Item 8. Financial Statements and Supplementary Data

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Item 8. Financial Statements and Supplementary Data

The following financial information is included on the pages indicated:

Host Hotels & Resorts, Inc. & Host Hotels & Resorts, L.P.

Page
Reports of Independent Registered Public Accounting Firm (Host Hotels & Resorts, Inc.)88
Report of Independent Registered Public Accounting Firm (Host Hotels & Resorts, L.P.)90
Financial Statements of Host Hotels & Resorts, Inc.:
Consolidated Balance Sheets as of December 31, 2015 and 201491
Consolidated Statements of Operations for the Years Ended December 31, 2015, 2014 and 201392
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2015, 2014 and 201393
Consolidated Statements of Equity for the Years Ended December 31, 2015, 2014 and 201394
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 201395
Financial Statements of Host Hotels & Resorts, L.P.:
Consolidated Balance Sheets as of December 31, 2015 and 201497
Consolidated Statements of Operations for the Years Ended December 31, 2015, 2014 and 201398
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2015, 2014 and 201399
Consolidated Statements of Capital for the Years Ended December 31, 2015, 2014 and 2013100
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 2013101
Notes to Consolidated Financial Statements (Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P.)103

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Host Hotels & Resorts, Inc.:

We have audited the accompanying consolidated balance sheets of Host Hotels & Resorts, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2015. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule III. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Host Hotels & Resorts, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method for reporting discontinued operations as of January 1, 2014.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Host Hotels & Resorts, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 22, 2016, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP
McLean, Virginia
February 22, 2016

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Host Hotels & Resorts, Inc.:

We have audited Host Hotels & Resorts, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Host Hotels & Resorts, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Item 9a Controls and Procedures—Internal Control over Financial Reporting of Form 10-K. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Host Hotels & Resorts, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Host Hotels & Resorts, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2015, and our report dated February 22, 2016, expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP
McLean, Virginia
February 22, 2016

Report of Independent Registered Public Accounting Firm

The Partners

Host Hotels & Resorts, L.P.:

We have audited the accompanying consolidated balance sheets of Host Hotels & Resorts, L.P. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), capital, and cash flows for each of the years in the three-year period ended December 31, 2015. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule III. These consolidated financial statements and financial statement schedule are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Host Hotels & Resorts, L. P. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method for reporting discontinued operations as of January 1, 2014.

/s/ KPMG LLP
McLean, Virginia
February 22, 2016

HOST HOTELS & RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2015 and 2014

(in millions, except per share amounts)

20152014
ASSETS
Property and equipment, net$10,661$10,575
Assets held for sale55—
Due from managers5670
Advances to and investments in affiliates345433
Furniture, fixtures and equipment replacement fund149129
Other264281
Restricted cash15—
Cash and cash equivalents239684
Total assets$11,784$12,172
LIABILITIES, NON-CONTROLLING INTERESTS AND EQUITY
Debt
Senior notes$2,376$2,858
Credit facility, including the term loans of $996 million and $499 million, respectively1,291697
Mortgage debt350402
Total debt4,0173,957
Accounts payable and accrued expenses243298
Other299324
Total liabilities4,5594,579
Non-controlling interests - Host Hotels & Resorts, L.P.143225
Host Hotels & Resorts, Inc. stockholders’ equity:
Common stock, par value $.01, 1,050 million shares authorized, 750.3 million shares and 755.8 million shares issued and outstanding, respectively88
Additional paid-in capital8,3028,476
Accumulated other comprehensive loss(107)(50)
Deficit(1,139)(1,098)
Total equity of Host Hotels & Resorts, Inc. stockholders7,0647,336
Non-controlling interests—other consolidated partnerships1832
Total equity7,0827,368
Total liabilities, non-controlling interests and equity$11,784$12,172

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2015, 2014 and 2013

(in millions, except per common share amounts)

201520142013
REVENUES
Rooms$3,465$3,452$3,317
Food and beverage1,5681,5461,503
Other354356346
Total revenues5,3875,3545,166
EXPENSES
Rooms902924894
Food and beverage1,1101,1091,095
Other departmental and support expenses1,2951,2641,249
Management fees226227222
Other property-level expenses396386376
Depreciation and amortization716701697
Corporate and other expenses9443121
Gain on insurance settlements(2)(10)—
Total operating costs and expenses4,7374,6444,654
OPERATING PROFIT650710512
Interest income444
Interest expense(234)(214)(304)
Gain on sale of assets9523633
Gain (loss) on foreign currency transactions and derivatives(5)(1)3
Equity in earnings (losses) of affiliates7026(17)
INCOME BEFORE INCOME TAXES580761231
Provision for income taxes(9)(14)(21)
INCOME FROM CONTINUING OPERATIONS571747210
Income from discontinued operations, net of tax——115
NET INCOME571747325
Less: Net income attributable to non-controlling interests(13)(15)(8)
NET INCOME ATTRIBUTABLE TO HOST HOTELS & RESORTS, INC.$558$732$317
Basic earnings per common share:
Continuing operations$.74$.97$.27
Discontinued operations——.16
Basic earnings per common share$.74$.97$.43
Diluted earnings per common share:
Continuing operations$.74$.96$.27
Discontinued operations——.15
Diluted earnings per common share$.74$.96$.42

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Years Ended December 31, 2015, 2014 and 2013

(in millions)

201520142013
NET INCOME$571$747$325
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates(71)(60)(18)
Change in fair value of derivative instruments1119(3)
Amounts reclassified from other comprehensive (income) loss3——
OTHER COMPREHENSIVE LOSS, NET OF TAX(57)(41)(21)
COMPREHENSIVE INCOME514706304
Less: Comprehensive income attributable to non-controlling interests(11)(15)(8)
COMPREHENSIVE INCOME ATTRIBUTABLE TO HOST HOTELS & RESORTS, INC.$503$691$296

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, INC. AND SUBISIDARIES

CONSOLIDATED STATEMENTS OF EQUITY

Years Ended December 31, 2015, 2014 and 2013

(in millions)

Common Shares OutstandingCommon StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income (Loss)Retained Earnings / (Deficit)Non-controlling Interest of Other Consolidated PartnershipsNon-controlling Interests of Host Hotels & Resorts, L.P.
724.6Balance, December 31, 2012$7$8,040$12$(1,234)$34$158
—Net income———31744
—Other changes in ownership—(38)——(3)38
—Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates——(18)———
—Change in fair value of derivative instruments——(3)———
28.7Common stock issuances1476————
1.2Comprehensive stock and employee stock purchase plans—8————
—Common stock dividends———(346)——
0.3Redemptions of limited partner interests for common stock—6———(6)
—Contributions from non- controlling interests of consolidated partnerships————7—
—Distributions to non-controlling interests————(8)(4)
754.8Balance, December 31, 2013$8$8,492$(9)$(1,263)$34$190
—Net income———73269
—Other changes in ownership—(39)——(1)38
—Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates——(60)———
—Change in fair value of derivative instruments——19———
0.2Common stock issuances—4————
0.5Comprehensive stock and employee stock purchase plans—13————
—Common stock dividends———(567)——
0.3Redemptions of limited partner interests for common stock—6———(6)
—Contributions from non- controlling interests of consolidated partnerships————1—
—Distributions to non-controlling interests————(8)(6)
755.8Balance, December 31, 2014$8$8,476$(50)$(1,098)$32$225
—Net income———55867
—Other changes in ownership—81——(10)(78)
—Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates——(71)—(2)—
—Change in fair value of derivative instruments——11———
—Amounts reclassified from Other Comprehensive Income——3———
32.1Common stock issuances—401————
0.6Comprehensive stock and employee stock purchase plans—16————
—Common stock dividends———(599)——
0.1Redemptions of limited partner interests for common stock—3———(3)
—Contributions from non- controlling interests of consolidated partnerships————2—
—Distributions to non-controlling interests————(10)(8)
(38.3)Repurchase of common stock—(675)
750.3Balance, December 31, 2015$8$8,302$(107)$(1,139)$18$143

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2015, 2014 and 2013

(in millions)

201520142013
OPERATING ACTIVITIES
Net income$571$747$325
Adjustments to reconcile to cash provided by operations:
Discontinued operations:
Loss on dispositions——(97)
Depreciation——10
Depreciation and amortization716701697
Amortization of finance costs, discounts and premiums, net212425
Non-cash loss on extinguishment of debt11213
Stock compensation expense112218
Deferred income taxes5(1)6
Gain on sale of assets(95)(236)(33)
Loss on foreign currency transactions and derivatives51(3)
Gain on property insurance settlement(2)(1)—
Equity in (earnings) losses of affiliates(70)(26)17
Change in due from managers17(17)21
Distributions from equity investments17——
Change in restricted cash for operating activities—25—
Changes in other assets20(34)39
Changes in other liabilities(56)(57)(19)
Cash provided by operating activities1,1711,1501,019
INVESTING ACTIVITIES
Proceeds from sales of assets, net277497643
Return of investment in affiliates10642—
Acquisitions(438)(138)(166)
Advances to and investments in affiliates(4)(65)(74)
Capital expenditures:
Renewals and replacements(388)(324)(303)
Redevelopment and acquisition-related investments(275)(112)(133)
New development—(13)(19)
Change in furniture, fixtures and equipment ("FF&E") replacement fund(9)18(23)
Property insurance proceeds112—
Change in restricted cash for investing activities(16)——
Cash used in investing activities(736)(93)(75)
FINANCING ACTIVITIES
Financing costs(11)(4)(4)
Issuances of debt8984550
Draws on credit facility8454393
Term loan issuance500——
Repayment of credit facility(725)(225)(207)
Repurchase/redemption of senior notes(1,001)(150)(801)
Mortgage debt and other prepayments and scheduled maturities(35)(384)(411)
Common stock repurchase(675)——
Issuance of common stock24303
Dividends on common stock(646)(469)(313)
Other financing activities(17)(6)(3)
Cash used in financing activities(865)(1,226)(493)
Effects of exchange rate changes on cash held(15)(8)(7)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS(445)(177)444
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD684861417
CASH AND CASH EQUIVALENTS, END OF PERIOD$239$684$861

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Years Ended December 31, 2015, 2014 and 2013

(in millions)

Supplemental schedule of noncash investing and financing activities:

During 2015, holders of $399 million of our 2.5% Exchangeable Senior Debentures due 2029 elected to convert their debentures into 32 million shares of Host Inc. common stock.

In March 2013, holders of approximately $174 million of the 3.25% Exchangeable Debentures elected to exchange their debentures for approximately 11.7 million shares of Host Inc. common stock.

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2015 and 2014

(in millions)

20152014
ASSETS
Property and equipment, net$10,661$10,575
Assets held for sale55—
Due from managers5670
Advances to and investments in affiliates345433
Furniture, fixtures and equipment replacement fund149129
Other264281
Restricted cash15—
Cash and cash equivalents239684
Total assets$11,784$12,172
LIABILITIES, LIMITED PARTNERSHIP INTERESTS OF THIRD PARTIES AND CAPITAL
Debt
Senior notes$2,376$2,858
Credit facility, including the term loans of $996 million and $499 million, respectively1,291697
Mortgage debt350402
Total debt4,0173,957
Accounts payable and accrued expenses243298
Other299324
Total liabilities4,5594,579
Limited partnership interests of third parties143225
Host Hotels & Resorts, L.P. capital:
General partner11
Limited partner7,1707,385
Accumulated other comprehensive loss(107)(50)
Total Host Hotels & Resorts, L.P. capital7,0647,336
Non-controlling interests—other consolidated partnerships1832
Total capital7,0827,368
Total liabilities, limited partnership interest of third parties and capital$11,784$12,172

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2015, 2014 and 2013

(in millions, except per common unit amounts)

201520142013
REVENUES
Rooms$3,465$3,452$3,317
Food and beverage1,5681,5461,503
Other354356346
Total revenues5,3875,3545,166
EXPENSES
Rooms902924894
Food and beverage1,1101,1091,095
Other departmental and support expenses1,2951,2641,249
Management fees226227222
Other property-level expenses396386376
Depreciation and amortization716701697
Corporate and other expenses9443121
Gain on insurance settlements(2)(10)—
Total operating costs and expenses4,7374,6444,654
OPERATING PROFIT650710512
Interest income444
Interest expense(234)(214)(304)
Gain on sale of assets9523633
Gain (loss) on foreign currency transactions and derivatives(5)(1)3
Equity in earnings (losses) of affiliates7026(17)
INCOME BEFORE INCOME TAXES580761231
Provision for income taxes(9)(14)(21)
INCOME FROM CONTINUING OPERATIONS571747210
Income from discontinued operations, net of tax——115
NET INCOME571747325
Less: Net income attributable to non-controlling interests(6)(6)(4)
NET INCOME ATTRIBUTABLE TO HOST HOTELS & RESORTS, L.P.$565$741$321
Basic earnings per common unit:
Continuing operations$.76$.99$.28
Discontinued operations——.15
Basic earnings per common unit$.76$.99$.43
Diluted earnings per common unit:
Continuing operations$.76$.99$.28
Discontinued operations——.15
Diluted earnings per common unit$.76$.99$.43

