Item 8. Financial Statements and Supplementary Data

173K characters. Original on sec.gov · Markdown

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.)87
Report of Independent Registered Public Accounting Firm (Host Hotels & Resorts, L.P.)89
Financial Statements of Host Hotels & Resorts, Inc.:
Consolidated Balance Sheets as of December 31, 2016 and 201590
Consolidated Statements of Operations for the Years Ended December 31, 2016, 2015 and 201491
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2016, 2015 and 201492
Consolidated Statements of Equity for the Years Ended December 31, 2016, 2015 and 201493
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 201494
Financial Statements of Host Hotels & Resorts, L.P.:
Consolidated Balance Sheets as of December 31, 2016 and 201596
Consolidated Statements of Operations for the Years Ended December 31, 2016, 2015 and 201497
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2016, 2015 and 201498
Consolidated Statements of Capital for the Years Ended December 31, 2016, 2015 and 201499
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014100
Notes to Consolidated Financial Statements (Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P.)102

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, 2016 and 2015, 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, 2016. 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, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016, 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.

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, 2016, 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 24, 2017, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP
McLean, Virginia
February 24, 2017

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, 2016, 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, 2016, 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, 2016 and 2015, 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, 2016, and our report dated February 24, 2017, expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP
McLean, Virginia
February 24, 2017

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, 2016 and 2015, 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, 2016. 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, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016, 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.

/s/ KPMG LLP
McLean, Virginia
February 24, 2017

HOST HOTELS & RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2016 and 2015

(in millions, except per share amounts)

20162015
ASSETS
Property and equipment, net$10,145$10,583
Assets held for sale15055
Due from managers5556
Advances to and investments in affiliates286324
Furniture, fixtures and equipment replacement fund173141
Other225261
Restricted cash215
Cash and cash equivalents372221
Total assets$11,408$11,656
LIABILITIES, NON-CONTROLLING INTERESTS AND EQUITY
Debt
Senior notes$2,380$2,376
Credit facility, including term loans of $997 million and $996 million, respectively1,2061,291
Mortgage debt63200
Total debt3,6493,867
Accounts payable and accrued expenses278243
Other283299
Total liabilities4,2104,409
Non-controlling interests - Host Hotels & Resorts, L.P.165143
Host Hotels & Resorts, Inc. stockholders’ equity:
Common stock, par value $.01, 1,050 million shares authorized, 737.8 million shares and 750.3 million shares issued and outstanding, respectively78
Additional paid-in capital8,0778,302
Accumulated other comprehensive loss(83)(107)
Deficit(1,007)(1,139)
Total equity of Host Hotels & Resorts, Inc. stockholders6,9947,064
Non-controlling interests—other consolidated partnerships3940
Total equity7,0337,104
Total liabilities, non-controlling interests and equity$11,408$11,656

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2016, 2015 and 2014

(in millions, except per common share amounts)

201620152014
REVENUES
Rooms$3,492$3,465$3,452
Food and beverage1,5991,5681,546
Other339317323
Total revenues5,4305,3505,321
EXPENSES
Rooms893902924
Food and beverage1,1141,1101,109
Other departmental and support expenses1,3061,2951,264
Management fees236226227
Other property-level expenses382386377
Depreciation and amortization724708693
Corporate and other expenses1069443
Gain on insurance and business interruption settlements(15)(2)(10)
Total operating costs and expenses4,7464,7194,627
OPERATING PROFIT684631694
Interest income344
Interest expense(154)(227)(207)
Gain on sale of assets25395236
Gain (loss) on foreign currency transactions and derivatives4(5)(1)
Equity in earnings of affiliates217629
INCOME BEFORE INCOME TAXES811574755
Provision for income taxes(40)(9)(14)
NET INCOME771565741
Less: Net income attributable to non-controlling interests(9)(7)(9)
NET INCOME ATTRIBUTABLE TO HOST HOTELS & RESORTS, INC.$762$558$732
Basic earnings per common share$1.03$.74$.97
Diluted earnings per common share$1.02$.74$.96

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Years Ended December 31, 2016, 2015 and 2014

(in millions)

201620152014
NET INCOME$771$565$741
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates—(71)(60)
Change in fair value of derivative instruments71119
Amounts reclassified from other comprehensive income (loss)173—
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX24(57)(41)
COMPREHENSIVE INCOME795508700
Less: Comprehensive income attributable to non-controlling interests(8)(5)(9)
COMPREHENSIVE INCOME ATTRIBUTABLE TO HOST HOTELS & RESORTS, INC.$787$503$691

