
stock. To maintain our qualification as a REIT for federal income tax
purposes, not more than 50% in value of our outstanding shares of capital stock
may be owned, directly or indirectly, by five or fewer individuals, as defined
in the Internal Revenue Code to include some entities. In addition, a person
who owns, directly or by attribution, 10% or more of an interest in a tenant of
ours, or a tenant of any partnership in which we are a partner, cannot own,
directly or by attribution, 10% or more of our shares without jeopardizing our
qualification as a REIT. Primarily to facilitate maintenance of our
qualification as a REIT for federal income tax purposes, the ownership limit
under our charter prohibits ownership, directly or by virtue of the attribution
provisions of the Internal Revenue Code, by any person or persons acting as a
group, of more than 9.8% of the issued and outstanding shares of our common
stock, subject to an exception for shares of our common stock held prior to our
conversion into a REIT (referred to as the "REIT conversion") so long as the
holder would not own more than 9.9% in value of our outstanding shares after
the REIT conversion, and prohibits ownership, directly or by virtue of the
attribution provisions of the Internal Revenue Code, by any person, or persons
acting as a group, of more than 9.8% of the issued and outstanding shares of
any class or series of our preferred shares. Together, these limitations are
referred to as the "ownership limit." Our Board of Directors, in its sole and
absolute discretion, may waive or modify the ownership limit with respect to
one or more persons who would not be treated as "individuals" for purposes of
the Internal Revenue Code if the Board of Directors is satisfied, based upon
information required to be provided by the party seeking the waiver and, if it
determines necessary or advisable, upon an opinion of counsel satisfactory to
our Board of Directors, that ownership in excess of this limit will not cause a
person who is an individual to be treated as owning shares in excess of the
ownership limit, applying the applicable
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constructive ownership rules, and will not otherwise jeopardize our status as a
REIT for federal income tax purposes (for example, by causing any of our
tenants to be considered a "related party tenant" for purposes of the REIT
qualification rules). Common stock acquired or held in violation of the
ownership limit will be transferred automatically to a trust for the benefit of
a designated charitable beneficiary, and the person who acquired the common
stock in violation of the ownership limit will not be entitled to any
distributions thereon, to vote those shares of common stock or to receive any
proceeds from the subsequent sale of the common stock in excess of the lesser
of the price paid for the common stock or the amount realized from the sale. A
transfer of shares of our common stock to a person who, as a result of the
transfer, violates the ownership limit may be void under certain circumstances,
and, in any event, would deny that person any of the economic benefits of
owning shares of our common stock in excess of the ownership limit. The
ownership limit may have the effect of delaying, deferring or preventing a
change in control and, therefore, could adversely affect the shareholders'
ability to realize a premium over the then-prevailing market price for our
common stock in connection with such transaction.
We depend on external sources of capital for future growth. As with other
REITs, but unlike corporations generally, our ability to reduce our debt and
finance our growth largely must be funded by external sources of capital
because we generally will have to distribute to our shareholders 90% of our
taxable income in order to qualify as a REIT, including taxable income we
recognize for tax purposes but with regard to which we do not receive
corresponding cash. Our access to external capital will depend upon a number of
factors, including general market conditions, the market's perception of our
growth potential, our current and potential future earnings, cash distributions
and the market price of our common stock.
Shares of our common stock that are or become available for sale could
affect the price for shares of our common stock. Sales of a substantial number
of shares of our common stock, or the perception that sales could occur, could
adversely affect prevailing market prices for our common stock. In addition,
holders of units of limited partnership interest in the Operating Partnership
(referred to as "OP Units"), who redeem their OP Units and receive common stock
upon redemption will be able to sell those shares freely, unless the person is
our affiliate and resale of the affiliate's shares is not covered by an
effective registration statement. There are currently approximately 22.1
million OP Units outstanding (not including OP Units held directly or
indirectly by us), all of which are currently redeemable. Further, a
substantial number of shares of our common stock have been and will be issued
or reserved for issuance from time to time under our employee benefit plans,
including shares of our common stock reserved for options, and these shares of
common stock would be available for sale in the public markets from time to
time pursuant to exemptions from registration or upon registration. Moreover,
the issuance of additional shares of our common stock by us in the future would
be available for sale in the public markets. We can make no prediction about
the effect that future sales of our common stock would have on the market price
of our common stock.
Our earnings and cash distributions will affect the market price of shares
of our common stock. We believe that the market value of a REIT's equity
securities is based primarily upon the market's perception of the REIT's growth
potential and its current and potential future cash distributions, whether from
operations, sales, acquisitions, development or refinancings, and is
secondarily based upon the value of the underlying assets. For that reason,
shares of our common stock may trade at prices that are higher or lower than
the net asset value per share. To the extent we retain operating cash flow for
investment purposes, working capital reserves or other purposes rather than
distributing the cash flow to shareholders, these retained funds, while
increasing the value of our underlying assets, may negatively affect the market
price of our common stock. Our failure to meet the market's expectation with
regard to future earnings and cash distributions would likely adversely affect
the market price of our common stock.
Market interest rates may affect the price of shares of our common stock. We
believe that one of the factors that investors consider important in deciding
whether to buy or sell shares of a REIT is the distribution rate on the shares,
considered as a percentage of the price of the shares, relative to market
interest rates. If market interest rates increase, prospective purchasers of
REIT shares may expect a higher distribution rate. Thus, higher market interest
rates could cause the market price of our shares to go down.
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Risks of Operation
Our revenues and the value of our properties are subject to conditions
affecting the lodging industry. Our revenues and the value of our properties
are subject to conditions affecting the lodging industry. These include:
. changes in the national, regional and local economic climate
. changes in business and pleasure travel
. local conditions such as an oversupply of hotel properties or a reduction
in demand for hotel rooms
. the attractiveness of our hotels to consumers and competition from
comparable hotels
. the quality, philosophy and performance of the managers of our hotels
. changes in room rates and increases in operating costs due to inflation
and other factors and
. the need to periodically repair and renovate our hotels.
As a result of the effects of the economic recession and the September 11,
2001 terrorist attacks, the lodging industry has experienced a significant
decline in business caused by a reduction in travel for both business and
pleasure. We currently expect that the decline in operating levels will
continue in 2002. Additionally, as a result of the September 11 terrorist
attacks and the collapse of the World Trade Center Towers, our New York World
Trade Center Marriott hotel was destroyed. We also sustained considerable
damage to a second property, the New York Marriott Financial Center hotel.
Room revenues of our hotels decreased during 2001 as a result of the
continuing economic recession. For the third quarter ended September 7, 2001
our comparable RevPAR decreased 11.9% due to a decrease in occupancy of 5.9
percentage points to 73.8% combined with a decline in the average room rate of
4.9% to $140.17. Our comparable RevPAR for the three quarters ended September
7, 2001 showed a more moderate decline of 6.1% as a result of a decline of 5.0
percentage points in occupancy, offset by a slight increase of 0.3% in average
room rate. Comparable RevPAR refers to revenues per available room for hotels
which were owned for the full comparison period in both the current and the
previous year.