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Years Ended December 31, 2015, 2014 and 2013

(in millions)

201520142013
NET INCOME$571$747$325
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates(71)(60)(18)
Change in fair value of derivative instruments1119(3)
Amounts reclassified from other comprehensive (income) loss3——
OTHER COMPREHENSIVE LOSS, NET OF TAX(57)(41)(21)
COMPREHENSIVE INCOME514706304
Less: Comprehensive income attributable to non-controlling interests(4)(6)(4)
COMPREHENSIVE INCOME ATTRIBUTABLE TO HOST HOTELS & RESORTS, L.P.$510$700$300

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, L.P. AND SUBISIDARIES

CONSOLIDATED STATEMENTS OF CAPITAL

Years Ended December 31, 2015, 2014 and 2013

(in millions)

Common OP Units OutstandingGeneral PartnerLimited PartnerAccumulated Other Comprehensive Income (Loss)Non-controlling Interests of Consolidated PartnershipsLimited Partnership Interests of Third Parties
709.4Balance, December 31, 2012$1$6,812$12$34$158
—Net income—317—44
—Other changes in ownership—(38)—(3)38
—Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates——(18)——
—Change in fair value of derivative instruments——(3)——
28.1Common OP unit issuances—477———
1.1Units issued to Host Inc. for the comprehensive stock and employee stock purchase plans—8———
—Distributions on common OP units—(346)——(4)
0.3Redemptions of limited partner interests for common stock—6——(6)
—Contributions from non- controlling interests of consolidated partnerships———7—
—Distributions to non-controlling interests———(8)—
738.9Balance, December 31, 2013$1$7,236$(9)$34$190
—Net income—732—69
—Other changes in ownership—(39)—(1)38
—Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates——(60)——
—Change in fair value of derivative instruments——19——
0.2Common OP unit issuances—4———
0.5Units issued to Host Inc. for the comprehensive stock and employee stock purchase plans—13———
—Distributions on common OP units—(567)——(6)
0.3Redemptions of limited partner interests for common stock—6——(6)
—Contributions from non- controlling interests of consolidated partnerships———1—
—Distributions to non-controlling interests———(8)—
739.9Balance, December 31, 2014$1$7,385$(50)$32$225
—Net income—558—67
—Other changes in ownership—81—(10)(78)
—Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates——(71)(2)—
—Change in fair value of derivative instruments——11——
—Amounts reclassified from Other Comprehensive Income——3——
31.4Common OP unit issuances—401———
0.6Units issued to Host Inc. for the comprehensive stock and employee stock purchase plans—16———
—Distributions on common OP units—(599)——(8)
0.1Redemptions of limited partner interests for common stock—3——(3)
—Contributions from non- controlling interests of consolidated partnerships———2—
—Distributions to non-controlling interests———(10)—
(37.5)Repurchase of common OP units—(675)———
734.5Balance, December 31, 2015$1$7,170$(107)$18$143

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2015, 2014 and 2013

(in millions)

201520142013
OPERATING ACTIVITIES
Net income$571$747$325
Adjustments to reconcile to cash provided by operations:
Discontinued operations:
Gain on dispositions——(97)
Depreciation——10
Depreciation and amortization716701697
Amortization of finance costs, discounts and premiums, net212425
Non-cash loss on extinguishment of debt11213
Stock compensation expense112218
Deferred income taxes5(1)6
Gain on sale of assets(95)(236)(33)
(Gain) loss on foreign currency transactions and derivatives51(3)
Gain on property insurance settlement(2)(1)—
Equity in (earnings) losses of affiliates(70)(26)17
Change in due from managers17(17)21
Distributions from equity investments17——
Change in restricted cash for operating activities—25—
Changes in other assets20(34)39
Changes in other liabilities(56)(57)(19)
Cash provided by operating activities1,1711,1501,019
INVESTING ACTIVITIES
Proceeds from sales of assets, net277497643
Return of investment in affiliates10642—
Acquisitions(438)(138)(166)
Advances to and investments in affiliates(4)(65)(74)
Capital expenditures:
Renewals and replacements(388)(324)(303)
Redevelopment and acquisition-related investments(275)(112)(133)
New development—(13)(19)
Change in furniture, fixtures and equipment ("FF&E") replacement fund(9)18(23)
Property insurance proceeds112—
Change in restricted cash for investing activities(16)——
Cash used in investing activities(736)(93)(75)
FINANCING ACTIVITIES
Financing costs(11)(4)(4)
Issuances of debt8984550
Draws on credit facility8454393
Term loan issuance500——
Repayment of credit facility(725)(225)(207)
Repurchase/redemption of senior notes(1,001)(150)(801)
Mortgage debt and other prepayments and scheduled maturities(35)(384)(411)
Common stock repurchase(675)——
Issuance of common OP units24303
Distributions on common OP units(654)(475)(317)
Other financing activities(9)—1
Cash used in financing activities(865)(1,226)(493)
Effects of exchange rate changes on cash held(15)(8)(7)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS(445)(177)444
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD684861417
CASH AND CASH EQUIVALENTS, END OF PERIOD$239$684$861

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2015, 2014 and 2013

(in millions)

Supplemental schedule of noncash investing and financing activities:

During 2015, holders of $399 million of our 2.5% Exchangeable Senior Debentures due 2029 elected to convert their debentures into 32 million shares of Host Inc. common stock. In connection with the debentures exchanged for Host Inc. common stock, Host L.P. issued 31.3 million common OP units.

In March 2013, holders of approximately $174 million of the 3.25% Exchangeable Debentures elected to exchange their debentures for approximately 11.7 million shares of Host Inc. common stock. In connection with the debentures exchanged for Host Inc. common stock, Host L.P. issued 11.5 million common OP units.

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.Summary of Significant Accounting Policies

Description of Business

Host Hotels & Resorts, Inc. operates as a self-managed and self-administered real estate investment trust, or REIT, with its operations conducted solely through Host Hotels & Resorts, L.P. Host Hotels & Resorts, L.P., a Delaware limited partnership, operates through an umbrella partnership structure, with Host Hotels & Resorts, Inc., a Maryland corporation, as its sole general partner. In the notes to the financial statements, we use the terms “we” or “our” to refer to Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. together, unless the context indicates otherwise. We also use the term “Host Inc.” to refer specifically to Host Hotels & Resorts, Inc. and the term “Host L.P.” to refer specifically to Host Hotels & Resorts, L.P. in cases where it is important to distinguish between Host Inc. and Host L.P. Host Inc. holds approximately 99% of Host L.P.’s partnership interests, or OP units.

Consolidated Portfolio

As of December 31, 2015, the hotels in our consolidated portfolio are located in the following countries:

Hotels
United States94
Australia1
Brazil3
Canada2
Chile2
Mexico1
New Zealand4
Total107

European Joint Venture

We own a non-controlling interest in a joint venture in Europe (“Euro JV”) that owns hotels in two separate funds. We own a 32.1% interest in the first fund (“Euro JV Fund I”) (3 hotels) and a 33.4% interest in the second fund (“Euro JV Fund II”) (7 hotels).

As of December 31, 2015, the Euro JV hotels are located in the following countries:

Hotels
Belgium1
France3
Germany1
Spain2
Sweden1
The Netherlands1
United Kingdom1
Total10

Asia/Pacific Joint Venture

We own a 25% non-controlling interest in a joint venture in Asia (“Asia/Pacific JV”). The Asia/Pacific JV owns a 36% non-controlling interest in a joint venture in India that is investing in seven hotels, two hotels operating in Bangalore, one hotel operating in Chennai, two hotels operating in New Delhi and two hotels in Chennai that are under development.

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements include the consolidated accounts of Host Inc., Host L.P. and their subsidiaries and controlled affiliates, including joint ventures and partnerships. We consolidate subsidiaries when we have the ability to control the entity. For the majority of our hotel and real estate investments, we consider those control rights to be (i) approval or amendment of developments plans, (ii) financing decisions, (iii) approval or amendments of operating budgets, and (iv) investment strategy decisions. For those partnerships and joint ventures where we are the general partner, we review the rights of the limited

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partners to determine if those rights would overcome the presumption of control as the general partner. Limited partner rights which would overcome presumption of control by the general partner include the substantive ability to dissolve (liquidate) the limited partnership or otherwise remove the general partners without cause and substantive participating rights over activities considered most significant to the business of the partnership or joint venture, primarily voting rights.

We also evaluate our subsidiaries to determine if they are variable interest entities (“VIEs”). If a subsidiary is a VIE, it is subject to the consolidation framework specifically for VIEs. Typically, the entity that has the power to direct the activities that most significantly impact economic performance would consolidate the VIE. We consider an entity a VIE if equity investors own an interest therein that does not have the characteristics of a controlling financial interest or if such investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. We review our subsidiaries and affiliates at least annually to determine if (i) they should be considered VIEs, and (ii) whether we should change our consolidation determination based on changes in the characteristics of these entities.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

We consider all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents.

Restricted Cash

Restricted cash includes reserves for debt service, real estate taxes, insurance, and furniture, fixtures and equipment replacement, as well as cash collateral and excess cash flow deposits due to mortgage debt agreement restrictions and provisions, and a reserve required for potential legal damages. For purposes of the statements of cash flows, changes in restricted cash caused by changes in required legal reserves are shown as operating activities. Changes in restricted cash caused by using such funds for furniture, fixtures and equipment replacement are shown as investing activities. The remaining changes in restricted cash are the direct result of restrictions under our loan agreements and are reflected in cash flows from financing activities.

Property and Equipment

Generally, property and equipment is recorded at cost. For properties we develop, cost includes interest and real estate taxes incurred during construction. For property and equipment acquired in a business combination, we record the assets based on their fair value as of the acquisition date. Replacements and improvements and capital leases are capitalized, while repairs and maintenance are expensed as incurred.

We capitalize certain inventory (such as china, glass, silver, and linen) at the time of a hotel opening or acquisition, or when significant inventory is purchased (in conjunction with a major rooms renovation or when the number of rooms or meeting space at a hotel is expanded). These amounts are then amortized over the estimated useful life of three years. Subsequent replacement purchases are expensed when placed in service.

We maintain a furniture, fixtures and equipment replacement fund for renewal and replacement capital expenditures at certain hotels, which generally is funded with 5% of property revenues.

Impairment testing. We analyze our consolidated properties for impairment throughout the year when events or circumstances occur that indicate the carrying value may not be recoverable. We consider a property to be impaired when the sum of the future undiscounted cash flows over our remaining estimated holding period is less than the carrying value of the asset. We test for impairment in several situations, including when a property has a current or projected loss from operations, when it becomes more likely than not that a hotel will be sold before the end of its previously estimated useful life, or when other events, trends, contingencies or changes in circumstances indicate that a triggering event has occurred and the carrying value of an asset may not be recoverable. For impaired assets, we record an impairment expense equal to the excess of the carrying value of the asset over its fair value. To the extent that a property has a substantial remaining estimated useful life and management does not believe that it is more likely than not the property will be disposed of prior to the end of its useful life, it would be unusual for undiscounted cash flows to be

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insufficient to recover the property’s carrying value. In the absence of other factors, we assume that the estimated life is equal to the GAAP depreciable life because of the continuous property maintenance and improvement capital expenditures required under our management agreements. We adjust our assumptions with respect to the remaining useful life of the property if situations dictate otherwise, such as an expiring ground lease, or that it is more likely than not that the asset will be sold prior to its previously expected useful life. We also consider the effect of regular renewal and replacement capital expenditures on the estimated life of our properties, including critical infrastructure, which regularly is maintained and then replaced at the end of its useful life.

In the evaluation of the impairment of our assets, we make many assumptions and estimates, including:

·projected cash flows, both from operations and the eventual disposition;
·the expected useful life and holding period of the asset;
·the future required capital expenditures; and
·fair values, including consideration of capitalization rates, discount rates and comparable selling prices, as well as available third-party appraisals.

While we consider all of the above indicators as preliminary indicators to determine if the carrying value may not be recovered by undiscounted cash flows, we reviewed the actual year-to-date and the projected cash flows from operations in order to identify properties with actual or projected annual operating losses or minimal operating profit as of December 31, 2015. The projected cash flows consider items such as booking pace, occupancy, room rate and property-level operating costs. As a result of our review, we identified one property that required further consideration of property and market specific conditions or factors to determine if the property was impaired using an undiscounted cash flow analysis. Management considered a range of RevPAR and operating margins compared to prior years’ operating results in evaluating the probability-weighted projected cash flows from operations. To appropriately evaluate if the carrying value of the asset was recoverable, we projected cash flows at a stabilized growth rate of approximately 3% over the remaining estimated lives of the properties. This stabilized growth rate is lower than the projected growth rate for the urban upper upscale properties, which we believe is most representative of our portfolio, over the period from 2013 through 2023. Based on this testing, none of the properties previously identified required further analysis. Management believes its assumptions and estimates reflect current market conditions. No impairment was recorded in 2015. During 2014 and 2013, we recognized impairment expenses of $6 million and $1 million, respectively, on one property in each of 2014 and 2013, which impairment expenses are included in depreciation and amortization, based on changes in estimated holding periods.

