filings.toolsItem 7A. Quantitative and Qualitative Disclosures about Market Risk
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
All information in this section applies to Host Inc. and Host L.P.
Interest Rate Sensitivity
Our future income, cash flows and fair values with respect to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We have no derivative financial instruments that are held for trading purposes. We use derivative financial instruments to manage, or hedge, interest rate risks.
The interest payments on 65% of our debt are fixed in nature. Valuations for mortgage debt and the credit facility are determined based on expected future payments, discounted at risk-adjusted rates. The senior notes are valued based on quoted market prices. If market rates of interest on our variable rate debt increase or decrease by 100 basis points, interest expense would increase or decrease, respectively, our future earnings and cash flows by approximately $13 million in 2017. The table below presents scheduled maturities and related weighted average interest rates by expected maturity dates (in millions, except percentages):
| Expected Maturity Date | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fair | |||||||||||||||||||||||||||||||
| 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | Value | ||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||
| Debt: | |||||||||||||||||||||||||||||||
| Fixed rate (1) (2) | $ | (3 | ) | $ | (3 | ) | $ | (3 | ) | $ | (3 | ) | $ | 297 | $ | 2,096 | $ | 2,381 | $ | 2,478 | |||||||||||
| Average interest rate | 4.65 | % | 4.65 | % | 4.65 | % | 4.65 | % | 4.61 | % | 4.34 | % | |||||||||||||||||||
| Variable rate (1) | $ | 560 | $ | 210 | $ | (1 | ) | $ | 499 | $ | — | $ | — | $ | 1,268 | $ | 1,273 | ||||||||||||||
| Average interest rate (3) | 1.88 | % | 1.81 | % | 1.87 | % | 1.87 | % | — | % | — | % | |||||||||||||||||||
| Total debt | $ | 3,649 | $ | 3,751 | |||||||||||||||||||||||||||
| ___________ |
| (1) | The amounts are net of unamortized discounts and deferred financing costs. |
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| (2) | Negative amounts prior to maturity represent the amortization of original issue discounts and deferred financing costs. |
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| (3) | The interest rate for our floating rate payments is based on the rate in effect as of December 31, 2016. No adjustments are made for forecast changes in the rate. |
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Exchange Rate Sensitivity
We have currency exchange risk as a result of our hotel ownership in Australia, Brazil, Canada and Mexico and our investment in the European and Asia/Pacific joint ventures. We utilize several strategies to mitigate the exposure of exchange risk for our portfolio, including (i) utilizing local currency denominated debt (including foreign currency draws on our credit facility), (ii) entering into forward or option foreign currency purchase contracts, and (iii) investing through partnership and joint venture structures. For 2016 and 2015, revenues from our consolidated foreign operations were $171 million and $221 million, or 3% and 4%, respectively, of our total revenues. As of December 31, 2016, our international investments consisted of the following (in millions):
Consolidated
| Country | Consolidated Assets (Book Value) | Mortgage Debt | Non-Controlling Interest | Net Assets | Credit Facility Draw(1) | Foreign Currency Forward Purchase Contracts (notional) | Net Asset Exposure | 2016 Net Gain/(Loss) on Foreign Currency Exposure (2) | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Australia | $ | 111 | $ | (62 | ) | $ | (10 | ) | $ | 39 | $ | (36 | ) | $ | — | $ | 3 | $ | 1 | |||||||||||||
| Brazil | 77 | — | — | 77 | — | — | 77 | 9 | ||||||||||||||||||||||||
| Canada | 75 | — | — | 75 | (80 | ) | (19 | ) | (24 | ) | (1 | ) | ||||||||||||||||||||
| Mexico | 17 | — | (8 | ) | 9 | — | — | 9 | (1 | ) | ||||||||||||||||||||||
| New Zealand(3) | 35 | — | — | 35 | — | (32 | ) | 3 | — | |||||||||||||||||||||||
| United Kingdom | — | — | — | — | (14 | ) | — | (14 | ) | 3 | ||||||||||||||||||||||
| $ | 315 | $ | (62 | ) | $ | (18 | ) | $ | 235 | $ | (130 | ) | $ | (51 | ) | $ | 54 | $ | 11 |
Unconsolidated