During the 4-week period subsequent to the events of September 11, 2001, our
hotels recorded average weekly occupancy rates of 38% to 63%. During that
period, we had a very high level of large group cancellations in the fourth
quarter which represented approximately $70 million in future revenue primarily
affecting our luxury and larger convention hotels. This period was not
representative of the fourth quarter results. However, our results from
operations for the fourth quarter did reflect a significant decline in RevPAR.
We have been actively working with the managers of our hotels to reduce the
operating costs of our hotels, as well as to provide economic incentives to
individuals and business travelers in selected markets to increase demand. In
addition, based on our assessment of the current operating environment and to
conserve capital, we have reduced or suspended all non-essential capital
expenditure projects.
As a result of a gradual return to more normal levels of business, we have
begun to see modest improvements in occupancy and average room rates, though
they remain below prior year levels. However, our fourth quarter results were
significantly lower than the prior year period. There can be no assurance that
the current economic recession will not continue for an extended period of time
and that it will not significantly affect our operations.
If, as a result of conditions such as those referenced above affecting the
lodging industry, our assets do not generate income sufficient to pay our
expenses, we will be unable to service our debt and maintain our properties.
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Thirty-one of our hotels and assets related thereto are subject to mortgages
in an aggregate amount of approximately $2.3 billion. If these hotels do not
produce adequate cash flow to service the debt represented by such mortgages,
the mortgage lenders could foreclose on such assets and we would lose such
assets. If the cash flow on such properties were not sufficient to provide us
with an adequate return, we could opt to allow such foreclosure rather than
making necessary mortgage payments with funds from other sources.
Our expenses may remain constant even if our revenue drops. The expenses of
owning property are not necessarily reduced when circumstances like market
factors and competition cause a reduction in income from the property. Because
of the effects of the September 11, 2001 terrorist attacks and the current
economic recession, we are working with our managers to substantially reduce
the operating costs of our hotels. In addition, based on our assessment of the
current operating environment, and in order to conserve capital, we have
reduced or suspended all non-essential capital expenditure projects.
Nevertheless, our financial condition could be adversely affected by the
following costs:
. interest rate levels
. debt service levels (including on loans secured by mortgages)
. the availability of financing
. the cost of compliance with government regulation, including zoning and
tax laws and
. hanges in governmental regulations, including those governing usage,
zoning and taxes.
If we are unable to reduce our expenses to reflect our current reduction in
revenue and the reduction that we expect in the future, our business will be
adversely affected.
We do not control our hotel operations, and we are dependent on the managers
of our hotels. Because federal income tax laws restrict REITs and their
subsidiaries from operating a hotel, we do not manage our hotels. Instead, we
retain third-party managers including, among others, Marriott International,
Hyatt, Four Seasons and Swissotel, to manage our hotels pursuant to management
agreements. Our income from the hotels may be adversely affected if the
managers fail to provide quality services and amenities and competitive room
rates at our hotels or fail to maintain the quality of the hotel brand names.
While HMT Lessee LLC, a taxable REIT subsidiary of ours that is the lessee of
substantially all of our full-service properties, monitors the hotel managers'
performance, we have limited specific recourse if we believe that the hotel
managers are not performing adequately. Underperformance by our hotel managers
could adversely affect our results of operations.
Our relationships with our hotel managers are primarily contractual in
nature, although certain of our managers owe fiduciary duties to us under
applicable law. We are in discussions with various managers of our hotels
regarding their performance under management agreements for our hotels. We have
had, and continue to have, differences with the managers of our hotels over
their performance and compliance with the terms of our agreements. We generally
resolve disputes with our managers through discussions and negotiations.
However, if we are unable to reach satisfactory results through discussions and
negotiations, we also occasionally may engage in litigation with our managers.
For example, we are currently engaged in litigation with Swissotel, the manager
of four of our hotels. If we fail to reach satisfactory resolution with respect
to any disputes, the operation of our hotels could be adversely affected.
Our relationship with Marriott International may result in conflicts of
interest. Marriott International, a public hotel management company, and its
affiliates, manages or franchises 109 of our 121 hotels. In addition, Marriott
International manages and in some cases may own or be invested in hotels that
compete with our hotels. As a result, Marriott International may make decisions
regarding competing lodging facilities that it manages that would not
necessarily be in our best interests. J.W. Marriott, Jr. is a member of our
Board of Directors and his brother, Richard E. Marriott, is our Chairman of the
Board. Both J.W. Marriott, Jr.
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and Richard E. Marriott serve as directors, and J.W. Marriott, Jr. also serves
as an executive officer, of Marriott International. J.W. Marriott, Jr. and
Richard E. Marriott beneficially owned, as determined for securities law
purposes, as of January 31, 2001, approximately 12.6% and 12.2%, respectively,
of the outstanding shares of common stock of Marriott International. As a
result, J.W. Marriott, Jr. and Richard E. Marriott have potential conflicts of
interest as our directors when making decisions regarding Marriott
International, including decisions relating to the management agreements
involving the hotels and Marriott International's management of competing
lodging properties.
Our Board of Directors follows policies and procedures intended to limit the
involvement of J.W. Marriott, Jr. and Richard E. Marriott in conflict
situations, including requiring them to abstain from voting as directors on
matters which present a conflict between the companies. If appropriate, these
policies and procedures will apply to other directors and officers.
We have substantial leverage. We have a significant amount of indebtedness
that could have important consequences. It currently requires us to dedicate a
substantial portion of our cash flow from operations to payments on our
indebtedness, which reduces the availability of our cash flow to fund working
capital, capital expenditures, expansion efforts, distributions to our partners
and other general purposes. Additionally, it could:
. limit our ability in the future to undertake refinancings of our debt or
obtain financing for expenditures, acquisitions, development or other
general business purposes on terms and conditions acceptable to us, if at
all, or
. affect adversely our ability to compete effectively or operate
successfully under adverse economic conditions.
If our cash flow and working capital were not sufficient to fund our
expenditures or service our indebtedness, we would have to raise additional
funds through:
. the sale of our equity
. the incurrence of additional permitted indebtedness or
. the sale of our assets.
We cannot assure you that any of these sources of funds would be available
to us or, if available, would be on terms that we would find acceptable or in
amounts sufficient for us to meet our obligations or fulfill our business plan.
For example, under the terms of our bank credit facility, the proceeds from
these activities must be used to repay amounts outstanding and may not be
otherwise available for our use.
There is no limitation on the amount of debt we may incur. There are no
limitations in our organizational documents that limit the amount of
indebtedness that we may incur. However, our existing debt instruments contain
restrictions on the amount of indebtedness that we may incur. If we became more
highly leveraged, our debt service payments would increase and our cash flow
and our ability to service our debt and other obligations might be adversely
affected.
The terms of our debt place restrictions on us and our subsidiaries,
reducing operational flexibility and creating default risks. The documents
governing the terms of our senior notes and bank credit facility contain
covenants that place restrictions on us and our subsidiaries. The activities
upon which such restrictions exist include, but are not limited to:
. acquisitions, merger and consolidations
. the incurrence of additional debt
. the creation of liens
. the sale of assets
. capital expenditures
. raising capital
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. the payment of dividends and
. transactions with affiliates.