Classification of Assets as “Held for Sale”. We will classify a hotel as held for sale when the sale thereof is probable, will be completed within one year and actions to complete the sale are unlikely to change or that the sale will not occur. This policy is consistent with our experience with real estate transactions under which the timing and final terms of a sale are frequently not known until purchase agreements are executed, the buyer has a significant deposit at risk and no financing contingencies exist which could prevent the transaction from being completed in a timely manner. We typically classify assets as held for sale when all of the following conditions are met:

·Host Inc.’s Board of Directors has approved the sale (to the extent that the dollar amount of the sale requires Board approval);
·a binding agreement to sell the property has been signed under which the buyer has committed a significant amount of nonrefundable cash; and
·no significant financing contingencies exist which could prevent the transaction from being completed in a timely manner.

If these criteria are met, we will cease recording depreciation and will record an impairment expense if the fair value less costs to sell is less than the carrying amount of the hotel. We will classify the assets and related liabilities as held for sale on the balance sheet. Gains on sales of properties are recognized at the time of sale or are deferred and recognized as income in subsequent periods as conditions requiring deferral are satisfied or expire without further cost to us.

Discontinued Operations. In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2014-08 Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360) - Reporting Discontinued Operations and Disclosure of Disposal of Components of an Entity (“ASU 2014-08 Reporting for Discontinued Operations”). Under this standard, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations only if the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. In addition, it requires an entity to present, for each comparative period, the assets and liabilities of a disposal group that

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includes a discontinued operation separately in the asset and liability sections, respectively, of the statement of financial position. As a result, the operations through the date of disposal and the gain or loss on sale of properties is included in continuing operations, unless the sale represents a strategic shift. We adopted this standard as of January 1, 2014. No prior year restatements are permitted for this change in policy.

Asset retirement obligations. We recognize the fair value of any liability for conditional asset retirement obligations, including environmental remediation liabilities, when incurred, which generally is upon acquisition, construction, or development and/or through the normal operation of the asset, if sufficient information exists with which to reasonably estimate the fair value of the obligation.

Depreciation and Amortization Expense. We depreciate our property and equipment using the straight-line method. Depreciation expense is based on the estimated useful life of our assets and amortization expense for leasehold improvements is based on the shorter of the lease term or the estimated useful life of the related assets. The lives of the assets are based on a number of assumptions, including cost and timing of capital expenditures to maintain and refurbish the assets, as well as specific market and economic conditions. While management believes its estimates are reasonable, a change in the estimated lives could affect depreciation expense and net income (loss) or the gain or loss on the sale of any of our hotels.

Intangible Assets and Liabilities

In conjunction with our acquisitions, we may identify intangible assets and liabilities. Identifiable intangible assets and liabilities typically include contracts, including ground and retail leases and management and franchise agreements, which are recorded at fair value. These contract values are based on the present value of the difference between contractual amounts to be paid pursuant to the contracts acquired and our estimate of the fair value of rates for corresponding contracts measured over the period equal to the remaining non-cancelable term of the contract. Intangible assets and liabilities are amortized using the straight-line method over the remaining non-cancelable term of the related agreements.

Non-Controlling Interests

Other Consolidated Partnerships. As of December 31, 2015, we consolidate six majority-owned partnerships that have third-party, non-controlling ownership interests. The third-party partnership interests are included in non-controlling interest-other consolidated partnerships on the consolidated balance sheets and totaled $18 million and $32 million as of December 31, 2015 and 2014, respectively. Two of the partnerships have finite lives that terminate between 2081 and 2095, and the associated non-controlling interests are mandatorily redeemable at the end of, but not prior to, the finite life. At December 31, 2015 and 2014, the fair values of the non-controlling interests in the partnerships with finite lives were approximately $91 million and $85 million, respectively.

Net income (loss) attributable to non-controlling interests of consolidated partnerships is included in our determination of net income (loss). Net income attributable to non-controlling interests of third parties is $6 million, $6 million and $4 million for 2015, 2014 and 2013, respectively.

Host Inc.’s treatment of the non-controlling interests of Host L.P. Host Inc. adjusts the non-controlling interests of Host L.P. each period so that the amount presented equals the greater of its carrying value based on its historical cost or its redemption value. The historical cost is based on the proportional relationship between the historical cost of equity held by our common stockholders relative to that of the unitholders of Host L.P. The redemption value is based on the amount of cash or Host Inc. stock, at our option, that would be paid to the non-controlling interests of Host L.P. if it were terminated. We have estimated that the redemption value is equivalent to the number of shares issuable upon conversion of the OP units currently owned by unrelated third parties (one OP unit may be exchanged for 1.021494 shares of Host Inc. common stock) valued at the market price of Host Inc. common stock at the balance sheet date. Non-controlling interests of Host L.P. are classified in the mezzanine section of the balance sheet as they do not meet the requirements for equity classification because the redemption feature requires the delivery of registered shares.

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The table below details the historical cost and redemption values for the non-controlling interests:

As of December 31,
20152014
OP units outstanding (millions)9.19.3
Market price per Host Inc. common share$15.34$23.77
Shares issuable upon conversion of one OP unit1.0214941.021494
Redemption value (millions)$143$225
Historical cost (millions)9094
Book value (millions) (1)143225
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(1)The book value recorded is equal to the greater of the redemption value or the historical cost.

Net income (loss) is allocated to the non-controlling interests of Host L.P. based on their weighted average ownership percentage during the period. Net income attributable to Host Inc. has been reduced by the amount attributable to non-controlling interests in Host L.P., which totaled $7 million, $9 million and $4 million for 2015, 2014 and 2013, respectively.

Investments in Affiliates

Other-than-Temporary Impairment of an Investment. We perform an analysis for our equity method investments for impairment based on the occurrence of triggering events that would indicate that the carrying amount of the investment exceeds its fair value on an other-than-temporary basis. Triggering events can include a decline in distributable cash flows from the investment, a change in the expected useful life or other significant events which would decrease the value of the investment. Our investments primarily consist of joint ventures which own hotel properties; therefore, generally we will have few observable inputs and will determine fair value based on a discounted cash flow analysis of the investment, as well as consideration of the impact of other elements (i.e. control premiums, etc.). We use certain inputs, such as available third-party appraisals and forecast net operating income for the hotel properties, to estimate the expected cash flows. If an equity method investment is impaired and that impairment is determined to be other than temporary, an expense is recorded for the difference between the fair value and the carrying amount of the investment. No other-than-temporary impairment was recorded in 2015, 2014, or 2013.

Distributions from Investments in Affiliates. We classify the distributions from our equity investments in the statements of cash flows based upon an evaluation of the specific facts and circumstances of each distribution. For example, distributions from cash generated by property operations are classified as cash flows from operating activities. However, distributions received as a result of property sales are classified as cash flows from investing activities.

Income Taxes

Host Inc. has elected to be treated as a REIT effective January 1, 1999, pursuant to the U.S. Internal Revenue Code of 1986, as amended. It is our current intention to continue to comply with the REIT qualification requirements and to maintain our qualification for taxation as a REIT. A corporation that elects REIT status and meets certain tax law requirements regarding the distribution of its taxable income to its stockholders as prescribed by applicable tax laws and complies with certain other requirements (relating primarily to the composition of its assets and the sources of its revenues) generally is not subject to federal and state income taxation on its operating income that is distributed to its stockholders. As a partnership for federal income tax purposes, Host L.P. is not subject to federal income tax. Host L.P. is, however, subject to state, local and foreign income and franchise tax in certain jurisdictions. Additionally, each of the Host L.P. taxable REIT subsidiaries is taxable as a regular C corporation, subject to federal, state and foreign income tax. Our consolidated income tax provision or benefit includes the income tax provision or benefit related to the operations of our taxable REIT subsidiaries, and state, local, and foreign income and franchise taxes incurred by Host L.P.

Deferred Tax Assets and Liabilities. Under the partnership agreement, Host L.P. generally is required to reimburse Host Inc. for any tax payments it is required to make. Accordingly, the tax information included herein represents disclosures regarding Host Inc. and its subsidiaries. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for net operating loss, capital loss, interest expense, and tax credit carryovers. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which such amounts are expected to be realized or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available

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evidence, including future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies.

GAAP prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. We must determine whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement in order to determine the amount of benefit to recognize in the financial statements. This accounting standard applies to all tax positions related to income taxes. We recognize accrued interest related to unrecognized tax benefits in interest expense and penalties in operating expenses.

Deferred Charges

Financing costs related to long-term debt are deferred and amortized over the remaining life of the debt using the effective interest method. These costs are presented as a direct deduction from their related liabilities on the balance sheets.

Foreign Currency Translation

As of December 31, 2015, our international operations consist of hotels located in Australia, Brazil, Canada, Chile, Mexico, and New Zealand, as well as investments in the Euro JV and the Asia/Pacific JV. The financial statements of these hotels and our investments therein are maintained in their functional currency, which generally is the local currency, and their operations are translated to U.S. dollars using the average exchange rates for the period. The assets and liabilities of the hotels and the investments therein are translated to U.S. dollars using the exchange rate in effect at the balance sheet date. The resulting translation adjustments are reflected in other comprehensive income (loss).

Foreign currency transactions are recorded in the functional currency for each entity using the exchange rates prevailing at the dates of the transactions. Assets and liabilities denominated in foreign currencies are remeasured at period end exchange rates. The resulting exchange differences are recorded in gain (loss) on foreign currency transactions and derivatives on the accompanying consolidated statements of operations, except when recorded in other comprehensive income (loss) as qualifying net investment hedges.

Derivative Instruments

We are subject to market exposures in several aspects of our business and may enter into derivative instruments in order to hedge the effect of these market exposures on our operations. Potential market exposures for which we may use derivative instruments to hedge include: (i) changes in the fair value of our international investments due to fluctuations in currency exchange rates, (ii) changes in the fair value of our fixed-rate debt due to changes in the underlying interest rates, and (iii) variability in interest payments due to changes in the underlying interest rate for our floating-rate debt. Derivative instruments are subject to fair value reporting at each reporting date and the increase or decrease in fair value is recorded in net income (loss) or other comprehensive income (loss), based on the applicable hedge accounting guidance. We estimate the fair value of these instruments through the use of third party valuations, which utilize the market standard methodology of netting the discounted future cash receipts and the discounted future expected cash payments. Prior to entering into the derivative instrument, we evaluate whether the transaction will qualify for hedge accounting and continue to evaluate hedge effectiveness throughout the life of the instrument. Derivative instruments that meet the requirements for hedge accounting are recorded on the balance sheet at fair value, with offsetting changes recorded to net income (loss) or other comprehensive income (loss), based on the applicable hedge accounting guidance. We incorporate credit valuation adjustments to reflect, as applicable, our own nonperformance risk or the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative instruments for the effect of nonperformance risk, we have considered the impact of netting any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and accumulated guarantees. The variable cash flow streams are based on an expectation of future interest and exchange rates derived from observed market interest and exchange rate curves. The values of these instruments will change over time as cash receipts and payments are made and as market conditions change.

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Accumulated Other Comprehensive Income (Loss)

The components of total accumulated other comprehensive income (loss) in the balance sheets are as follows (in millions):

As of December 31,
20152014
Gain on foreign currency forward contracts$35$19
Loss on interest rate swap cash flow hedges(7)(2)
Foreign currency translation(137)(67)
Other comprehensive loss attributable to non-controlling interests2—
Total accumulated other comprehensive loss$(107)$(50)

During 2015, we reclassified a net loss due to foreign currency translation of $3 million that had been recognized previously in other comprehensive income (loss) due to the sale of the Delta Meadowvale Hotel & Conference Centre and three hotels in New Zealand. The loss was recognized as part of the gain on sale of assets on our consolidated statement of operations. There were no material amounts reclassified out of accumulated other comprehensive income (loss) to net income for the year ended December 31, 2014.

Revenues

Our results of operations include revenues and expenses of our hotels. Revenues are recognized when the services are provided. Additionally, we collect sales, use, occupancy and similar taxes at our hotels, which we present on a net basis (excluded from revenues) on our statements of operations.

Fair Value Measurement

In evaluating the fair value of both financial and non-financial assets and liabilities, GAAP outlines a valuation framework and creates a fair value hierarchy that distinguishes between market assumptions based on market data (“observable inputs”) and a reporting entity’s own assumptions about market data (“unobservable inputs”). Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability at the measurement date in an orderly transaction (an “exit price”). Assets and liabilities are measured using inputs from three levels of the fair value hierarchy. The three levels are as follows:

Level 1 — Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date. An active market is defined as a market in which transactions occur with sufficient frequency and volume to provide pricing on an ongoing basis.

Level 2 — Inputs include quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data correlation or other means.

Level 3 — Unobservable inputs reflect our assumptions about the pricing of an asset or liability when observable inputs are not available.