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, INC. AND SUBISIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

Years Ended December 31, 2016, 2015 and 2014

(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.
754.8Balance, December 31, 2013$8$8,492$(9)$(1,263)$53$190
—Net income———732—9
—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————(1)(6)
755.8Balance, December 31, 2014$8$8,476$(50)$(1,098)$52$225
—Net income———558—7
—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————(2)(8)
(38.3)Repurchase of common stock—(675)————
750.3Balance, December 31, 2015$8$8,302$(107)$(1,139)$40$143
—Net income———762—9
—Other changes in ownership—(30)———31
—Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates————(1)—
—Change in fair value of derivative instruments——7———
—Amounts reclassified from Other Comprehensive Income——17———
0.3Common stock issuances—4————
0.4Comprehensive stock and employee stock purchase plans—8————
—Common stock dividends———(630)——
0.6Redemptions of limited partner interests for common stock—10———(10)
—Distributions to non-controlling interests—————(8)
(13.8)Repurchase of common stock(1)(217)————
737.8Balance, December 31, 2016$7$8,077$(83)$(1,007)$39$165

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2016, 2015 and 2014

(in millions)

201620152014
OPERATING ACTIVITIES
Net income$771$565$741
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization724708693
Amortization of finance costs, discounts and premiums, net72124
Non-cash loss on extinguishment of debt—112
Stock compensation expense121122
Deferred income taxes275(1)
Gain on sale of assets(253)(95)(236)
(Gain) loss on foreign currency transactions and derivatives(4)51
Gain on property insurance settlement(1)(2)(1)
Equity in earnings of affiliates(21)(76)(29)
Change in due from managers(6)17(17)
Distributions from investments in affiliates29277
Change in restricted cash for operating activities——25
Changes in other assets1218(34)
Changes in other liabilities6(56)(57)
Cash provided by operating activities1,3031,1591,140
INVESTING ACTIVITIES
Proceeds from sales of assets, net467277497
Return of investments in affiliates2310642
Advances to and investments in affiliates(5)(4)(65)
Acquisitions(63)(438)(138)
Capital expenditures:
Renewals and replacements(293)(383)(316)
Redevelopment and acquisition-related investments(226)(275)(112)
New development——(13)
Change in furniture, fixtures and equipment ("FF&E") replacement fund(31)(10)17
Change in restricted cash for investing activities13(16)—
Property insurance proceeds—112
Cash used in investing activities(115)(732)(86)
FINANCING ACTIVITIES
Financing costs—(11)(4)
Issuances of debt—8984
Draws on credit facility7348454
Term loan issuance—500—
Repayment of credit facility(816)(725)(225)
Repurchase/redemption of senior notes—(1,001)(150)
Mortgage debt and other prepayments and scheduled maturities(137)(35)(384)
Issuance of common stock424
Common stock repurchase(218)(675)—
Dividends on common stock(596)(646)(469)
Other financing activities(8)(9)1
Cash used in financing activities(1,037)(857)(1,219)
Effects of exchange rate changes on cash held—(15)(8)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS151(445)(173)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD221666839
CASH AND CASH EQUIVALENTS, END OF PERIOD$372$221$666

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Years Ended December 31, 2016, 2015 and 2014

(in millions)

Supplemental schedule of noncash investing and financing activities:

During 2016, 2015 and 2014, Host Inc. issued approximately 0.6 million, 0.1 million and 0.3 million shares of common stock, respectively, upon the conversion of Host L.P. units, or OP units, held by non-controlling interests valued at $10 million, $3 million and $6 million, respectively.

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.