In addition, certain covenants in our bank credit facility require us and
our subsidiaries to meet financial performance tests. The restrictive covenants
in the indenture, the bank credit facility and the documents governing our
other debt (including our mortgage debt) will reduce our flexibility in
conducting our operations and will limit our ability to engage in activities
that may be in our long-term best interest. Our failure to comply with these
restrictive covenants could result in an event of default that, if not cured or
waived, could result in the acceleration of all or a substantial portion of our
debt or a significant increase in the interest rates on our debt, either of
which could adversely affect our operations and ability to maintain adequate
liquidity.
As a result of the effects on our business of the economic recession and the
events of September 11, 2001, we anticipate that in the future we may fail to
comply with certain financial covenants under the documents governing certain
of our indebtedness. As a result of the effects on our business of the economic
recession and the events of September 11, 2001, we have entered into an
amendment to our bank credit facility, effective November 19, 2001, which among
other things:
. adjusts certain financial covenants so as to require us to meet less
stringent levels in respect of (a) a minimum consolidated interest
coverage ratio and a minimum unsecured interest coverage ratio until
September 6, 2002 and (b) the maximum leverage ratio through August 15,
2002
. suspends until September 6, 2002 the minimum fixed charge coverage ratio
test that we must meet
. limits draws under the revolver portion of our bank credit facility to (a)
$50 million in the first quarter of 2002 and (b) up to $25 million in the
second quarter of 2002 (but only if draws in the second quarter of 2002 do
not cause the aggregate amount drawn in 2002 and then outstanding to
exceed $25 million) and
. increases the interest rate based on higher leverage levels.
In addition, the amendment imposes restrictions and requirements through
August 15, 2002 which include, among others:
. restricting our ability to pay on our equity securities and our QUIPs
convertible debt obligations unless projections indicate such payment is
necessary to maintain our REIT status and/or unless we are below certain
leverage levels
. restricting our ability to incur additional indebtedness and requiring
that we apply all net proceeds of permitted incurrences of indebtedness to
repay outstanding amounts under the bank credit facility
. requiring us to apply all net proceeds from capital contributions to the
Operating Partnership or from sales of equity by us to repay outstanding
amounts under the bank credit facility
. requiring us to use all net proceeds from the sale of assets to repay
indebtedness under the bank credit facility
. restricting our ability to make acquisitions and investments unless the
asset to be acquired has a leverage ratio of 3.5 to 1.0 or below
. restricting our investments in subsidiaries and
. restricting our capital expenditures.
The amendment also permits us (i) to retain in escrow any casualty insurance
proceeds that we receive from insurance policies covering the New York World
Trade Center Marriott and the New York Marriott Financial Center until such
proceeds are applied toward the restoration of the New York Marriott Financial
Center and the construction of a new hotel that replaces the New York World
Trade Center Marriott, or (ii) to apply such insurance proceeds to the payment
of amounts due to certain third parties, including the New York World Trade
Center Marriott ground lessor, mortgage lender and Marriott International as
manager. Any proceeds (other than business interruption insurance proceeds) not
so used would be used to repay amounts outstanding under the bank credit
facility. The amendment also allows us to include business interruption
proceeds that we receive for
8
the New York World Trade Center Marriott and the New York Marriott Financial
Center hotels in our calculation of consolidated EBITDA for purposes of our
financial covenants.
As of December 31, 2001 we had no amounts outstanding under our bank credit
facility.
We anticipate that if we decide to re-draw the amounts available under the
bank credit facility, we would have to refinance or repay our bank credit
facility or obtain another amendment from our lenders to adjust the leverage
ratio applicable after August 15, 2002 and, possibly, other financial covenants
applicable at the end of our third quarter of 2002. We intend to amend or
replace the bank credit facility prior to August 15, 2002. There can be no
assurance that we will be able to amend or replace the bank credit facility on
terms any more favorable than those currently in effect, if at all. Any default
under the bank credit facility or any successor credit facility that results in
an acceleration of its final stated maturity could constitute an event of
default under the indenture with respect to all outstanding series of senior
notes issued thereunder.
We are currently in compliance with the terms and restrictive covenants of
our bank credit facility. As a result of entering into the recent amendment,
and obtaining the relief from the financial covenants described above, we
expect to remain in compliance with our bank credit facility through at least
August 15, 2002, the date after which our maximum leverage ratio will return to
the levels that were in effect prior to this amendment. We anticipate that, if
adverse operating conditions continue at currently forecasted levels, we will
not be able to comply with the leverage ratio applicable after August 15, 2002
or other financial tests applicable at the end of our third quarter of 2002
(September 6, 2002). If we fail to comply with the leverage ratio or any other
covenant of the bank credit facility, we would be in default under the bank
credit facility.
Under the indenture pursuant to which nearly all of our outstanding senior
notes were issued, we and our restricted subsidiaries are generally prohibited
from incurring additional indebtedness unless, at the time of such incurrence,
we would satisfy the requirements set forth in the indenture. One of these
requirements is that, after giving effect to any such new incurrence, on a pro
forma basis, our consolidated coverage ratio cannot be less than 2.0 to 1.0. As
a result of the effects on our business of the economic recession and the
September 11, 2001 terrorist attacks, we anticipate that any consolidated
coverage ratio that is calculated under the indenture after the end of our
first quarter 2002 may be less than 2.0 to 1.0. If this occurs, then we will be
prohibited from incurring indebtedness and from issuing disqualified stock
under the indenture other than the indebtedness that we and our restricted
subsidiaries are specifically permitted to incur under certain exceptions to
this prohibition set forth in the indenture. Our failure to maintain a
consolidated coverage ratio of greater than or equal to 2.0 to 1.0 could limit
our ability to engage in activities that may be in our long-term best interest.
Our management agreements could impair the sale or financing of our
hotels. Under the terms of the management agreements, we generally may not
sell, lease or otherwise transfer the hotels unless the transferee is not a
competitor of the manager, and the transferee assumes the related management
agreements and meets specified other conditions. Our ability to finance,
refinance or sell any of the properties may, depending upon the structure of
such transactions, require the manager's consent. If the manager does not
consent, we would be prohibited from financing, refinancing or selling the
property without breaching the management agreement.
The acquisition contracts relating to some hotels limit our ability to sell
or refinance those hotels. For reasons relating to federal income tax
considerations of the former and current owners of approximately 20 of our
full-service hotels, we agreed to restrictions on selling some hotels or
repaying or refinancing the mortgage debt on those hotels for varying periods
depending on the hotel. We anticipate that, in specified circumstances, we may
agree to similar restrictions in connection with future hotel acquisitions. As
a result, even if it were in our best interests to sell or refinance the
mortgage debt on these hotels, it may be difficult or impossible to do so
during their respective lock-out periods.