Host Inc. Earnings Per Common Share

Basic earnings per common share is computed by dividing net income attributable to common stockholders by the weighted average number of shares of Host Inc. common stock outstanding. Diluted earnings per common share is computed by dividing net income attributable to common stockholders, as adjusted for potentially dilutive securities, by the weighted average number of shares of Host Inc. common stock outstanding plus other potentially dilutive securities. Dilutive securities may include shares granted under comprehensive stock plans, other non-controlling interests that have the option to convert their limited partnership interests to common OP units and convertible debt securities. No effect is shown for any securities that are anti-dilutive.

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The calculation of basic and diluted earnings per common share is shown below (in millions, except per share amounts):

Year ended December 31,
201520142013
Net income$571$747$325
Less: Net income attributable to non-controlling interests(13)(15)(8)
Net income attributable to Host Inc.558732317
Assuming conversion of exchangeable senior debentures—27—
Diluted income attributable to Host Inc.$558$759$317
Basic weighted average shares outstanding752.4755.4744.4
Assuming weighted average shares for conversion of exchangeable senior debentures—30.32.4
Assuming distribution of common shares granted under the comprehensive stock plans, less shares assumed purchased at market0.51.11.1
Diluted weighted average shares outstanding (1)752.9786.8747.9
Basic earnings per common share$.74$.97$.43
Diluted earnings per common share$.74$.96$.42
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(1)There were approximately 25 million and 30 million potentially dilutive shares as of December 31, 2015 and 2013, respectively, related to our exchangeable senior debentures, which shares were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the period.

Host L.P. Earnings Per Common Unit

Basic earnings per common unit is computed by dividing net income attributable to common unitholders by the weighted average number of common units outstanding. Diluted earnings per common unit is computed by dividing net income attributable to common unitholders, as adjusted for potentially dilutive securities, by the weighted average number of common units outstanding plus other potentially dilutive securities. Dilutive securities may include units distributed to Host Inc. to support Host Inc. common shares granted under comprehensive stock plans, other non-controlling interests that have the option to convert their limited partnership interests to common OP units and convertible debt securities. No effect is shown for any securities that are anti-dilutive.

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The calculation of basic and diluted earnings per common unit is shown below (in millions, except per unit amounts):

Year ended December 31,
201520142013
Net income$571$747$325
Less: Net income attributable to non-controlling interests(6)(6)(4)
Net income attributable to Host L.P.565741321
Assuming conversion of exchangeable senior debentures—271
Diluted income attributable to Host L.P.$565$768$322
Basic weighted average units outstanding745.7748.9738.4
Assuming weighted average units for conversion of exchangeable senior debentures—29.72.4
Assuming distribution of common units granted under the comprehensive stock plans, less units assumed purchased at market0.51.01.1
Diluted weighted average units outstanding (1)746.2779.6741.9
Basic earnings per common unit$.76$.99$.43
Diluted earnings per common unit$.76$.99$.43
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(1)There were approximately 25 million and 29 million potentially dilutive units as of December 31, 2015 and 2013, respectively, related to our exchangeable senior debentures, which units were not included in the computation of diluted earnings per unit because to do so would have been anti-dilutive for the period.

Share-Based Payments

At December 31, 2015, Host Inc. maintained two stock-based employee compensation plans. Upon the issuance of Host’s common stock under the compensation plans, Host L.P. will issue to Host Inc. common OP units of an equivalent value. These liabilities are included in the consolidated financial statements for Host Inc. and Host L.P.

We recognize costs resulting from Host Inc.’s share-based payment transactions over their vesting periods. We classify share-based payment awards granted in exchange for employee services either as equity awards or liability awards based upon cash settlement options. Equity classified awards are measured based on the fair value on the date of grant. Liability classified awards are remeasured to fair value each reporting period. Awards are classified as liability awards to the extent that settlement features allow the recipient to determine percentage of the restricted stock awards withheld to meet the recipients’ tax withholding requirements. As these awards vest over a one-year period ending December 31, the value is calculated as the estimated number of shares earned during the year times the stock price at year end, less estimated forfeitures. For performance-based awards, compensation cost will be recognized when the achievement of the performance condition is considered probable. If a performance condition has more than one outcome that is probable, recognition of compensation cost will be based on the condition that is the most likely outcome. No compensation cost is recognized for awards for which employees do not render the requisite services.

Concentrations of Credit Risk

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents. We are exposed to credit risk with respect to cash held at various financial institutions, access to our credit facility, and amounts due or payable under our derivative contracts. At December 31, 2015 and December 31, 2014, our exposure to risk related to our derivative instruments totaled $17 million and $13 million, respectively, and the counterparties to such instruments are investment grade financial institutions. Our credit risk exposure with regard to our cash and the $702 million available capacity under the revolver portion of our credit facility is spread among a diversified group of investment grade financial institutions.

Business Combinations

We recognize identifiable assets acquired, liabilities assumed, and non-controlling interests in a business combination at their fair values at the acquisition date based on the exit price (i.e. the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date). We evaluate several factors, including market data for similar assets, expected cash flows discounted at risk adjusted rates and replacement cost for the assets to determine an

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

appropriate exit cost when evaluating the fair value of our assets. Property and equipment are recorded at fair value and such fair value is allocated to buildings, improvements, furniture, fixtures and equipment using appraisals and valuations performed by management and independent third parties. Acquisition-related costs, such as due diligence, legal and accounting fees, are not capitalized or applied in determining the fair value of the acquired assets.

Other items that we evaluate in a business combination include identifiable intangible assets, capital lease assets and obligations and goodwill. Identifiable intangible assets typically consist of assumed contracts, including ground and retail leases and management and franchise agreements, which are recorded at fair value. Capital lease obligations that are assumed as part of the acquisition of a leasehold interest are measured at fair value and are included as debt on the accompanying balance sheet and we record the corresponding right-to-use assets. Classification of a lease does not change if it is part of a business combination. In making estimates of fair values for purposes of allocating purchase price, we may utilize a number of sources that arise in connection with the acquisition or financing of a property and other market data, including third-party appraisals and valuations. In certain situations, a deferred tax liability is recognized due to the difference between the fair value and the tax basis of the acquired assets at the acquisition date. Any consideration paid in excess of the net fair value of the identifiable assets and liabilities acquired would be recorded to goodwill. In very limited circumstances, we may record a bargain purchase gain if the consideration paid is less than the net fair value of the assets and liabilities acquired.

Reclassifications

Certain prior year financial statement amounts have been reclassified to conform with the current year presentation.

New Accounting Standards

In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The new standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The standard is effective for annual reporting periods beginning after December 15, 2015. We early adopted ASU 2015-03 for the year ended December 31, 2015 and reclassified deferred financing costs, net, from total assets to net of debt in the liabilities section of our balance sheet. Adoption of this standard was applied retrospectively for all periods presented and affects only the presentation of our balance sheets.

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis. The ASU amends the consolidation guidance for variable interest entities (VIEs) and general partners' investments in limited partnerships and modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities. The ASU is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted.

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which affects virtually all aspects of an entity’s revenue recognition. The new standard sets forth five prescribed steps to determine the timing and amount of revenue to be recognized to appropriately depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effectiveness of ASU No. 2014-09 to reporting periods beginning after December 15, 2017 and permitted early application for annual reporting periods beginning after December 15, 2016. We have not yet completed our assessment of the effect of the new standard on our financial statements, including possible transition alternatives.

2.Property and Equipment

Property and equipment consists of the following (in millions):

HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31,
20152014
Land and land improvements$2,044$1,990
Buildings and leasehold improvements13,64613,336
Furniture and equipment2,3192,217
Construction in progress290209
18,29917,752
Less accumulated depreciation and amortization(7,638)(7,177)
$10,661$10,575

The aggregate cost of real estate for federal income tax purposes is approximately $10.6 billion at December 31, 2015.

3.Investments in Affiliates

We own investments in joint ventures that are accounted for under the equity method of accounting. The debt of the Euro JV and Asia/Pacific JV is non-recourse to, and not guaranteed by, us. As of December 31, 2015, 50% of the debt of the Hyatt Place JV and 100% of the construction loan for the Maui JV is jointly and/or severally guaranteed by the partners of the joint ventures. Investments in affiliates consist of the following (in millions):

As of December 31, 2015
OwnershipOurOur Portion
InterestsInvestmentof DebtTotal DebtAssets
Euro JV32.1 – 33.4%$251$262$797Ten hotels in Europe
Asia/Pacific JV25%25——A 36% interest in five operating hotels and two hotels under development in India
Maui JV67%724568131-unit vacation ownership project in Maui, Hawaii
Hyatt Place JV50%31531One hotel in Nashville, Tennessee
Philadelphia Marriott Downtown11%(6)25224One hotel in Philadelphia, PA
Total$345$347$1,120
As of December 31, 2014
OwnershipOurOur Portion
InterestsInvestmentof DebtTotal DebtAssets
Euro JV32.1 - 33.4%$348$388$1,186Nineteen hotels in Europe
Asia/Pacific JV25%22937One hotel in Australia and a 36% interest in three operating hotels and four hotels under development in India
Maui JV67%616496131-unit vacation ownership project in Maui, Hawaii
Hyatt Place JV50%71631One hotel in Nashville, Tennessee
Philadelphia Marriott Downtown11%(5)25227One hotel in Philadelphia, PA
Total$433$502$1,577

HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

European Joint Venture

We own general and limited partner interests in the Euro JV that consists of two separate funds, with the other partners thereof including APG Strategic Real Estate Pool NV, an affiliate of a Dutch Pension Fund, and Jasmine Hotels Pte Ltd, an affiliate of the real estate investment company of the Government of Singapore Investment Corporation Pte Ltd (“GIC RE”). We own a combined 32.1% interest of Euro JV Fund I and a combined 33.4% interest of Euro JV Fund II. We do not consolidate the Euro JV due to the structure and substantive participating rights of the non-Host limited partners, including approval over financing, acquisitions and dispositions, and annual operating and capital expenditures budgets. The joint venture agreement expires in 2021, subject to two one-year extensions. As of December 31, 2015, the total assets of the Euro JV are approximately €1.6 billion. As asset manager of the Euro JV funds, we earn asset management fees based on the amount of equity commitments and equity invested, which in 2015, 2014 and 2013 were approximately $11 million, $16 million and $15 million, respectively.

As of December 31, 2015, the partners have funded approximately €463 million, or 67%, of the total equity commitment for Euro JV Fund I and €301 million, or 67%, of the total equity commitment for Euro JV Fund II. In July 2015, the Euro JV Fund II partners amended the Euro JV partnership agreement to extend the commitment period for Euro JV Fund II by one year to June 27, 2016. The remaining equity commitment for Euro JV Fund I is limited in its use to capital expenditures and financing needs.

For 2015, 2014 and 2013, our portion of the earnings (losses) of the Euro JV was $57 million, $21 million and $(12) million, respectively, and is included in equity in earnings (losses) of affiliates on our statements of operations. The earnings in 2015 include €39 million ($43 million) related to our portion of the gains recognized on the sale of nine properties, discussed below. The earnings in 2014 include €3 million ($4 million) related to our portion of the gains recognized on the sale of one property. The loss in 2013 includes €11 million ($15 million) related to our portion of a €33 million impairment expense related to the Sheraton Roma Hotel & Conference Center, which has been sold. In addition to the US GAAP impairment analysis performed for each of the properties at the partnership level, we also reviewed our investment in the Euro JV for other-than-temporary impairment and determined that the investment was not impaired in either 2015 or 2014.

During 2015, the Euro JV sold nine properties for €526 million and repaid €229 million of mortgage loans secured by the properties. During 2014, the Euro JV sold one property for £33 million and repaid the £21 million mortgage loan secured by the property. Net proceeds from the hotel sales were distributed to the partners. During 2015, the Euro JV distributed €328.5 million to its partners, of which Host’s share was €107 million ($115 million). Ninety-two percent of the 2015 distributions were funded by proceeds from the hotel dispositions, while the remainder was funded by cash from operations. During 2014, the Euro JV distributed €37 million to its partners, of which Host’s share was €12 million ($17 million), which distributions were funded with net proceeds from the hotel disposition.

In 2014, the Euro JV acquired a 90% ownership interest in the 394-room Grand Hotel Esplanade in Berlin (renamed the Sheraton Berlin Grand Hotel Esplanade). The hotel was acquired based on an aggregate gross value of €81 million, and the partnership assumed €48 million of mortgage and other long-term debt. The net assets acquired were funded by partner contributions.

The Euro JV has €734 million of mortgage debt, all of which is non-recourse to us. A default of the Euro JV mortgage debt does not trigger a default under any of our debt. In addition to the repayment of mortgage debt in conjunction with hotel dispositions, described above, the Euro JV refinanced €174 million of mortgage debt in 2015.

We have entered into four foreign currency forward sale contracts in order to hedge the foreign currency exposure resulting from the eventual repatriation of our net investment in the Euro JV. The forward purchases will occur between January 2016 and September 2017. We have hedged €177 million (approximately $208 million) of our investment through these contracts and designated draws under our credit facility in Euros. See Note 12 – “Fair Value Measurement” for further information.