| Investment Balance | Foreign Currency Forward Purchase Contracts (notional) | Credit Facility Draw | Net Asset Exposure | 2016 Net Gain/(Loss) on Foreign Currency Exposure (2) | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| European Joint Venture | $ | 227 | $ | (118 | ) | $ | (81 | ) | $ | 28 | $ | (4 | ) | |||||||
| Asia/Pacific Joint Venture | 17 | — | — | 17 | — | |||||||||||||||
| $ | 244 | $ | (118 | ) | $ | (81 | ) | $ | 45 | $ | (4 | ) | ||||||||
| ___________ |
| (1) | Approximately $34 million of the $80 million CAD credit facility draw and the entire AUD credit facility draw have been designated as hedges of our net investment in foreign entities. |
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| (2) | Includes a net gain of $1 million that is included in accumulated other comprehensive income and $6 million recognized during 2016 in our Statement of Operations. |
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| (3) | We have substantially liquidated our New Zealand assets; however, the remaining balance relates to $35 million of cash repatriated in January 2017. |
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Hedging Instruments. As described above, to manage the currency exchange risk applicable to ownership in non-U.S. hotels, where possible, we may enter into forward or option foreign currency purchase contracts or designate a portion of the foreign currency draws on our credit facility as hedges of net investments in foreign operations. The foreign currency exchange agreements into which we have entered strictly are to hedge foreign currency risk and are not for trading purposes.
During 2016, in connection with the maturity of foreign currency forward sale contracts with a total notional amount of C$25 million and €30 million, for which we received total proceeds of approximately $11 million, we entered into new foreign currency forward sale contracts with the same notional amounts. We also entered into a new foreign currency forward sale contract with a total notional amount of NZ$45 million. The gain related to the matured contracts is included in accumulated other comprehensive income and will be recognized in earnings when our investments have been repatriated.
As of December 31, 2016, we have six 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 sheets. 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. Pursuant to these contracts, we will sell the foreign currency amount, as applicable, and receive the U.S. dollar amount on the forward sale date. We also evaluate counterparty credit risk when we calculate the fair value of the derivatives.
As of December 31, 2016, the fair value of our foreign currency forward sale contracts is $12 million. The following table summarizes our foreign currency forward sale contracts (in millions):
| Currently Outstanding | Change in Fair Value - All Contracts | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total | |||||||||||||||||||
| Transaction Amount in | Total Transaction | Gain (Loss) | |||||||||||||||||
| Transaction Date | Foreign | Amount | Forward Purchase | Year ended December 31, | |||||||||||||||
| Range | Currency | in Dollars | Date Range | 2016 | 2015 | ||||||||||||||
| May 2014-January 2016 | € | 100 | $ | 118 | May 2017-January 2018 | $ | 5 | $ | 13 | ||||||||||
| November 2016 | C$ | 25 | $ | 19 | November 2018 | $ | — | $ | 3 | ||||||||||
| November 2016 | NZ$ | 45 | $ | 32 | February 2017 | $ | 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 international investments. The following table summarizes the draws on our credit facility that are designated as hedges of net investments in foreign operations (in millions):
| Balance | Balance | Gain (Loss) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Outstanding | Outstanding in | Year ended December 31, | ||||||||||
| Currency | US$ | Foreign Currency | 2016 | 2015 | ||||||||
| Canadian dollars (1) | $ | 34 | C$ | 46 | $ | (1) | $ | 5 | ||||
| Euros | $ | 81 | € | 77 | $ | 3 | $ | 10 | ||||
| Australian dollars | $ | 36 | A$ | 50 | $ | 2 | $ | — | ||||
| ___________ |
| (1) | We have drawn an additional $45 million on the credit facility in Canadian dollars that has not been designated as a hedging instrument. |
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