Our ground lease payments may increase faster than the revenues we receive
on the hotels. As of January 31, 2002, we leased 45 of our hotels pursuant to
ground leases. These ground leases generally require
9
increases in ground rent payments every five years. Our ability to service our
debt could be adversely affected to the extent that our revenues do not
increase at the same or a greater rate as the increases under the ground
leases. In addition, if we were to sell a hotel encumbered by a ground lease,
the buyer would have to assume the ground lease, which could result in a lower
sales price. Moreover, to the extent that such ground leases are not renewed at
their expiration, our revenues could be adversely affected.
We may be unable to sell properties when appropriate because real estate
investments are illiquid. Real estate investments generally cannot be sold
quickly. We may not be able to vary our portfolio promptly in response to
economic or other conditions. The inability to respond promptly to changes in
the performance of our investments could adversely affect our financial
condition and ability to service debt. In addition, there are limitations under
the federal tax laws applicable to REITs and agreements that we have entered
into when we acquired some of our properties that may limit our ability to
recognize the full economic benefit from a sale of our assets.
We depend on our key personnel. We depend on the efforts of our executive
officers and other key personnel. While we believe that we could find
replacements for these key personnel, the loss of their services could have a
significant adverse effect on our operations. None of our key personnel have
employment agreements. We do not have or intend to obtain key-man life
insurance with respect to any of our personnel.
Partnership and other litigation judgments or settlements could have a
material adverse effect on our financial condition. We are a party to various
lawsuits relating to previous partnership transactions, including transactions
relating to our conversion into a REIT. While we and the other defendants to
such lawsuits believe all of the lawsuits in which we are a defendant are
without merit and we are vigorously defending against such claims, we can give
no assurance as to the outcome of any of the lawsuits. If any of the lawsuits
were to be determined adversely to us or a settlement involving a payment of a
material sum of money were to occur, there could be a material adverse effect
on our financial condition.
We may acquire hotel properties through joint ventures with third parties
that could result in conflicts. Instead of purchasing hotel properties
directly, we may invest as a co-venturer. Joint venturers often share control
over the operation of the joint venture assets. For example, through our
subsidiary Rockledge Hotel Properties, Inc., we entered into a joint venture
with Marriott International through which the joint venture owns two limited
partnerships holding, in the aggregate, 120 Courtyard by Marriott hotels.
Subsidiaries of Marriott International manage these Courtyard by Marriott
hotels. Actions by a co-venturer, particularly Marriott International, could
subject the assets to additional risk, including:
. our co-venturer in an investment might have economic or business interests
or goals that are inconsistent with our interests or goals
. our co-venturer may be in a position to take action contrary to our
instructions or requests or contrary to our policies or objectives or
. a joint venture partner could go bankrupt, leaving us liable for its share
of joint venture liabilities.
Although we generally will seek to maintain sufficient control of any joint
venture to permit our objectives to be achieved, we might not be able to take
action without the approval of our joint venture partners. Also, our joint
venture partners could take actions binding on the joint venture without our
consent. For further discussion of the risks associated with entering into a
joint venture with Marriott International, see the discussion above under "Our
relationship with Marriott International may result in conflicts of interest".
Environmental problems are possible and can be costly. We believe that our
properties are in compliance in all material respects with applicable
environmental laws. Unidentified environmental liabilities could arise,
however, and could have a material adverse effect on our financial condition
and performance. Federal, state and local laws and regulations relating to the
protection of the environment may require a current
10
or previous owner or operator of real estate to investigate and clean up
hazardous or toxic substances or petroleum product releases at the property.
The owner or operator may have to pay a governmental entity or third parties
for property damage and for investigation and clean-up costs incurred by the
parties in connection with the contamination. These laws typically impose
clean-up responsibility and liability without regard to whether the owner or
operator knew of or caused the presence of the contaminants. Even if more than
one person may have been responsible for the contamination, each person covered
by the environmental laws may be held responsible for all of the clean-up costs
incurred. In addition, third parties may sue the owner or operator of a site
for damages and costs resulting from environmental contamination emanating from
that site. Environmental laws also govern the presence, maintenance and removal
of asbestos. These laws require that owners or operators of buildings
containing asbestos properly manage and maintain the asbestos, that they notify
and train those who may come into contact with asbestos and that they undertake
special precautions, including removal or other abatement, if asbestos would be
disturbed during renovation or demolition of a building. These laws may impose
fines and penalties on building owners or operators who fail to comply with
these requirements and may allow third parties to seek recovery from owners or
operators for personal injury associated with exposure to asbestos fibers.
Compliance with other government regulations can also be costly. Our hotels
are subject to various other forms of regulation, including Title III of the
Americans with Disabilities Act, building codes and regulations pertaining to
fire safety. Compliance with those laws and regulations could require
substantial capital expenditures. These regulations may be changed from time to
time, or new regulations adopted, resulting in additional or unexpected costs
of compliance. Any increased costs could have a material adverse effect on our
business, financial condition or results of operations.
Some potential losses are not covered by insurance. We carry comprehensive
insurance coverage for general liability, property, business interruption and
other risks with respect to all of our hotels and other properties. These
policies offer coverage features and insured limits that we believe are
customary for similar type properties. Generally, the policies provide coverage
and limits on a blanket basis, combining the claims of our properties together
for evaluation against policy aggregate limits and sub-limits and, in the case
of our Marriott-managed hotels, with other Marriott-managed hotels of other
owners. Thus, for certain risks (e.g., earthquake), multiple claims from
several hotels or owners may exceed policy sub-limits. Certain other risks
(e.g., war and environmental hazards), however, may be uninsurable or too
expensive to justify insuring against. Furthermore, an insurance provider could
elect to deny or limit coverage under a claim. Should an uninsured loss or a
loss in excess of insured limits occur, or should an insurance carrier deny or
limit coverage under a claim, we could lose all, or a portion of, the capital
we have invested in a property, as well as the anticipated future revenue from
the hotel. In that event, we might nevertheless remain obligated for any
mortgage debt or other financial obligations related to the property.
As discussed below in "Recent or future terrorist attacks could adversely
affect us", on September 11, 2001, terrorist attacks on the World Trade Center
Towers in New York City resulted in the destruction of our New York World Trade
Center Marriott hotel and caused considerable damage to our New York Marriott
Financial Center hotel. Although we have both casualty and business
interruption insurance for our two affected hotels with a major insurer through
our manager, Marriott International, from which we expect to receive business
interruption insurance and property damage insurance proceeds to cover all or a
substantial portion of the losses at both hotels, we cannot currently determine
the amount or timing of those payments. Under the terms of the New York World
Trade Center Marriott ground lease, any proceeds from the casualty portion of
the hotel claim are required to be placed in an insurance trust for the
exclusive purpose of rebuilding the hotel. As of December 1, 2001, we had
received business interruption and casualty advances from our insurers in an
aggregate amount of $11.1 million of which approximately $2.5 million was for
casualty insurance proceeds relating to the New York Marriott Financial Center.
Under the terms of our amended bank credit facility, casualty insurance
proceeds that we receive from insurance coverage on the New York World Trade
Center Marriott and New York Marriott Financial Center are to be retained in
escrow until applied as described in "--As a result of the effects on our
business of the economic recession and the events of September 11, 2001, we
anticipate that in the future we may
11
fail to comply with certain financial covenants under the documents governing
certain of our indebtedness." If the amount of such insurance proceeds is
substantially less than our actual losses or if the payments are substantially
delayed, it could have a material adverse effect on our business.