Asia/Pacific Joint Venture

We own a 25% general and limited partner interest in the Asia/Pacific JV, the other partner of which is RECO Hotels JV Private Limited, an affiliate of GIC RE. The Asia/Pacific JV may be terminated by the partners at any time. Due to the ownership structure and the substantive participating rights of the non-Host limited partner, including approval over financing, acquisitions and dispositions, and annual operating and capital expenditures budgets, the Asia/Pacific JV is not consolidated in our financial statements. The commitment period for the equity contributions to the joint venture expired in March of 2012. As a result, unanimous approval of the joint venture partners is necessary to fund additional acquisitions. Certain funding commitments remain, however, related to existing investments.

HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2015, the Asia/Pacific JV partners have invested approximately $96 million (of which our share was $24 million) in a joint venture in India with Accor S.A. and InterGlobe Enterprises Limited, in which the Asia/Pacific JV holds a 36% interest. On November 3, 2015, the Pullman & Novotel New Delhi Aerocity opened with 99 and 207 rooms, respectively. As a result, this joint venture owns two hotels in Bangalore, one in Chennai, two in New Delhi and two additional properties in various stages of development in Chennai. The five hotels that are operating and the two hotels under development are or will be managed by AccorHotels under the Pullman, ibis and Novotel brands.

On October 14, 2015, the Asia/Pacific JV sold the Four Points by Sheraton Perth for A$91.5 million and repaid A$43 million of mortgage debt. The Asia/Pacific JV recorded a gain on sale of approximately A$11 million ($8 million).

Maui Joint Venture

We have a 67% non-controlling interest in a joint venture to develop, sell and operate a 131-unit vacation ownership project in Maui, Hawaii adjacent to our Hyatt Regency Maui Resort & Spa (the “Maui JV”). The project opened in December 2014 with total development costs of approximately $195 million, which was partially funded with a $110 million construction loan, which is jointly and severally guaranteed by us and Hyatt Hotels Corporation, and with member contributions. As of December 31, 2015, $44 million was outstanding on the construction loan. We have contributed approximately $87 million to the Maui JV, which includes the contribution of land valued at $36 million. We recognized earnings of $9 million and $3 million in 2015 and 2014, respectively, which includes our portion of the net income of the partnership as well as a portion of the deferred gain on the contribution of the land. The book value of our investment in the Maui JV is $72 million.

Combined Financial Information of Unconsolidated Investees

Combined summarized balance sheet information for our affiliates is as follows (in millions):

As of December 31,
20152014
Property and equipment, net$1,650$2,369
Timeshare inventory157178
Other assets642424
Total assets$2,449$2,971
Debt$1,120$1,577
Other liabilities301163
Equity1,0281,231
Total liabilities and equity$2,449$2,971

Combined summarized operating results for our affiliates is as follows (in millions):

Year ended December 31,
201520142013
Total revenues$728$776$617
Operating expenses
Expenses(545)(568)(489)
Depreciation and amortization(75)(91)(131)
Operating profit (loss)108117(3)
Interest income3——
Interest expense(72)(79)(59)
Gain on disposition141122
Net income (loss)$180$50$(60)

HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.Debt

Debt consists of the following (in millions):

As of December 31,
20152014
Series V senior notes, with a rate of 6% due November 2020$—$495
Series X senior notes, with a rate of 5⅞% due June 2019—493
Series Z senior notes, with a rate of 6% due October 2021297296
Series B senior notes, with a rate of 5¼% due March 2022347346
Series C senior notes, with a rate of 4¾% due March 2023445445
Series D senior notes, with a rate of 3¾% due October 2023397397
Series E senior notes, with a rate of 4% due June 2025495—
Series F senior notes, with a rate of 4½% due February 2026395—
2009 Exchangeable Senior Debentures, with a rate of 2½% due October 2029—386
Total senior notes2,3762,858
Credit facility revolver295198
2014 Credit facility term loan due June 2017499499
2015 Credit facility term loan due September 2020497—
Mortgage debt (non-recourse), with an average interest rate of 4.7% and 5.0% at December 31, 2015 and 2014, respectively, maturing through January 2024350402
Total debt$4,017$3,957

In connection with the adoption of ASU 2015-03, deferred financing costs of $29 million and $35 million as of December 31, 2015 and 2014, respectively, now are classified within the debt on our consolidated balance sheets. The total deferred financing costs of $35 million at December 31, 2014 had previously been classified as an asset on our consolidated balance sheets.

Senior Notes

General. Under the terms of our senior notes indenture, our senior notes are equal in right of payment with all of our unsubordinated indebtedness and senior to all of our subordinated obligations. The face amount of our senior notes as of December 31, 2015 and 2014 was $2.4 billion and $2.9 billion, respectively. The senior notes balance as of December 31, 2015 and 2014 includes discounts of approximately $2 million and $16 million, respectively. We pay interest on each series of our senior notes semi-annually in arrears at the respective annual rates indicated in the table above.

Under the terms of the senior notes indenture, our ability to incur indebtedness and pay dividends is subject to restrictions and the satisfaction of various conditions. As of December 31, 2015, we are in compliance with all of these covenants.

We completed the following senior notes transactions in 2015 and 2014:

●On May 15, 2015, we issued $500 million 4% Series E Senior Notes due June 2025 for proceeds of approximately $495 million, net of discounts, underwriting fees and expenses. Interest is payable semi-annually on June 15 and December 15, commencing June 15, 2015. Net proceeds, along with cash on hand, were used on June 15, 2015 to redeem $500 million of 5 7/8% Series X Senior Notes due 2019 at an aggregate redemption price of $515 million.
●On October 14, 2015, we issued $400 million of 4.5% Series F Senior Notes due February 2026 for proceeds of approximately $395 million, net of discounts, underwriting fees and expenses. Interest is payable semi-annually on February 1 and August 1, commencing February 1, 2016. Net proceeds, along with cash on hand and an additional $100 million draw on the credit facility, were used to redeem $500 million of 6% Series V Senior Notes due 2020 for $515 million in November 2015.
●In February 2014, we redeemed the remaining $150 million 6¾% Series Q senior notes due 2016 for an aggregate price of $152 million.

Exchangeable Debentures. In 2009, Host L.P. issued $400 million of 2½% exchangeable senior debentures (the “Debentures”). In October 2015, Host L.P. gave notice that it would redeem all of its currently outstanding Debentures at a cash

HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

redemption price of 100% of the principal amount, plus accrued interest. At the time, the Debentures were exchangeable and the exchange price was equivalent to a Host Inc. share price of $12.45. Based on Host Inc.’s then current stock price, the exchange value of the Debentures exceeded the cash redemption price and holders of all but $1 million of the Debentures elected to exchange their Debentures for shares of Host Inc. common stock at the exchange value rather than receive the redemption price at par. As a result, we issued 32 million shares of Host Inc. common stock upon exchange (including $8.7 million of Debentures that holders had elected to exchange in July 2015) and redeemed approximately $1 million of Debentures for cash.

Interest expense recorded for our exchangeable senior debentures (including interest expense for debentures redeemed in 2015, 2014 and 2013) consists of the following (in millions):

Year ended December 31,
201520142013
Contractual interest expense (cash)$8$10$10
Non-cash interest expense due to discount amortization131615
Total interest expense$21$26$25

Authorization for Repurchase of Senior Notes and Exchangeable Senior Debentures. In February 2016, Host Inc.’s Board of Directors authorized repurchases of up to $500 million of senior notes and mortgage debt (other than in accordance with their terms).

Credit Facility. On June 27, 2014, we entered into a new senior revolving credit facility with Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., as syndication agent, and certain other agents and lenders. The credit facility allows for revolving borrowings in an aggregate principal amount of up to $1 billion, including a foreign currency subfacility for Canadian dollars, Australian dollars, New Zealand dollars, Japanese yen, Euros, British pound sterling and, if available to the lenders, Mexican pesos, of up to the foreign currency equivalent of $500 million, subject to a lower amount in the case of New Zealand dollar and Mexican peso borrowings. The credit facility also provides a subfacility of up to $100 million for swingline borrowings in U.S. dollars, Canadian dollars, Euros and British pound sterling and a subfacility of up to $100 million for issuances of letters of credit. Host L.P. also has the option to increase the aggregate principal amount of the credit facility by up to $500 million, subject to obtaining additional loan commitments and satisfaction of certain conditions. The credit facility has an initial scheduled maturity of June 2018, with two six-month renewal options. The credit facility contained a term loan facility of $500 million, which replaced and refinanced the term loan under our prior facility of like amount. The term loan facility has an initial scheduled maturity of June 2017, with two one-year renewal options, resulting in a maturity for the entire credit facility of June 2019, if all renewal options are exercised, subject to certain conditions, including the payment of an extension fee and the accuracy of representations and warranties.

We pay interest on revolver borrowings under the credit facility at floating rates equal to LIBOR plus a margin ranging from 87.5 to 155 basis points (depending on Host L.P.’s unsecured long-term debt rating). We also pay a facility fee ranging from 12.5 to 30 basis points, depending on our rating and regardless of usage. Based on Host L.P.’s unsecured long-term debt rating as of December 31, 2015, we are able to borrow at a rate of LIBOR plus 100 basis points and pay a facility fee of 20 basis points.

On September 10, 2015, we closed on a $500 million term loan (“2015 Term Loan”) by exercising the accordion feature of our existing credit facility. The loan has a five-year maturity and its interest rate spread depends on our unsecured debt rating. At the time it closed, based on our unsecured debt rating, the loan has a floating interest rate of LIBOR + 110 bps (or approximately 1.3% all-in interest rate). This increases our credit facility to $2 billion, consisting of the $1 billion revolver and two $500 million term loans. On that same day, we drew $300 million on the 2015 Term Loan and drew the remaining $200 million on December 29, 2015. The proceeds were used to repay outstanding amounts on the revolver.

Net draws under the credit facility were $120 million in 2015, while in 2014 we repaid $221 million, net. As of December 31, 2015, we have $702 million available capacity under the revolver portion of our credit facility.

Financial Covenants. The credit facility contains covenants concerning allowable leverage, fixed charge coverage and unsecured interest coverage (as defined in our credit facility). Currently, we are permitted to borrow and maintain amounts outstanding under the credit facility so long as our leverage ratio is not in excess of 7.25x, our unsecured coverage ratio is not less than 1.75x and our fixed charge coverage ratio is not less than 1.25x. The financial covenants for the credit facility do not apply when there are no borrowings thereunder. Therefore, so long as there are no amounts outstanding, we would not be in default if we do not satisfy the financial covenants and we do not lose the potential to draw under the credit facility in the future if we were to regain compliance with the financial covenants. These calculations are performed based on pro forma results for the prior four fiscal quarters, giving effect to transactions such as acquisitions, dispositions and financings as if they had occurred at the beginning of the period. Under the terms of the credit facility, interest expense excludes items such as gains and losses on the extinguishment of debt, deferred financing

HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

charges related to the senior notes or the credit facility, amortization of debt premiums or discounts that were recorded at issuance of a loan in order to establish the debt at fair value and non-cash interest expense due to the implementation in 2009 of accounting standards related to our exchangeable debentures, all of which are included in interest expense on our consolidated statement of operations. Additionally, total debt used in the calculation of our leverage ratio is based on a “net debt” concept, under which cash and cash equivalents in excess of $100 million are deducted from our total debt balance. As of December 31, 2015, we are in compliance with the financial covenants under our credit facility.

Collateral and Guarantees. The credit facility initially does not include any subsidiary guarantees or pledges of equity interests in our subsidiaries, and the guarantees and pledges are required only in the event that Host L.P.’s leverage ratio exceeds 6.0x for two consecutive fiscal quarters at a time that Host L.P. does not have an investment grade long-term unsecured debt rating. In the event that such guarantee and pledge requirement is triggered, the guarantees and pledges ratably would benefit the credit facility, as well as the notes outstanding under Host L.P.’s senior notes indenture, interest rate and currency hedges and certain other hedging and bank product arrangements with lenders that are parties to the credit facility. Even when triggered, the guarantees and pledges only would be required by certain U.S. and Canadian subsidiaries of Host L.P. and a substantial portion of our subsidiaries would provide neither guarantees nor pledges of equity interests. As of December 31, 2015, our leverage ratio was 2.8x.

Other Covenants and Events of Default. The credit facility contains restrictive covenants on customary matters. Certain covenants become less restrictive at any time that our leverage ratio falls below 6.0x. In particular, at any time that our leverage ratio is below 6.0x, we will not be subject to limitations on capital expenditures, and the limitations on acquisitions, investments and dividends contained in the credit facility will be superseded by the generally less restrictive corresponding covenants in our senior notes indenture. Additionally, the credit facility’s restrictions on the incurrence of debt and the payment of dividends generally are consistent with our senior notes indenture for our Series D senior notes. These provisions, under certain circumstances, limit debt incurrence to debt incurred under the credit facility or in connection with a refinancing, and limit dividend payments to those necessary to maintain Host Inc.’s tax status as a REIT. Our senior notes and credit facility have cross default provisions that would trigger a default under those agreements if we were to have a payment default or an acceleration prior to maturity of other debt of Host L.P. or its subsidiaries. The amount of other debt in default needs to exceed certain thresholds in order to trigger a cross default and the thresholds are greater for secured debt than for unsecured debt. The credit facility also includes usual and customary events of default for facilities of this nature, and provides that, upon the occurrence and continuance of an event of default, payment of all amounts owed under the credit facility may be accelerated, and the lenders’ commitments may be terminated. In addition, upon the occurrence of certain insolvency or bankruptcy related events of default, all amounts owed under the credit facility will become due and payable and the lenders’ commitments will terminate.