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2016 and 2015

(in millions)

20162015
ASSETS
Property and equipment, net$10,145$10,583
Assets held for sale15055
Due from managers5556
Advances to and investments in affiliates286324
Furniture, fixtures and equipment replacement fund173141
Other225261
Restricted cash215
Cash and cash equivalents372221
Total assets$11,408$11,656
LIABILITIES, LIMITED PARTNERSHIP INTERESTS OF THIRD PARTIES AND CAPITAL
Debt
Senior notes$2,380$2,376
Credit facility, including term loans of $997 million and $996 million, respectively1,2061,291
Mortgage debt63200
Total debt3,6493,867
Accounts payable and accrued expenses278243
Other283299
Total liabilities4,2104,409
Limited partnership interests of third parties165143
Host Hotels & Resorts, L.P. capital:
General partner11
Limited partner7,0767,170
Accumulated other comprehensive loss(83)(107)
Total Host Hotels & Resorts, L.P. capital6,9947,064
Non-controlling interests—consolidated partnerships3940
Total capital7,0337,104
Total liabilities, limited partnership interest of third parties and capital$11,408$11,656

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2016, 2015 and 2014

(in millions, except per common unit amounts)

201620152014
REVENUES
Rooms$3,492$3,465$3,452
Food and beverage1,5991,5681,546
Other339317323
Total revenues5,4305,3505,321
EXPENSES
Rooms893902924
Food and beverage1,1141,1101,109
Other departmental and support expenses1,3061,2951,264
Management fees236226227
Other property-level expenses382386377
Depreciation and amortization724708693
Corporate and other expenses1069443
Gain on insurance and business interruption settlements(15)(2)(10)
Total operating costs and expenses4,7464,7194,627
OPERATING PROFIT684631694
Interest income344
Interest expense(154)(227)(207)
Gain on sale of assets25395236
Gain (loss) on foreign currency transactions and derivatives4(5)(1)
Equity in earnings of affiliates217629
INCOME BEFORE INCOME TAXES811574755
Provision for income taxes(40)(9)(14)
NET INCOME771565741
Less: Net loss attributable to non-controlling interests———
NET INCOME ATTRIBUTABLE TO HOST HOTELS & RESORTS, L.P.$771$565$741
Basic earnings per common unit$1.05$.76$.99
Diluted earnings per common unit$1.05$.76$.99

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Years Ended December 31, 2016, 2015 and 2014

(in millions)

201620152014
NET INCOME$771$565$741
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates—(71)(60)
Change in fair value of derivative instruments71119
Amounts reclassified from other comprehensive income (loss)173—
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX24(57)(41)
COMPREHENSIVE INCOME795508700
Less: Comprehensive loss attributable to non-controlling interests12—
COMPREHENSIVE INCOME ATTRIBUTABLE TO HOST HOTELS & RESORTS, L.P.$796$510$700

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, L.P. AND SUBISIDIARIES

CONSOLIDATED STATEMENTS OF CAPITAL

Years Ended December 31, 2016, 2015 and 2014

(in millions)

Common OP Units OutstandingGeneral PartnerLimited PartnerAccumulated Other Comprehensive Income (Loss)Non-controlling Interests of Consolidated PartnershipsLimited Partnership Interests of Third Parties
738.9Balance, December 31, 2013$1$7,236$(9)$53$190
—Net income—732——9
—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———(1)—
739.9Balance, December 31, 2014$1$7,385$(50)$52$225
—Net income—558——7
—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———(2)—
(37.5)Repurchase of common OP units—(675)———
734.5Balance, December 31, 2015$1$7,170$(107)$40$143
—Net income—762——9
—Other changes in ownership—(30)——31
—Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates———(1)—
—Change in fair value of derivative instruments——7——
—Amounts reclassified from Other Comprehensive Income——17——
0.2Common OP unit issuances—4———
0.4Units issued to Host Inc. for the comprehensive stock and employee stock purchase plans—8———
—Distributions on common OP units—(630)——(8)
0.6Redemptions of limited partner interests for common stock—10——(10)
(13.5)Repurchase of common OP units—(218)———
722.2Balance, December 31, 2016$1$7,076$(83)$39$165

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2016, 2015 and 2014

(in millions)