Recent or future terrorist attacks could adversely affect us. On September
11, 2001, several aircraft that were hijacked by terrorists destroyed the World
Trade Center Towers in New York City and damaged the Pentagon in northern
Virginia. As a result of the attacks and the collapse of the World Trade Center
Towers, our New York World Trade Center Marriott hotel was destroyed and we
sustained considerable damage to our New York Marriott Financial Center hotel.
Subsequent to the attacks, the Federal Aviation Administration closed United
States airspace to commercial traffic for several days. The aftermath of these
events, together with an economic recession, has adversely affected the travel
and hospitality industries, including the full-service hotel industry. The
impact which these terrorist attacks, or future events such as military or
police activities in the United States or foreign countries, future terrorist
activities or threats of such activities, biological or chemical weapons
attacks, political unrest and instability, interruptions in transportation
infrastructure, riots and protests, could have on our business in particular
and the United States economy, the global economy, and global financial markets
in general cannot presently be determined. It is possible that these factors
could have a material adverse effect on our business, our ability to finance
our business, our ability to insure our properties (see "We may not be able to
obtain new insurance for our hotels or to obtain insurance at acceptable
premium levels" below), and on our financial condition and results of
operations as a whole.
We may not be able to obtain new insurance for our hotels or to obtain
insurance at acceptable premium levels. Due to changes in the insurance market
arising prior to September 11, 2001 and the effects of the terrorist attacks on
September 11, 2001, it is becoming more difficult and more expensive to obtain
insurance. Our current insurance policies on our hotels generally reach the end
of their terms on April 1, 2002. We may encounter difficulty in obtaining or
renewing property or casualty insurance on our properties. In addition, such
insurance may be more limited and for some catastrophic risks (e.g.,
earthquake, flood and terrorism) may not be generally available at all or at
current levels. Even if we are able to renew our policies or to obtain new
policies at levels and with limitations consistent with our current policies,
we cannot be sure that we will be able to obtain such insurance at premium
rates that are commercially reasonable. Our inability to obtain insurance on
our properties could cause us to be in default under covenants on our debt
instruments or other contractual commitments we have which require us to
maintain adequate insurance on our properties to protect against the risk of
loss. If this were to occur, or if we were unable to obtain insurance and our
properties experienced damages which would otherwise have been covered by
insurance, it could materially adversely affect our business and the conditions
of our properties.
Federal Income Tax Risks
To qualify as a REIT, we are required to distribute at least 90% of our
taxable income, irrespective of our available cash or outstanding
obligations. To continue to qualify as a REIT, we currently are required to
distribute to our shareholders with respect to each year at least 90% of our
taxable income, excluding net capital gain. In addition, we will be subject to
a 4% nondeductible excise tax on the amount, if any, by which distributions
made by us with respect to the calendar year are less than the sum of 85% of
our ordinary income and 95% of our capital gain net income for that year and
any undistributed taxable income from prior periods. We intend to make
distributions to our shareholders to comply with the distribution requirement
and to avoid the nondeductible excise tax and will rely for this purpose on
distributions from the Operating Partnership. However, there are differences in
timing between our recognition of taxable income and our receipt of cash
available for distribution due to, among other things, the seasonality of the
lodging industry and the fact that some taxable income will be "phantom"
income, which is taxable income that is not matched by cash flow, or EBITDA, to
us. Due to some transactions entered into in years prior to the REIT
conversion, we expect to recognize substantial amounts of "phantom" income.
There is a distinct possibility that these timing differences could require us
to borrow funds or to issue additional equity to enable us to meet the
distribution requirement and, therefore, to maintain our REIT status, and to
avoid the nondeductible excise tax. In addition, because the REIT distribution
12
requirements prevent us from retaining earnings, we will generally be required
to refinance debt that matures with additional debt or equity. We cannot assure
you that any of these sources of funds, if available at all, would be
sufficient to meet our distribution and tax obligations.
Adverse tax consequences would apply if we failed to qualify as a REIT. We
believe that we have been organized and have operated in such a manner so as to
qualify as a REIT under the Internal Revenue Code, commencing with our taxable
year beginning January 1, 1999, and we currently intend to continue to operate
as a REIT during future years. No assurance can be provided, however, that we
qualify as a REIT or that new legislation, Treasury Regulations, administrative
interpretations or court decisions will not significantly change the tax laws
with respect to our qualification as a REIT or the federal income tax
consequences of our REIT qualification. If we fail to qualify as a REIT, we
will be subject to federal and state income tax, including any applicable
alternative minimum tax, on our taxable income at regular corporate rates. In
addition, unless entitled to statutory relief, we would not qualify as a REIT
for the four taxable years following the year during which REIT qualification
is lost. The additional tax burden on us would significantly reduce the cash
available for distribution by us to our shareholders, and we would no longer be
required to make any distributions to shareholders. Our failure to qualify as a
REIT could reduce materially the value of our common stock and would cause any
distributions to shareholders that otherwise would have been subject to tax as
capital gain dividends to be taxable as ordinary income to the extent of our
current and accumulated earnings and profits, or "E&P." However, subject to
limitations under the Internal Revenue Code, corporate distributees may be
eligible for the dividends received deduction with respect to our
distributions. Our failure to qualify as a REIT also would cause an event of
default under our credit facility that could lead to an acceleration of the
amounts due under the credit facility, which, in turn, would constitute an
event of default under our outstanding debt securities.
We will be disqualified as a REIT at least for taxable year 1999 if we
failed to distribute all of our E&P attributable to our non-REIT taxable
years. In order to qualify as a REIT, we cannot have at the end of any taxable
year any undistributed E&P that is attributable to one of our non-REIT taxable
years. A REIT has until the close of its first taxable year as a REIT in which
it has non-REIT E&P to distribute its accumulated E&P. We were required to have
distributed this E&P prior to the end of 1999, the first taxable year for which
our REIT election was effective. If we failed to do this, we will be
disqualified as a REIT at least for taxable year 1999. We believe that
distributions of non-REIT E&P that we made were sufficient to distribute all of
the non-REIT E&P as of December 31, 1999, but we cannot guarantee that we met
this requirement.
If our leases are not respected as true leases for federal income tax
purposes, we would fail to qualify as a REIT. To qualify as a REIT, we must
satisfy two gross income tests, under which specified percentages of our gross
income must be passive income, like rent. For the rent paid pursuant to the
leases, which constitutes substantially all of our gross income, to qualify for
purposes of the gross income tests, the leases must be respected as true leases
for federal income tax purposes and not be treated as service contracts, joint
ventures or some other type of arrangement. In addition, the lessees must not
be regarded as "related party tenants," as defined in the Internal Revenue
Code. We believe that the leases will be respected as true leases for federal
income tax purposes. There can be no assurance, however, that the IRS will
agree with this view. We also believe that Crestline Capital Corporation, the
lessee of substantially all of our full-service hotels prior to January 1,
2001, was not a "related party tenant" and, as a result of changes in the tax
laws effective January 1, 2001, HMT Lessee will not be treated as a "related
party tenant" so long as it qualifies as a "taxable REIT subsidiary." If the
leases were not respected as true leases for federal income tax purposes or if
the lessees were regarded as "related party tenants," we would not be able to
satisfy either of the two gross income tests applicable to REITs and we would
lose our REIT status. See "Risk Factors--Federal Income Tax Risks--Adverse tax
consequences would apply if we failed to qualify as a REIT" above.