Mortgage Debt

All of our mortgage debt is recourse solely to specific assets, except for environmental liabilities, fraud, misapplication of funds and other customary recourse provisions. As of December 31, 2015, we have mortgage debt secured by seven assets, with an average interest rate of 4.7%, which mortgage debt matures between 2016 and 2024. Interest is payable either monthly or quarterly. As of December 31, 2015, we are in compliance with the covenants under all of our mortgage debt obligations.

We have made the following mortgage debt repayments since January 2014:

Maturity
Transaction DatePropertyRateDateAmount
Repayments
November 2015Novotel Queenstown Lakeside6.65%2/18/2016$(20)
October 2015Novotel Auckland Ellerslie and ibis Auckland Ellerslie6.40%2/18/2016(15)
February 2014The Ritz-Carlton, Naples and Newport Beach Marriott Hotel3.25%3/1/2014(300)

HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Aggregate Debt Maturities

Aggregate debt maturities are as follows (in millions):

As of December 31, 2015
2016$163
2017500
2018334
2019—
2020500
Thereafter2,550
4,047
Deferred financing costs(29)
Unamortized (discounts) premiums, net(2)
Capital lease obligations1
$4,017

Other

On October 30, 2014, we redeemed the $12 million 7.125% Dulles Airport Industrial Development Revenue Bonds. On June 25, 2014, we redeemed the $40 million 7.75% Philadelphia Airport Industrial Development Revenue Bonds. Additionally, on June 15, 2014, we redeemed the $32 million 7% Newark Airport Industrial Development Refunding Revenue Bonds.

Interest

The following items are included in interest expense (in millions):

Year ended December 31,
2015(1)2014(1)2013(1)
Interest expense$234$214$304
Amortization of debt premiums/discounts, net (2)(13)(16)(15)
Amortization of deferred financing costs(8)(8)(10)
Non-cash losses on debt extinguishments(11)(2)(13)
Change in accrued interest12116
Interest paid (3)$214$189$282
___________
(1)Interest expense and interest paid for 2015, 2014 and 2013 include cash prepayment premiums of approximately $30 million, $2 million and $23 million, respectively.
(2)Primarily represents the amortization of the debt discount on our Debentures, which is considered non-cash interest expense.
(3)Does not include capitalized interest of $5 million, $7 million and $6 million during 2015, 2014 and 2013, respectively.

Our debt repayments resulted in debt extinguishment costs included in interest expense for 2015, 2014 and 2013 of $41 million, $4 million and $36 million, respectively.

5.Equity of Host Inc. and Capital of Host L.P.

Equity of Host Inc.

Host Inc. has authorized 1,050 million shares of common stock, with a par value of $0.01 per share, of which 750.3 million and 755.8 million were outstanding as of December 31, 2015 and 2014, respectively. Fifty million shares of no par value preferred stock are authorized; none of such preferred shares were outstanding as of December 31, 2015 and 2014.

HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capital of Host L.P.

As of December 31, 2015, Host Inc. is the owner of approximately 99% of Host L.P.’s common OP units. The remaining 1% of Host L.P.’s common OP units are held by various unaffiliated limited partners. Each common OP unit may be redeemed for cash or, at the election of Host Inc., Host Inc. common stock, based on the conversion ratio of 1.021494 shares of Host Inc. common stock for each OP unit. In connection with the issuance of shares by Host Inc., Host L.P. will issue OP units based on the same conversion ratio. As of December 31, 2015 and 2014, Host L.P. had 743.7 million and 749.1 million OP units outstanding, respectively, of which Host Inc. held 734.5 million and 739.9 million, respectively.

Issuances of Common Stock and Common OP Units

During 2015, holders of $399 million Debentures elected to exchange their debentures for shares of Host Inc. common stock, totaling approximately 32 million shares.

On April 30, 2015, Host Inc.’s Board of Directors announced a program to repurchase up to $500 million of common stock, and again on October 29, 2015, to repurchase up to an additional $500 million of common stock. During 2015, we repurchased 38.3 million shares at an average price of $17.64 for a total purchase price of approximately $675 million. At December 31, 2015, we have completed the first program and have $325 million of repurchase capacity remaining under the second program.

Dividends/Distributions

Host Inc. is required to distribute at least 90% of its annual taxable income, excluding net capital gains, to its stockholders in order to maintain its qualification as a REIT, including taxable income recognized for federal income tax purposes but with regard to which we do not receive cash. Funds used by Host Inc. to pay dividends on its common stock are provided by distributions from Host L.P. The amount of any future dividends will be determined by Host Inc.’s Board of Directors.

The dividends that were taxable to our stockholders in 2015 were considered 80% ordinary income (non-qualified dividend income), 8% qualified dividend income, 5% capital gain distribution and 7% unrecaptured Section 1250 gain. The dividends that were taxable to our stockholders in 2014 were considered 65% ordinary income (non-qualified dividend income), 22% capital gain distribution and 13% unrecaptured Section 1250 gain.

The table below presents the amount of common dividends declared per share and common distributions per unit as follows:

Year ended December 31,
201520142013
Common stock$.80$.75$.46
Common OP units.817.766.470

On February 16, 2016, Host Inc.’s Board of Directors authorized a regular quarterly cash dividend of $0.20 per share on Host Inc.’s common stock. The dividend is payable on April 15, 2016, to stockholders of record on March 31, 2015.

6.Income Taxes

We elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with our taxable year ended December 31, 1999. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our taxable income to our stockholders, excluding net capital gain. As a REIT, we generally will not be subject to federal corporate income tax on that portion of our taxable income that currently is distributed to our stockholders. If we fail to qualify for taxation as a REIT in any taxable year, we will be subject to federal corporate income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if we qualify for taxation as a REIT, we may be subject to certain state, local and foreign taxes on our income and property, and to federal income and excise taxes on our undistributed taxable income.

We have recorded a 100% valuation allowance of approximately $20 million against the deferred tax asset related to the net operating loss carryovers as of December 31, 2015 with respect to our hotel in Mexico. There is a $3 million valuation allowance recorded against the deferred tax asset related to the net operating loss and capital loss carryovers as of December 31, 2015 with respect to our hotels in Canada. We expect that the net operating loss and alternative minimum tax credit carryovers for U.S. federal

HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES

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income tax purposes will be realized. The net decrease in the valuation allowance for the year ending December 31, 2015 and December 31, 2014 is approximately $22 million and $16 million, respectively. The primary components of our net deferred tax assets are as follows (in millions):

As of December 31,
20152014
Deferred tax assets
Related party interest expense$7$21
Net operating loss and capital loss carryovers6370
Alternative minimum tax credits55
Property and equipment44
Investments in domestic affiliates33
Deferred revenue and expenses5255
Other21
Total gross deferred tax assets136159
Less: Valuation allowance(23)(45)
Total deferred tax assets, net of valuation allowance$113$114
Deferred tax liabilities
Property and equipment(16)(17)
Investments in domestic and foreign affiliates(12)(8)
Other(2)(2)
Total gross deferred tax liabilities(30)(27)
Net deferred tax assets$83$87

At December 31, 2015, we have aggregate gross domestic and foreign net operating loss, and capital loss carryovers of approximately $186 million. We have deferred tax assets related to these loss and tax credit carryovers of approximately $63 million, with a valuation allowance of approximately $23 million. Our net operating loss carryovers expire through 2035, and our foreign capital loss carryovers have no expiration period. Our alternative minimum tax credit carryovers have no expiration period. In addition to the net deferred tax assets reflected in the above table, we have recorded a deferred tax asset related to AOCI activity concerning net foreign exchange losses of approximately $18 million and $8 million at December 31, 2015 and 2014, respectively. We believe that it is more likely than not that we will be able to realize our deferred tax assets, net of valuation allowance, of $113 million in the future.

Our U.S. and foreign income from continuing operations before income taxes was as follows (in millions):

Year ended December 31,
201520142013
U.S. income$536$744$213
Foreign income441718
Total$580$761$231

The provision for income taxes from continuing operations consists of (in millions):

Year ended December 31,
201520142013
Current—Federal$2$3$2
—State(1)24
—Foreign3109
41515
Deferred—Federal2(1)4
—State—(1)1
—Foreign311
5(1)6
Income tax provision – continuing operations$9$14$21

HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The differences between the income tax provision calculated at the statutory U.S. federal income tax rate of 35% and the actual income tax provision recorded for continuing operations are as follows (in millions):

Year ended December 31,
201520142013
Statutory federal income tax provision – continuing operations$204$265$81
Adjustment for nontaxable income of Host Inc. – continuing operations(203)(268)(77)
State income tax provision, net115
Provision for uncertain tax positions152
Foreign income tax provision61110
Income tax provision – continuing operations$9$14$21

Cash paid for income taxes, net of refunds received, was $9 million, $22 million, and $17 million in 2015, 2014, and 2013, respectively.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):

20152014
Balance at January 1$10$5
State decreases(2)2
Other increases33
Balance at December 31$11$10

All of such uncertain tax position amounts, if recognized, would impact our reconciliation between the income tax provision calculated at the statutory U.S. federal income tax rate of 35% and the actual income tax provision recorded each year.

We expect a decrease to the balance of unrecognized tax benefits within 12 months of the reporting date of approximately $1 million. As of December 31, 2015, the tax years that remain subject to examination by major tax jurisdictions generally include 2012-2015.

There were no material interest or penalties recorded for the years ended December 31, 2015, 2014 and 2013.

7.Leases

Taxable REIT Subsidiaries Leases

We lease substantially all of our hotels to a wholly owned subsidiary that qualifies as a taxable REIT subsidiary due to federal income tax restrictions on a REIT’s ability to derive revenue directly from the operation and management of a hotel.

Vornado Lease

On July 30, 2012, we leased the retail and signage components of the New York Marriott Marquis to Vornado Realty Trust (“Vornado”). Vornado will redevelop and expand the existing retail space and a portion of the parking garage into a high-end retail space, as well as create a 25,000 square foot, block front, LED signage. The lease has a 20-year term and, over the term of the lease, each party has options that, if exercised, would result in ownership of the retail space being conveyed to Vornado at a price based on the future cash flow of the leased property. Minimum rental revenue is recognized on a straight-line basis over the term of the lease. The future minimum rental revenue under the non-cancelable lease is $12.5 million on an annual basis. Percentage rent is accrued when the specified income targets have been met.

Ground Leases

As of December 31, 2015, all or a portion of 31 of our hotels are subject to ground leases, generally with multiple renewal options, all of which are accounted for as operating leases. For lease agreements with scheduled rent increases, we recognize the lease

HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES

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expense ratably over the term of the lease. Certain of these leases contain provisions for the payment of contingent rentals based on a percentage of sales in excess of stipulated amounts.

Other Lease Information

We also have leases on facilities used in our former restaurant business, all of which we subsequently subleased. These leases and subleases contain one or more renewal options, generally for five or ten-year periods. The restaurant leases are accounted for as operating leases. Our contingent liability related to these leases is $16 million as of December 31, 2015. However, management considers the likelihood of any material funding related to these leases to be remote. Our leasing activity also includes those entered into by our hotels for various types of equipment, such as computer equipment, vehicles and telephone systems. Equipment leases are accounted for either as operating or capital leases, depending on the characteristics of the particular lease arrangement. Equipment leases that are characterized as capital leases are classified as furniture and equipment and are depreciated over the life of the lease. The amortization expense applicable to capitalized leases is included in depreciation expense.

The following table presents the future minimum annual rental commitments required under non-cancelable leases for which we are the lessee (in millions):

As of December 31, 2015
CapitalOperating
LeasesLeases
2016$1$44
2017—43
2018—41
2019—39
2020—39
Thereafter—1,509
Total minimum lease payments$1$1,715

Minimum payments for the operating leases have not been reduced by aggregate minimum sublease rentals from restaurants of approximately $9 million per year that are payable to us under non-cancelable subleases.

Rent expense is included in other property-level expenses on our consolidated statements of operations and consists of (in millions):

Year ended December 31,
201520142013
Minimum rentals on operating leases$48$48$50
Additional rentals based on sales333232
Rental payments based on real estate tax assessments——24
Less: sublease rentals(2)(3)(3)
$79$77$103
8.Employee Stock Plans

Upon the issuance of Host Inc.’s common stock under either of the two stock-based compensation plans described below, Host L.P. will issue to Host Inc. common OP units of an equivalent value. Accordingly, these liabilities and related disclosures are included in both Host Inc.’s and Host L.P.’s consolidated financial statements.