201620152014
OPERATING ACTIVITIES
Net income$771$565$741
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization724708693
Amortization of finance costs, discounts and premiums, net72124
Non-cash loss on extinguishment of debt—112
Stock compensation expense121122
Deferred income taxes275(1)
Gain on sale of assets(253)(95)(236)
(Gain) loss on foreign currency transactions and derivatives(4)51
Gain on property insurance settlement(1)(2)(1)
Equity in earnings of affiliates(21)(76)(29)
Change in due from managers(6)17(17)
Distributions from investments in affiliates29277
Change in restricted cash for operating activities——25
Changes in other assets1218(34)
Changes in other liabilities6(56)(57)
Cash provided by operating activities1,3031,1591,140
INVESTING ACTIVITIES
Proceeds from sales of assets, net467277497
Return of investments in affiliates2310642
Advances to and investments in affiliates(5)(4)(65)
Acquisitions(63)(438)(138)
Capital expenditures:
Renewals and replacements(293)(383)(316)
Redevelopment and acquisition-related investments(226)(275)(112)
New development——(13)
Change in furniture, fixtures and equipment ("FF&E") replacement fund(31)(10)17
Change in restricted cash for investing activities13(16)—
Property insurance proceeds—112
Cash used in investing activities(115)(732)(86)
FINANCING ACTIVITIES
Financing costs—(11)(4)
Issuances of debt—8984
Draws on credit facility7348454
Term loan issuance—500—
Repayment of credit facility(816)(725)(225)
Repurchase/redemption of senior notes—(1,001)(150)
Mortgage debt and other prepayments and scheduled maturities(137)(35)(384)
Issuance of common OP units424
Repurchase of common OP units(218)(675)—
Distributions on common OP units(603)(654)(475)
Other financing activities(1)(1)7
Cash used in financing activities(1,037)(857)(1,219)
Effects of exchange rate changes on cash held—(15)(8)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS151(445)(173)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD221666839
CASH AND CASH EQUIVALENTS, END OF PERIOD$372$221$666

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2016, 2015 and 2014

(in millions)

Supplemental schedule of noncash investing and financing activities:

During 2016, 2015 and 2014, non-controlling partners converted common operating partnership units (“OP units”) valued at $10 million, $3 million and $6 million, respectively, in exchange for 0.6 million, 0.1 million and 0.3 million shares, respectively, of Host Inc. common stock.

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.

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, 2016, the hotels in our consolidated portfolio are located in the following countries:

Hotels
United States89
Australia1
Brazil3
Canada2
Mexico1
Total96

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, 2016, the Euro JV hotels are located in the following countries:

Hotels
Belgium1
France3
Germany1
Spain2
Sweden1
The Netherlands1
United Kingdom1
Total10

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.

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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 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. Specifically, as a result of the elimination of the presumption that a general partner should consolidate a limited partnership, and that these partnerships should be evaluated under the VIE or Voting Interest model, we re-evaluated the VIE determination of our non-wholly-owned partnerships. We adopted this standard on January 1, 2016, and applied the changes retrospectively. As a result, we no longer consolidate the partnership that owns the Fort Lauderdale Marriott Harbor Beach Resort & Spa, of which we are the managing partner and hold 49.9% of the partnership interests, due to the voting rights of the third-party owner. Accordingly, the operations, assets and liabilities of the hotel no longer are included in our consolidated financial statements. Instead, we have included our interest in the hotel based on the carrying amount on January 1, 2015 in advances to and investments in affiliates and our portion of the hotel’s earnings are recorded to equity in earnings of affiliates, with no cumulative-effect adjustment. As a result of the adoption of this ASU, total assets and total liabilities at December 31, 2015 were reduced by $128 million and $150 million, respectively. In addition, for the years ended December 31, 2015 and 2014, total revenues were reduced by $37 million and $33 million, respectively. Net income decreased by $6 million for both years ended December 31, 2015 and 2014. The deconsolidation of this entity had no effect on the total equity of Host Inc. stockholders, total Host L.P. capital or net income attributable to Host Inc. or Host L.P.

Additionally, three partnerships now are considered VIE’s, as the general partner maintains control over the decisions that most significantly impact the partnerships; however, this consideration did not change the consolidation determination. This conclusion includes the operating partnership, Host L.P., which is consolidated by Host Inc., of which Host Inc. is the general partner and holds 99% of the limited partner interests. Host Inc.’s sole significant asset is its investment in Host L.P. and, consequently, substantially all of Host Inc.’s assets and liabilities represent assets and liabilities of Host L.P. All of Host Inc.’s debt is an obligation of Host L.P. and may be settled only with assets of Host L.P. We also determined that our consolidated partnership that owns the Houston Airport Marriott at George Bush Intercontinental, of which we are the general partner and hold 85% of the partnership interests, is a VIE. The total assets of this VIE at December 31, 2016 are $60 million and consist of cash and property and equipment. Liabilities for the VIE total $3 million and consist of accounts payable and deferred revenue. The unconsolidated partnership that owns the Philadelphia Marriott Downtown, of which we hold 11% of the limited partner interests, also is a VIE. The carrying amount of this investment at December 31, 2016 is $(6) million and is included in advances to and investments in affiliates. The mortgage debt held by this VIE is non-recourse to us.