If HMT Lessee fails to qualify as a taxable REIT subsidiary, we would fail
to qualify as a REIT. For our taxable years beginning on and after January 1,
2001, as a result of REIT tax law changes under the specific provisions of the
Ticket to Work and Work Incentives Improvement Act of 1999 relating to REITs
(we refer to those provisions as the "REIT Modernization Act"), we are
permitted to lease our hotels to a subsidiary of the
13
Operating Partnership that is taxable as a corporation and that elects to be
treated as a "taxable REIT subsidiary." Accordingly, effective January 1, 2001,
HMT Lessee directly or indirectly acquired all but one of the full-service
hotel leasehold interests formerly held by Crestline. So long as HMT Lessee and
other affiliated lessees qualify as taxable REIT subsidiaries of ours, they
will not be treated as "related party tenants." As of June 15, 2001, we
acquired the one remaining leasehold interest from Crestline. In addition, as
of July 1, 2001, we acquired the four remaining leasehold interests from third
parties. We believe that HMT Lessee qualifies to be treated as a taxable REIT
subsidiary for federal income tax purposes. We cannot assure you, however, that
the IRS will not challenge its status as a taxable REIT subsidiary for federal
income tax purposes, or that a court would not sustain such a challenge. If the
IRS were successful in disqualifying HMT Lessee from treatment as a taxable
REIT subsidiary, we would fail to meet the asset tests applicable to REITs and
substantially all of our income would fail to qualify for the gross income
tests and, accordingly, we would cease to qualify as a REIT. See "Risk
Factors--Federal Income Tax Risks--Adverse tax consequences would apply if we
failed to qualify as a REIT" above.
Despite our REIT status, we remain subject to various taxes, including
substantial deferred and contingent tax liabilities. Notwithstanding our
status as a REIT, we are subject, through our ownership interest in the
Operating Partnership, to certain federal, state, local and foreign taxes on
our income and property. In addition, we will be required to pay federal tax at
the highest regular corporate rate upon our share of any "built-in gain"
recognized as a result of any sale before January 1, 2009, by the Operating
Partnership of assets, including the hotels, in which interests were acquired
by the Operating Partnership from our predecessor and its subsidiaries as part
of the REIT conversion. Built-in gain is the amount by which an asset's fair
market value exceeded our adjusted basis in the asset on January 1, 1999, the
first day of our first taxable year as a REIT. The total amount of gain on
which we would be subject to corporate income tax if the assets that we held at
the time of the REIT conversion were sold in a taxable transaction prior to
January 1, 2009 would be material to us. In addition, at the time of the REIT
conversion, we expected that we or Rockledge Hotel Properties, Inc. or Fernwood
Hotel Assets, Inc. (each of which is a taxable corporation in which the
Operating Partnership owned a 95% nonvoting interest until April, 2001 when the
Operating Partnership purchased the remaining 5% voting interest) likely would
recognize substantial built-in gain and deferred tax liabilities in the next
ten years without any corresponding receipt of cash by us or the Operating
Partnership. We may have to pay certain state income taxes because not all
states treat REITs the same as they are treated for federal income tax
purposes. We may also have to pay certain foreign taxes to the extent we own
assets or conduct operations in foreign jurisdictions. The Operating
Partnership is obligated under its partnership agreement to pay all such taxes
(and any related interest and penalties) incurred by us, as well as any
liabilities that the IRS may assert against us for corporate income taxes for
taxable years prior to the time we qualified as a REIT. Our taxable REIT
subsidiaries, including Rockledge, Fernwood and HMT Lessee, are taxable as
corporations and will pay federal, state and local income tax on their net
income at the applicable corporate rates, and foreign taxes to the extent they
own assets or conduct operations in foreign jurisdictions.
If the IRS were to challenge successfully the Operating Partnership's status
as a partnership for federal income tax purposes, we would cease to qualify as
a REIT and suffer other adverse consequences. We believe that the Operating
Partnership qualifies to be treated as a partnership for federal income tax
purposes. As a partnership, it is not subject to federal income tax on its
income. Instead, each of its partners, including us, is required to pay tax on
its allocable share of the Operating Partnership's income. No assurance can be
provided, however, that the IRS will not challenge its status as a partnership
for federal income tax purposes, or that a court would not sustain such a
challenge. If the IRS were successful in treating the Operating Partnership as
a corporation for tax purposes, we would fail to meet the income tests and
certain of the asset tests applicable to REITs and, accordingly, cease to
qualify as a REIT. If the Operating Partnership fails to qualify as a
partnership for federal income tax purposes or we fail to qualify as a REIT,
either failure would cause an event of default under our credit facility that,
in turn, could constitute an event of default under our outstanding debt
securities. Also, the failure of the Operating Partnership to qualify as a
partnership would cause it to become subject to federal and state corporate
income tax, which would reduce significantly the amount of cash available for
debt service and for distribution to its partners, including us. Finally, the
classification of the Operating Partnership as a corporation would cause us to
recognize gain at least equal to our "negative capital account," if any.
14
As a REIT, we are subject to limitations on our ownership of debt and equity
securities. Subject to the exceptions discussed in this paragraph, a REIT is
prohibited from owning securities in any one issuer if the value of those
securities exceeds 5% of the value of the REIT's total assets or the securities
owned by the REIT represent more than 10% of the issuer's outstanding voting
securities or more than 10% of the value of the issuer's outstanding
securities. A REIT is permitted to own securities of a subsidiary in an amount
that exceeds the 5% value test and the 10% vote or value test if the subsidiary
elects to be a "taxable REIT subsidiary," which is taxable as a corporation.
However, a REIT may not own securities of taxable REIT subsidiaries that
represent in the aggregate more than 20% of the value of the REIT's total
assets. Effective January 1, 2001, each of Fernwood, Rockledge and HMT Lessee
has elected to be treated as a taxable REIT subsidiary.
Our taxable REIT subsidiaries are subject to special rules that may result
in increased taxes. Several Internal Revenue Code provisions ensure that a
taxable REIT subsidiary is subject to an appropriate level of federal income
taxation. For example, a taxable REIT subsidiary is limited in its ability to
deduct interest payments made to an affiliated REIT. In addition, the REIT has
to pay a 100% penalty tax on some payments that it receives if the economic
arrangements between the REIT and the taxable REIT subsidiary are not
comparable to similar arrangements between unrelated parties.