Host Inc. maintains two stock-based compensation plans, the Comprehensive Stock and Cash Incentive Plan (the “2009 Comprehensive Plan”), under which Host Inc. may award to participating employees Host Inc.’s common stock and options to purchase our common stock, and the Employee Stock Purchase Plan (“ESPP”). At December 31, 2015, there were approximately 16 million shares of Host Inc.’s common stock reserved and available for issuance under the 2009 Comprehensive Plan.

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We recognize costs resulting from share-based payments in our financial statements over their vesting periods. No compensation cost is recognized for awards for which employees do not render the requisite services. We classify share-based payment awards granted in exchange for employee services as either equity or liability awards. Equity awards are measured based on their fair value as of the date of grant. In contrast, liability awards are re-measured to fair value each reporting period.

During 2015, 2014 and 2013, we recorded stock-based compensation expense of approximately $11 million, $22 million and $18 million, respectively. Shares granted in 2015, 2014 and 2013 totaled 1.8 million, 2.0 million and 2.2 million, respectively, while 0.8 million, 1.3 million and 1.2 million shares, respectively, vested during those years.

Senior Executive Plan

During 2015, Host Inc. granted 1.3 million shares of restricted stock awards and 0.4 million shares of stock option awards, to senior executives (the “Annual Plan”), which amount represents the maximum number of shares that can be earned during the year if performance is at the “high” level of achievement. The stock option awards have an average exercise price of $23.64 per share for performance year 2015. The restricted stock awards and stock option awards vest on an annual basis; therefore, no unvested awards were outstanding at December 31, 2015.

Restricted stock awards

Vesting of restricted stock awards is based on (1) the achievement of relative total shareholder return (“TSR”) and (2) the company and personal performance of employees attributable to specific management business objectives. Approximately 50% of the restricted stock awards are based on the satisfaction of the TSR compared to (i) the NAREIT index, (ii) the Standard & Poor’s index, and (iii) a Selected Lodging Company index that serves as a relevant industry/asset specific measurement to our competitors, with the remaining 50% based on the achievement of management business objectives. Restricted stock awards granted to U.S. senior executives are classified as liability awards, due to settlement features that allow the recipient to have a percentage of the restricted stock awards withheld to meet tax requirements in excess of the statutory minimum withholding requirements. The fair value of these shares is adjusted at each balance sheet date and, at year end, is equal to the number of shares earned during the year at the December 31, 2015 stock price. Of the awards granted in 2015, 96% were classified as liability awards. In contrast, restricted stock awards granted to senior executives operating out of our international offices do not have this settlement feature and are considered equity awards. The fair value of these equity awards is based on the fair value on the grant date, and is not adjusted for subsequent movements in fair value.

During 2015, 2014 and 2013, we recorded compensation expense of approximately $8 million, $18 million and $14 million, respectively, related to the restricted stock awards to senior executives. The following table is a summary of the status of our senior executive plans for the three years ended December 31, 2015:

Year ended December 31,
201520142013
SharesFair ValueSharesFair ValueSharesFair Value
(in millions)(per share)(in millions)(per share)(in millions)(per share)
Balance, at beginning of year—$——$——$—
Granted1.3161.5181.716
Vested (1)(0.4)15(0.8)24(0.8)19
Forfeited/expired(0.9)15(0.7)24(0.9)19
Balance, at end of year——————
Issued in calendar year (1)0.5240.4190.319
___________
(1)Shares that vest at December 31 of each year are issued to the employees in the first quarter of the following year, although the requisite service period is complete. Accordingly, the 0.5 million shares issued in 2015 include shares vested at December 31, 2014, after adjusting for shares withheld to meet employee tax requirements. The shares withheld for employee tax requirements were valued at $9.8 million, $6.1 million and $5.5 million, for 2015, 2014 and 2013, respectively.

Stock Option Awards

As of December 31, 2015, 1.0 million shares of stock option awards were outstanding and exercisable, with a weighted average remaining life of 8 years and a weighted average exercise price of $19.37 per share. During 2015, 2014 and 2013, stock option grants totaled 366,000, 393,000 and 420,000, respectively. Stock option compensation expense was $1.8 million, $1.8 million and $1.8

HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES

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million during 2015, 2014 and 2013, respectively, and all stock option awards outstanding as of December 31, 2015 were fully vested. The stock option awards are equity classified awards, as they do not include cash settlement features. We expense stock option awards over the vesting period based on the estimated fair value of the options at the grant date using a binomial pricing model. The utilization of the binomial model requires us to make certain estimates related to the volatility of the share price of our common stock, risk-free interest rates and the amount of our awards expected to be forfeited, and our expected dividend yield. To calculate the fair value of stock option awards granted from 2013 to 2015, we assumed (i) a volatility ranging between 28% and 32%, (ii) a risk-free rate ranging between 1.0% and 1.8%, (iii) a dividend yield of between 3% and 4%, and (iv) an expected life of 5.5 years.

Other Stock Plans

In addition to the share-based plans described above, we maintain an upper-middle management plan and an employee stock purchase plan. The awards are time-based equity awards that vest within three years of the grant date and expense is recognized over the life of the award based on the grant date fair value. Through the employee stock purchase plan, employees can purchase stock at a 10% discount of the lower of the beginning and ending stock price each quarter. During 2015, 2014 and 2013, we granted 116,000 shares, 118,000 shares and 116,000 shares, respectively, under both of these programs and recorded expense of $1.9 million, $2.2 million and $2.0 million, respectively.

9.Profit Sharing and Postemployment Benefit Plans

We contribute to defined contribution plans for the benefit of employees who meet certain eligibility requirements and who elect participation in the plans. The discretionary amount to be matched by us is determined annually by Host Inc.’s Board of Directors. Our recorded liability for this obligation is not material. Payments for these items were not material for the three years ended December 31, 2015.

10.Dispositions

We disposed of eight hotels in 2015, five hotels in 2014, and five hotels in 2013. Effective January 1, 2014, we adopted ASU 2014-08, Reporting for Discontinued Operations. As a result, operations and any gain or loss on sale of hotels sold subsequent to December 31, 2013 will generally continue to be reported in continuing operations. The results of properties sold in 2013, including the gain on sale, will continue to be reported in discontinued operations.

The following table provides summary results of operations for the eight hotels sold in 2015 and five hotels sold in 2014, which are included in continuing operations (in millions):

Year ended December 31,
20152014
Revenues$60$197
Income before taxes512
Gain on disposals89229

The following table provides summary results of operations for the five hotels sold in 2013, which are included in discontinued operations (in millions):

Year ended December 31,
2013
Revenues$104
Income before taxes22
Gain on disposals, net of tax97

HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net income attributable to Host Inc. is allocated between continuing and discontinued operations as follows (in millions):

Year ended December 31,
2013
Continuing operations, net of tax$203
Discontinued operations, net of tax114
Net income attributable to Host Inc.$317

Net income attributable to Host L.P. is allocated between continuing and discontinued operations as follows (in millions):

Year ended December 31,
2013
Continuing operations, net of tax$206
Discontinued operations, net of tax115
Net income attributable to Host L.P.$321
11.Acquisitions

Business Combinations

We acquired one hotel during 2015 and recorded $1 million of acquisition related expenses and acquired two hotels during 2014 and recorded $2 million of acquisition related expenses. For 2015 and 2014, our business combinations were as follows:

●On June 8, 2015, we acquired the 643-room Phoenician hotel for approximately $400 million.
●On August 11, 2014, we acquired the 242-room YVE Hotel Miami (formerly the b2 miami downtown hotel) for approximately $58 million.
●On January 21, 2014, we acquired the 151-room Axiom Hotel (formerly the Powell Hotel) in San Francisco, California, including retail space and the fee simple interest in the land, for approximately $75 million.

Accounting for the acquisition of a hotel property or an entity as a purchase transaction requires an allocation of the purchase price to the assets acquired and the liabilities assumed in the transaction at their respective estimated fair values. The purchase price allocations are estimated based on current available information.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed for our 2015 and 2014 hotel acquisitions (in millions):

As of December 31,
20152014
Property and equipment$400$131
FF&E Reserves and other assets—3
Total assets400134
Other liabilities(2)(1)
Net assets acquired$398$133

HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Our summarized unaudited consolidated pro forma results of operations, assuming the 2015 and 2014 hotel acquisitions occurred on January 1, 2014 and 2013, respectively, and excluding the acquisition costs discussed above, are as follows (in millions, except per share and per unit amounts):

Year ended December 31,
20152014
Revenues$5,459$5,475
Income from continuing operations594763
Net income594763
Host Inc.:
Net income attributable to Host Inc.$581$748
Basic earnings per common share$.77$.99
Diluted earnings per common share$.77$.99
Host L.P.:
Net income attributable to Host L.P.$588$757
Basic earnings per common share$.79$1.01
Diluted earnings per common share$.79$1.01

For 2015 and 2014, our consolidated statements of operations include $68 million and $12 million of revenues, respectively, and a net loss of $2 million for 2015 and net income of $2 million for 2014.

New Development and Other Asset Acquisitions

For 2015 and 2014, our new development and other asset acquisitions were as follows:

●On December 30, 2015, we purchased the land under the Minneapolis City Center Marriott for $34 million.
●In February 2015, we purchased the ground lease at the Sheraton Indianapolis Hotel at Keystone Crossing, along with two out-parcels, for $4.6 million.
●In the fourth quarter of 2014, we completed construction and opened the 149-room Novotel and 256-room ibis Rio de Janeiro Parque Olimpico in Barra da Tijuca, both managed by Accor, for a total investment of R$139 million ($65 million).
12.Fair Value Measurements

Overview

Our recurring fair value measurements consist of the valuation of our derivative instruments, all of which are designated as accounting hedges. Non-recurring fair value measurements during 2014 consisted of the impairment of one of our hotel properties, which was sold during 2014.

HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table details the fair value of our financial assets and liabilities that are required to be measured at fair value on a recurring basis, as well as non-recurring fair value measurements that we completed during 2014 due to the impairment of non-financial assets (in millions):

Fair Value at Measurement Date Using
Balance at December 31, 2015Quoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)
Fair Value Measurements on a Recurring Basis:
Assets
Foreign currency forward sale contracts (1)$17$—$17$—
Liabilities
Interest rate swap derivatives (1)(1)—(1)—
Fair Value at Measurement Date Using
Balance at December 31, 2014Quoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)
Fair Value Measurements on a Recurring Basis:
Assets
Foreign currency forward sale contracts (1)$13$—$13$—
Liabilities
Interest rate swap derivatives (1)(2)—(2)—
Fair Value Measurements on a Non-recurring Basis:
Impaired hotel properties held and used (2)———18
___________
(1)These derivative contracts have been designated as hedging instruments.
(2)The fair value measurement is as of the measurement date of the impairment and may not reflect the book value as of December 31, 2014.

Impairment

During 2014, an impairment expense of $6 million was recorded related to the Dayton Marriott. The fair value was based on expected sale proceeds of the property, which property was sold on December 17, 2014. The impairment expense is included in depreciation expense.

HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES

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Derivatives and Hedging

Interest rate swap derivatives designated as cash flow hedges. We have designated our floating-to-fixed interest rate swap derivatives as cash flow hedges. The purpose of the interest rate swaps is to hedge against changes in cash flows (interest payments) attributable to fluctuations in variable rate debt. The derivatives are valued based on the prevailing market yield curve on the date of measurement. We also evaluate counterparty credit risk when we calculate the fair value of the swaps. Changes in the fair value of the derivatives are recorded to other comprehensive income (loss) on the accompanying balance sheets. The hedges were fully effective as of December 31, 2015.

In connection with the partial repayment of the mortgage loan secured by our New Zealand properties, we reduced the notional amount of the related interest rate swap to NZ$53 million ($36 million). The reduction of the notional amount did not result in any changes to the maturity date, swapped index or all-in fixed interest rate of the mortgage loan.

During 2015, in contemplation of issuing the 4% Series E senior notes, we entered into three forward swaps and two treasury locks for total notional amounts of $150 million and $200 million, respectively. The purpose of the forward swaps and treasury locks was to hedge against changes in interest-related cash flows (forecast interest payments) on an issuance of long-term debt. The forward swaps hedged the risk of changes in the 3-month LIBOR rate over a 10-year period and the treasury locks hedged the risk of changes in the 10-year U.S. Treasury rate. Subsequent to the pricing date of the 4% Series E senior notes in May 2015, we net settled the three forward swaps and two treasury locks for total proceeds of approximately $4 million. The gain on the forward swaps and treasury locks has been recorded to other comprehensive income and will be amortized over the 10-year life of the Series E senior notes, as a reduction to interest expense.

