WASHINGTON -- Host Marriott Corp., which started off with $2.2 billion in debt when it was spun off from Marriott Corp. in October, is adding another $375 million in balance-sheet debt because of the financial woes of a former partner.
Host Marriott disclosed in a filing with the Securities and Exchange Commission last week that it seized a 28.6 percent interest in the Marriott Marquis hotel in New York's Times Square after Atlanta real estate developer John Portman defaulted on a loan related to the landmark atrium hotel.
Foreclosing on the 28.6 percent interest, posted as collateral for the loan, gives Host Marriott a majority stake in the holding company that owns the hotel. As a result, current accounting rules require Host Marriott to consolidate the hotel's assets and liabilities, including a $375 million mortgage loan, on its own financial statements.
That's important because skittish investors have already seen the value of their Marriott-related bond holdings go through one wild swing because of concerns about excessive debt tied to the restructuring that broke Marriott into two pieces: Host Marriott, an asset-rich company with a heavy debt load, and Marriott International Inc., a hotel management company.
Moreover, the Portman transaction was only the first of what looks to be an active portfolio management by Host Marriott Chief Executive Stephen F. Bollenbach that could lead to even more leverage for the real estate company.
For example, the news of the Portman foreclosure was contained in a registration statement for 17.5 million shares of stock filed Thursday with the SEC. The company doesn't plan to use those sales proceeds to pay down debt, however. It says in the SEC filing that it wants to acquire additional full-service hotels, which the company believes are undervalued.
"Management believes that significant opportunities exist within the full-service segment to acquire hotels at attractive multiples of cash flow or at significant discounts to replacement value," Marriott said in the SEC filing.
For their part, Host Marriott officials downplay the effect of the New York hotel debt restructuring. A company spokesman points out that the holding company for the Marriott Marquis, rather than Host Marriott, will ultimately be responsible for repayment of the $375 million debt.
"The cash generated from the hotel will cover its carrying costs," said Robert Souers, a Host Marriott spokesman. "In the astronomically unlikely event that the hotel is unable to meet its debt service, the recourse would be to the hotel itself, not to the company," he added.