We may be required to pay a penalty tax upon the sale of a hotel. The
federal income tax provisions applicable to REITs provide that any gain
realized by a REIT on the sale of property held as inventory or other property
held primarily for sale to customers in the ordinary course of business is
treated as income from a "prohibited transaction" that is subject to a 100%
penalty tax. Under existing law, whether property, including hotels, is held as
inventory or primarily for sale to customers in the ordinary course of business
is a question of fact that depends upon all of the facts and circumstances with
respect to the particular transaction. The Operating Partnership intends that
it and its subsidiaries will hold the hotels for investment with a view to
long-term appreciation, to engage in the business of acquiring and owning
hotels and to make occasional sales of hotels as are consistent with the
Operating Partnership's investment objectives. We cannot assure you, however,
that the IRS might not contend that one or more of these sales is subject to
the 100% penalty tax.
15
FORWARD-LOOKING STATEMENTS
This prospectus and the information incorporated by reference into this
prospectus contain forward-looking statements within the meaning of Section 27A
of the Securities Act and Section 21E of the Securities Exchange Act. Such
statements include statements regarding our expectations, hopes or intentions
regarding the future, including our strategy, competition, financing,
indebtedness, revenues, operators, regulations and compliance with applicable
laws. We 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.
Forward-looking statements are subject to numerous assumptions, risks and
uncertainties. Factors which may cause our actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by us in those statements include, among
others, the following:
. national and local economic and business conditions, including the effect
of the terrorist attacks of September 11, 2001 on travel, that will
affect, among other things, demand for products and services at our
hotels, the level of room rates and occupancy that can be achieved by such
properties and the availability and terms of financing and our liquidity
. our ability to restructure or refinance our existing bank credit facility
in order to maintain operating flexibility and liquidity
. our ability to maintain the properties in a first-class manner, including
meeting capital expenditure requirements
. our ability to compete effectively in areas such as access, location,
quality of accommodations and room rate structures
. our degree of leverage which may affect our ability to obtain financing in
the future
. our degree of compliance with current debt covenants
. our ability to acquire or develop additional properties and the risk that
potential acquisitions or developments may not perform in accordance with
expectations
. changes in travel patterns, taxes and government regulations which
influence or determine wages, prices, construction procedures and costs
. government approvals, actions and initiatives, including the need for
compliance with environmental and safety requirements, and changes in laws
and regulations or the interpretation thereof
. the effects of tax legislative action, including specified provisions of
the REIT Modernization Act
. our ability to satisfy complex rules in order for us to qualify as a REIT
for federal income tax purposes, the Operating Partnership's ability to
satisfy the rules in order for it to qualify as a partnership for federal
income tax purposes, and the ability of certain of our subsidiaries to
qualify as taxable REIT subsidiaries for federal income tax purposes, and
our ability and the ability of our subsidiaries to operate effectively
within the limitations imposed by these rules, and
. other factors discussed under the heading "Risk Factors" in this
prospectus and in our other filings with the Commission.
All forward-looking statements in this prospectus and the information
incorporated by reference into this prospectus are made as of the date hereof
or thereof, and we caution you not to rely on these statements without also
considering the risks and uncertainties associated with these statements and
our business that are addressed in this prospectus and the information
incorporated by reference into this prospectus. Moreover, although we believe
the expectations reflected in our forward-looking statements are based upon
reasonable assumptions, we can give no assurance that we will attain these
expectations or that any deviations will not be material. Except as otherwise
required by the federal securities laws, we disclaim any obligations or
undertaking to disseminate to you any updates or revisions to any
forward-looking statement contained in this prospectus or any information
incorporated by reference into this prospectus.
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THE COMPANY
We are a self-managed and self-administered REIT owning full-service hotel
properties. Through our subsidiaries, we currently own or hold controlling
interests in 121 hotels, containing approximately 58,000 rooms located
throughout the United States, in Toronto and Calgary, Canada and in Mexico
City, Mexico. Our hotels are generally operated under the Marriott, Ritz-
Carlton, Four Seasons, Hyatt, Hilton and Swissotel brand names. These brands
are among the most respected and widely recognized names in the lodging
industry.
We were formed as a Maryland corporation in 1998. As part of our efforts to
reorganize our business operations to qualify as a REIT for federal income tax
purposes, on December 29, 1998 we succeeded by merger to the hotel ownership
business formerly conducted by Host Marriott Corporation, a Delaware
corporation. We conduct our business as an umbrella partnership REIT, or
UPREIT, through the Operating Partnership, which is a Delaware limited
partnership of which we are the sole general partner and in which we currently
hold approximately 92% of the partnership interests. The Operating Partnership
leases substantially all of our full-service hotels to HMT Lessee, a wholly
owned subsidiary of it that is taxed as a corporation.
Our principal executive offices are located at 10400 Fernwood Road,
Bethesda, Maryland 20817-1109, and our telephone number is (301) 380-9000.
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THE OFFERING
This prospectus relates to up to 1,100,000 shares of our common stock that
may be sold by Summit Resources. Summit Resources received these shares of our
common stock upon the exchange of a portion of its limited partnership
interests in our subsidiary, Pacific Gateway, Ltd., pursuant to an agreement
among Host Marriott, the Operating Partnership, Pacific Gateway, Summit
Resources and affiliates of Summit Resources that are also limited partners of
Pacific Gateway. We refer to this agreement as the "Exchange Agreement."
NO PROCEEDS TO THE COMPANY
We will not receive any proceeds upon the sale of the common stock covered
by this prospectus, but we will incur expenses in connection with the filing of
the registration statement of which this prospectus forms a part.
TAX STATUS OF THE COMPANY
We believe that we have been organized and have operated in such a manner so
as to qualify as a REIT under the Internal Revenue Code, commencing with our
taxable year beginning January 1, 1999. A REIT generally is not taxed at the
corporate level on income it currently distributes to its shareholders as long
as it distributes currently at least 90% of its taxable income (excluding net
capital gain). No assurance can be provided that we will qualify as a REIT or
that new legislation, Treasury Regulations, administrative interpretations or
court decisions will not significantly change the tax laws with respect to our
qualification as a REIT or the federal income tax consequences of such
qualification. Even if we qualify as a REIT, we will be subject to corporate
level taxes on specified gains that we recognize prior to January 1, 2009,
including significant deferred tax gains that are likely to be recognized
during that period without our receipt of any cash. In addition, some of our
subsidiaries, including HMT Lessee, are subject to corporate income taxes. See
"Material Federal Income Tax Consequences" incorporated by reference to our
Form 8-K dated February 8, 2002 for a more detailed explanation.
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SELLING SHAREHOLDER
All of the 1,100,000 shares of common stock offered by Summit Resources
under this prospectus represent shares of common stock that have been issued by
us upon the exchange of limited partnership interests of Pacific Gateway.
Summit Resources owns no shares of common stock other than the shares of common
stock offered under this prospectus. Since Summit Resources may sell all, some
or none of the shares of common stock covered by this prospectus, no estimate
can be made of the number of shares of common stock that will be sold by Summit
Resources or that will be owned by Summit Resources upon completion of the
offering. The shares of common stock covered by this prospectus represent less
than 1% of the total shares of common stock outstanding as of January 31, 2002.