Also in 2015, in contemplation of issuing the 4.5% Series F senior notes, we entered into five forward swaps for a total notional amount of $350 million. The purpose of the forward swaps was to hedge against changes in interest-related cash flows (forecast interest payments) on an issuance of long-term debt. The forward swaps hedged the risk of changes in the 3-month LIBOR rate over a 10-year period. Subsequent to the pricing date of the 4.5% Series F senior notes in October 2015, we net settled the five forward swaps for a total payment of approximately $9 million. The loss on the forward swaps has been recorded to other comprehensive income and will be amortized over the 10-year life of the Series F senior notes, as an increase to interest expense. The following table summarizes our interest rate swap derivatives designated as cash flow hedges (in millions):

Currently OutstandingChange in Fair Value - All Contracts
Gain (Loss)
Total NotionalMaturitySwappedAll-in-Year ended December 31,
Transaction DateAmountDateIndexRate20152014
November 2011 (1)A$62November 2016Reuters BBSY6.7%$ 1$ —
February 2011 (2)NZ$53February 2016NZ$ Bank Bill7.15%——
___________
(1)The swap was entered into in connection with the A$86 million ($63 million) mortgage loan on the Hilton Melbourne South Wharf.
(2)The swap was entered into in connection with the NZ$53 million ($36 million) mortgage loan on four properties in New Zealand.

HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Foreign Investment Hedging Instruments. We have five foreign currency forward sale contracts that hedge a portion of the foreign currency exposure resulting from the eventual repatriation of our net investment in foreign operations. These derivatives are considered hedges of the foreign currency exposure of a net investment in a foreign operation and are marked-to-market with changes in fair value recorded to other comprehensive income (loss) within the equity portion of our balance sheet. The foreign currency forward sale contracts are valued based on the forward yield curve of the foreign currency to U.S. dollar forward exchange rate on the date of measurement. We also evaluate counterparty credit risk when we calculate the fair value of the derivatives.

During 2015, in connection with the maturity of two foreign currency forward sale contracts with a total notional amount of €55 million, for which we received total proceeds of approximately $12 million, we entered into two new foreign currency forward sale contracts with a total notional amount of €55 million. The gain related to the matured contracts is included in accumulated other comprehensive income and will be recognized in earnings when our investment in the Euro JV has been repatriated. The following table summarizes our foreign currency forward sale contracts (in millions):

Currently OutstandingChange in Fair Value - All Contracts
Total
Transaction Amount inTotal TransactionGain (Loss)
Transaction DateForeignAmountForward PurchaseYear ended December 31,
RangeCurrencyin DollarsDate Range20152014
January 2013-September 2015€100$124January 2016-September 2017$13$18
November 2014C$25$22November 2016$3$1

In addition to the foreign currency forward sale contracts, we have designated a portion of the foreign currency draws on our credit facility as hedges of net investments in foreign operations. As a result, currency translation adjustments in the designated credit facility draws are recorded to other comprehensive income (loss) within the equity portion of our balance sheet, which adjustments offset a portion of the translation adjustment related to our foreign investments. The following table summarizes the draws on our credit facility that are designated as hedges of net investments in international operations (in millions):

BalanceBalanceGain (Loss)
OutstandingOutstanding inYear ended December 31,
CurrencyUS$Foreign Currency20152014
Canadian dollars (1)$33C$46$5$2
Euros$84€77$10$13
___________
(1)We have drawn an additional $44 million on the credit facility in Canadian dollars that has not been designated as a hedging instrument.

Other Assets and Liabilities

Fair Value of Other Financial Assets and Liabilities. We did not elect the fair value measurement option for any of our other financial assets or liabilities. The fair values of secured debt and our credit facility are determined based on the expected future payments discounted at risk-adjusted rates. Senior Notes and the Exchangeable Senior Debentures are valued based on quoted market prices. The fair values of financial instruments not included in this table are estimated to be equal to their carrying amounts. The fair value of certain financial assets and liabilities and other financial instruments are shown below (in millions):

As of December 31,
20152014
Carrying AmountFair ValueCarrying AmountFair Value
Financial liabilities
Senior notes (Level 1)$2,376$2,452$2,472$2,668
Exchangeable Senior Debentures (Level 1)——386739
Credit facility (Level 2)1,2911,298697704
Mortgage debt and other, excluding capital leases (Level 2)349355401413

HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.Relationship with Marriott International

We have entered into various agreements with Marriott, including the management of approximately 54% of our hotels (as measured by revenues), financing for joint ventures or partnerships, including our JW Marriott Hotel, Mexico City, Mexico and certain limited administrative services.

In 2015, 2014 and 2013, we paid Marriott $145 million, $146 million and $150 million, respectively, of hotel management fees and approximately $2.6 million, $1.4 million and $1.3 million, respectively, of franchise fees for 2015, 2014 and 2013.

14.Hotel Management Agreements and Operating and License Agreements

All of our hotels are managed by third parties pursuant to management or operating agreements, with some of our hotels also being subject to separate license agreements addressing matters pertaining to operation under the designated brand. Properties managed by Marriott, Starwood and Hyatt, represent 54%, 24% and 12% of our total revenues, respectively. Under these agreements, the managers generally have sole responsibility for all activities necessary for the day-to-day operation of the hotels, including establishing room rates, processing reservations and promoting and publicizing the hotels. The managers also provide all employees for the hotels, prepare reports, budgets and projections, and provide other administrative and accounting support services to the hotels. For the majority of our properties, we have approval rights over budgets, capital expenditures, significant leases and contractual commitments, and various other matters.

The initial term of our agreements generally is 10 to 25 years, with one or more renewal terms at the option of the manager. The majority of our agreements condition the manager’s right to exercise options for renewal upon the satisfaction of specified economic performance criteria. The manager typically receives a base management fee, which is calculated as a percentage (generally 2-3%) of annual gross revenues, and an incentive management fee, which typically is calculated as a percentage (generally 10-20%) of operating profit after the owner has received a priority return on its investment. In the case of our Starwood-managed hotels, the base management fee only is 1% of annual gross revenues, but that amount is supplemented by license fees payable to Starwood under a separate license agreement pertaining to the designated brand, including rights to use trademarks, service marks and logos, matters relating to compliance with certain brand standards and policies, and the provision of certain system programs and centralized services. Under the license agreement Starwood generally receives 5% of gross revenues attributable to room sales and 2% of gross revenues attributable to food and beverage sales in addition to a base management fee.

As part of the agreements, the manager furnishes the hotels with certain chain services, which generally are provided on a central or regional basis to all hotels in the manager’s hotel system. Chain services include central training, advertising and promotion, national reservation systems, computerized payroll and accounting services, and such additional services as needed which may be more efficiently performed on a centralized basis. Costs and expenses incurred in providing such services are allocated among the hotels managed, owned or leased by the manager on a fair and equitable basis. In addition, our managers generally will sponsor a guest rewards program, the costs of which will be charged to all of the hotels that participate in such program.

We are obligated to provide the manager with sufficient funds, generally 5% of the revenue generated at the hotel, to cover the cost of (a) certain non-routine repairs and maintenance to the hotels which normally are capitalized, and (b) replacements and renewals to the hotels’ furniture, fixtures and equipment. Under certain circumstances, we will be required to establish escrow accounts for such purposes under terms outlined in the agreements.

We generally are limited in our ability to sell, lease or otherwise transfer the hotels unless the transferee assumes the related management agreement. However, most agreements include owner rights to terminate the agreements on the basis of the manager’s failure to meet certain performance-based metrics. Typically, these criteria are subject to the manager’s ability to ‘cure’ and avoid termination by payment to us of specified deficiency amounts (or, in some instances, waiver of the right to receive specified future management fees).

In addition to any performance-based or other termination rights, we have negotiated with Marriott, Starwood and some of our other managers specific termination rights related to specific agreements. These termination rights can take a number of different forms, including termination of agreements upon sale that leave the property unencumbered by any agreement; termination upon sale provided that the property continues to be operated under a license or franchise agreement with continued brand affiliation; as well as termination without sale or other condition, which may require the payment of a fee. These termination rights also may restrict the number of agreements that may be terminated over any annual or other period; impose limitations on the number of agreements

HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

terminated as measured by EBITDA; require that a certain number of properties continue to maintain the brand affiliation; or be restricted to a specific pool of assets.

15.Geographic and Business Segment Information

We consider each one of our hotels to be an operating segment, none of which meets the threshold for a reportable segment. We also allocate resources and assess operating performance based on individual hotels. All of our other real estate investment activities (primarily our office buildings) are immaterial and, with our operating segments, meet the aggregation criteria, and thus, we report one segment: hotel ownership. Our international operations consist of hotels in six countries. There were no intersegment sales during the periods presented. The following table presents revenues and long-lived assets for each of the geographical areas in which we operate (in millions):

201520142013
RevenuesProperty and Equipment, netRevenuesProperty and Equipment, netRevenuesProperty and Equipment, net
United States$5,166$10,372$5,077$10,111$4,895$10,498
Australia34883910240106
Brazil305336823076
Canada586687829789
Chile254432443454
Mexico291829262432
New Zealand45205412846140
Total$5,387$10,661$5,354$10,575$5,166$10,995
16.Guarantees and Contingencies

We have certain guarantees which consist of commitments made to third parties for leases or debt that are not recognized in our consolidated financial statements due to various dispositions, spin-offs and contractual arrangements, but that we have agreed to pay in the event of certain circumstances, including the default by an unrelated party. We also may have contingent environmental liabilities related to the presence of hazardous or toxic substances. We consider the likelihood of any material payments under these guarantees and contingencies to be remote. The guarantees and contingencies that are not recognized in our consolidated financial statements are listed below:

●We remain contingently liable for rental payments on certain divested non-lodging properties. These primarily represent certain restaurants that were sold subject to our guarantee of the future rental payments. The aggregate amount of these future rental payments is approximately $16 million as of December 31, 2015.
●In connection with the sale of two hotels in January 2005, we remain contingently liable for the amounts due under the respective ground leases. The future minimum lease payments are approximately $12 million through the full term of the leases, including renewal options. We believe that the likelihood of any material payments related to these ground leases is remote, and in each case, we have been indemnified by the purchaser of the hotel.

Guarantees and environmental liabilities that are recorded on our consolidated balance sheet include:

●In connection with the sale of the Atlanta Marriott Marquis in January 2013, we retained a contingent liability for potential environmental liabilities, which is not to exceed $5 million.
●In connection with the sale of the Ritz-Carlton San Francisco hotel in June 2013, we agreed to guarantee the hotel’s operating income through December 31, 2016. During this period, we will make support payments of up to $4 million a year, not to exceed $11 million for the life of the agreement. In 2015 and 2014, we recognized approximately $4 million and $3 million, respectively, of the deferred gain. As of December 31, 2015, we have accrued $4 million for the remaining guarantee.

HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17.Legal Proceedings

We are involved in various legal proceedings in the ordinary course of business regarding the operation of our hotels and company matters. To the extent not covered by insurance, these lawsuits generally fall into the following broad categories: disputes involving hotel-level contracts, employment litigation, compliance with laws such as the Americans with Disabilities Act, tax disputes and other general matters. Under our management agreements, our operators have broad latitude to resolve individual hotel-level claims for amounts generally less than $150,000. However, for matters exceeding such threshold, our operators may not settle claims without our consent.

Based on our analysis of legal proceedings with which we currently are involved or of which we are aware and our experience in resolving similar claims in the past, we have accrued approximately $4 million as of December 31, 2015. We have estimated that, in the aggregate, our losses related to these proceedings could be as much as $15 million. We believe this range represents the maximum potential loss for all of our legal proceedings. We are not aware of any other matters with a reasonably possible unfavorable outcome for which disclosure of a loss contingency is required. No assurances can be given as to the outcome of any pending legal proceedings.

18.Quarterly Financial Data (unaudited)
2015
FirstSecondThirdFourth
QuarterQuarterQuarterQuarter
(in millions, except per share/unit amounts)
Host Hotels & Resorts, Inc.:
Revenues$1,317$1,449$1,287$1,334
Operating profit144227132147
Net income10421685166
Net income attributable to Host Hotels & Resorts, Inc.9821285163
Basic earnings per common share.13.28.11.22
Diluted earnings per common share.13.28.11.22
Host Hotels & Resorts, L.P.(1):
Net income attributable to Host Hotels & Resorts, L.P.9921586165
Basic earnings per common unit.13.29.12.22
Diluted earnings per common unit.13.29.12.22
2014
FirstSecondThirdFourth
QuarterQuarterQuarterQuarter
(in millions, except per share/unit amounts)
Host Hotels & Resorts, Inc.:
Revenues$1,309$1,431$1,294$1,320
Operating profit134225202149
Net income185159145258
Net income attributable to Host Hotels & Resorts, Inc.179155144254
Basic earnings per common share.24.21.19.34
Diluted earnings per common share.24.21.19.33
Host Hotels & Resorts, L.P.(1):
Net income attributable to Host Hotels & Resorts, L.P.181157146257
Basic earnings per common unit.24.21.19.34
Diluted earnings per common unit.24.21.19.34
___________

HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)Other income statement line items not presented for Host L.P. are equal to the amounts presented for Host Inc.

The sum of the basic and diluted earnings per common share and OP units for the four quarters in all years presented differs from the annual earnings per common share and OP units due to the required method of computing the weighted average number of shares and OP units in the respective periods.

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