Summit Resources and various affiliates of Summit Resources that are limited
partners of Pacific Gateway have elected pursuant to the Exchange Agreement to
exchange an additional portion of their limited partnership interests in
Pacific Gateway for approximately 6.8 million OP Units. The Operating
Partnership expects to issue these OP Units to Summit Resources and its
affiliates in March 2002. Beginning one year after the date of their issuance,
unless otherwise agreed, each of these OP Units will be redeemable at the
election of the holder for cash or, at our election, one share of our common
stock (subject to adjustment).
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PLAN OF DISTRIBUTION
Summit Resources may from time to time, in one or more transactions, sell
all or a portion of the shares of common stock covered by this prospectus on
the New York Stock Exchange, in the over-the-counter market, on any other
national securities exchange on which the common stock is listed or traded, in
negotiated transactions or otherwise, at prices then prevailing or related to
the then current market price or at negotiated prices. The offering price of
the shares of common stock covered by this prospectus will be determined from
time to time by Summit Resources and, at the time of such determination, may be
higher or lower than the market price of the common stock on the New York Stock
Exchange. The shares of common stock may be sold directly or through
broker-dealers acting as principal or agent. The methods by which the offered
shares may be sold include:
. block trade in which a broker-dealer will attempt to sell the shares of
common stock as agent but may position and resell a portion of the block
as principal to facilitate the transaction
. purchases by a broker-dealer as principal and resale by the broker-dealer
for its account pursuant to this prospectus
. ordinary brokerage transactions and transactions in which the broker
solicits purchasers
. an exchange distribution in accordance with the rules of the New York
Stock Exchange and
. privately negotiated transactions.
Summit Resources and any broker-dealers or agents participating in the
distribution of the offered shares may be deemed to be "underwriters" within
the meaning of the Securities Act, and any profit on the sale of the offered
shares by Summit Resources and any commissions received by any such
broker-dealers may be deemed to be underwriting commissions under the
Securities Act.
In order to comply with the securities laws of certain states, if
applicable, the shares of common stock covered by this prospectus may be sold
only through registered or licensed brokers or dealers. In addition, in certain
states, the shares of common stock may not be sold unless they have been
registered or qualified for sale in such state or an exemption from such
registration or qualification requirement is available and is complied with.
We have agreed to pay all costs and expenses incurred in connection with the
filing of the registration statement of which this prospectus forms a part,
including registration and filing fees, printing expenses and fees and expenses
of our legal counsel and accountants. Summit Resources will pay any brokerage
fees and commissions, fees and disbursements of legal counsel for Summit
Resources and stock transfer and other taxes attributable to the sale of the
shares of common stock covered by this prospectus.
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LEGAL MATTERS
In connection with this prospectus, Hogan & Hartson L.L.P. has provided its
opinion as to the validity of the issuance of the common stock offered by this
prospectus and as to our qualification as a REIT for federal income tax
purposes.
EXPERTS
The audited financial statements and schedules incorporated by reference in
this prospectus and elsewhere in this registration statement have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included therein in reliance upon the
authority of said firm as experts in giving said reports.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Commission under the Securities Act of 1933.
This prospectus does not contain all of the information included in the
registration statement. We have omitted parts of the registration statement in
accordance with the rules and regulations of the Commission. For further
information, we refer you to the registration statement on Form S-3, including
its exhibits. Statements contained in this prospectus about the provisions or
contents of any agreement or other document are not necessarily complete. If
the Commission rules and regulations require that such agreement or document be
filed as an exhibit to the registration statement, please see such agreement or
document for a complete description of these matters. This prospectus may be
accompanied by a prospectus supplement. You should not assume that the
information in this prospectus or any prospectus supplement is accurate as of
any date other than the date on the front cover of this prospectus or such
prospectus supplement. You should read this prospectus together with additional
information described under the heading "Where You Can Find More Information."
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Commission. You may read and copy materials that we have
filed with the Commission, including the registration statement, at the
following Commission public reference rooms:
450 Fifth Street, N.W. 500 West Madison Street
Room 1024 Suite 1400
Washington, D.C. 20549 Chicago, Illinois 60661
Please call the Commission at 1-800-SEC-0330 for further information on the
public reference rooms.
Our Commission filings can also be read at the following address:
New York Stock Exchange,
20 Broad Street
New York, New York 10005
Our Commission filings are also available to the public on the Commission's
Web Site at http://www.sec.gov.
The Commission allows us to "incorporate by reference" the information we
file with them, which means that we can disclose important information to you
by referring you to those documents. The information incorporated by reference
is an important part of this prospectus, and information that we file later
with the Commission will automatically update and supersede this information.
We incorporate by reference the documents listed below. In addition, any future
filings made with the Commission under Sections 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934 until we have sold all of the offered
securities to which this prospectus relates or the offering is otherwise
terminated will be deemed to be incorporated by reference into this prospectus.
1. Annual Report on Form 10-K/A for the fiscal year ended December 31, 2000
(filed with the Commission on December 3, 2001).
2. Annual Report on Form 10-K for the fiscal year ended December 31, 2000
(filed with the Commission on April 2, 2001).
3. Quarterly Report on Form 10-Q for the quarter ended September 7, 2001
(filed with the Commission on October 22, 2001).
4. Quarterly Report on Form 10-Q for the quarter ended June 15, 2001 (filed
with the Commission on July 30, 2001).
5. Quarterly Report on Form 10-Q for the quarter ended March 23, 2001 (filed
with the Commission on May 7, 2001).
6. Current Report on Form 8-K (filed with the Commission on February 8,
2002).
7. Current Report on Form 8-K (filed with the Commission on December 21,
2001).
8. Current Report on Form 8-K (filed with the Commission on December 5,
2001).
9. Current Report on Form 8-K (filed with the Commission on June 4, 2001).
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10. Current Report on Form 8-K (filed with the Commission on May 25, 2001).
11. Current Report on Form 8-K (filed with the Commission on May 8, 2001).
12. Current Report on Form 8-K (filed with the Commission on May 3, 2001).
13. Current Report on Form 8-K/A (filed with the Commission on May 2, 2001).
14. Current Report on Form 8-K (filed with the Commission on April 13, 2001).
15. Current Report on Form 8-K (filed with the Commission on March 23, 2001).
16. Current Report on Form 8-K (filed with the Commission on February 7,
2001).
17. Description of our common stock included in a Registration Statement on
Form 8-A (filed with the Commission on November 18, 1998) (as amended on
December 28, 1998).
18. Description of our Rights included in a Registration Statement on Form
8-A (filed with the Commission on December 11, 1998) (as amended on December
24, 1998).
Additional federal income tax consequences that are reasonably anticipated
to be material to prospective holders in connection with the purchase,
ownership and disposition of our securities are described in our Current Report
on Form 8-K, filed with the SEC on February 8, 2002 (together with any
amendments to such filing), which filing is incorporated by reference herein,
as indicated above.
You may request a copy of any filing incorporated by reference into this
prospectus, at no cost, by writing us at the following address or contacting us
by telephone at (301) 380-2070 between the hours of 9:00 a.m. and 4:00 p.m.,
Eastern Time:
Corporate Secretary
Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
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