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 may include 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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 then are 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 our 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 that the property will be disposed of prior to the end of its useful life, it would be unusual for undiscounted cash flows to be 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 from 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, 2016. 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 no properties that required further consideration of property and market specific conditions or factors to determine if it was impaired. If any properties had been identified, we use an undiscounted cash flow analysis, considering a range of RevPAR and operating margins compared to the prior years’ operating results in evaluating the probability-weighted projected cash flows from operations. To appropriately evaluate if the carrying value of the asset is recoverable, we project cash flows at a stabilized growth rate over its remaining estimated life using assumptions and estimates that we believe reflect current market conditions. No impairment was recorded in 2016 and 2015. During 2014, we recognized impairment expense of $6 million on one property, which is included in depreciation and amortization.

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

•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. We generally include the operations of a disposed hotel or a hotel that has been classified as held for sale in continuing operations, including the gain or loss on the sale, unless the sale represents a strategic shift that will have a major impact on our operations and financial results. We adopted this policy as of January 1, 2014, following the issuance of 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, and no prior year restatements were permitted.

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 Acquired Liabilities

In conjunction with our acquisitions, we may identify intangible assets and other liabilities. These identifiable intangible assets and liabilities typically include above and below market 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, 2016, we consolidate four 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 $39 million and $40 million as of December 31, 2016 and 2015, respectively. One of the partnerships has a finite life that terminates in 2095, and the associated non-controlling interests are mandatorily redeemable at the end of, but not prior to, the finite life.

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 was immaterial for each of the years ended December 31, 2016, 2015 and 2014.

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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

As of December 31,
20162015
OP units outstanding (millions)8.69.1
Market price per Host Inc. common share$18.84$15.34
Shares issuable upon conversion of one OP unit1.0214941.021494
Redemption value (millions)$165$143
Historical cost (millions)8490
Book value (millions) (1)165143
___________

(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 $9 million, $7 million and $9 million for 2016, 2015 and 2014, 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 2016, 2015, or 2014.

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 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. and its subsidiaries.

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2016, our international operations consist of hotels located in Australia, Brazil, Canada and Mexico, 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 of 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 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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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,
20162015
Gain on foreign currency forward contracts$40$35
Loss on interest rate swap cash flow hedges(5)(7)
Foreign currency translation(121)(137)
Other comprehensive loss attributable to non-controlling interests32
Total accumulated other comprehensive loss$(83)$(107)

During 2016, we reclassified a net loss due to foreign currency translation of $17 million that had been recognized previously in other comprehensive income (loss) upon the sale of two hotels in Chile and four hotels in New Zealand. 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) upon the sale of the Delta Meadowvale Hotel & Conference Centre and three hotels in New Zealand. The losses were recognized as a reduction to the gain on sale of assets.

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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Year ended December 31,
201620152014
Net income$771$565$741
Less: Net income attributable to non-controlling interests(9)(7)(9)
Net income attributable to Host Inc.762558732
Assuming conversion of exchangeable senior debentures——27
Diluted income attributable to Host Inc.$762$558$759
Basic weighted average shares outstanding743.0752.4755.4
Assuming weighted average shares for conversion of exchangeable senior debentures——30.3
Assuming distribution of common shares granted under the comprehensive stock plans, less shares assumed purchased at market0.70.51.1
Diluted weighted average shares outstanding (1)743.7752.9786.8
Basic earnings per common share$1.03$.74$.97
Diluted earnings per common share$1.02$.74$.96
___________
(1)There were approximately 25 million potentially dilutive shares (on a weighted average basis) for the year ended December 31, 2015 related to our exchangeable senior debentures, which were anti-dilutive for the period. The exchangeable senior debentures were redeemed in 2015 in exchange for 32 million shares.

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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Year ended December 31,
201620152014
Net income$771$565$741
Less: Net loss attributable to non-controlling interests———
Net income attributable to Host L.P.771565741
Assuming conversion of exchangeable senior debentures——27
Diluted income attributable to Host L.P.$771$565$768
Basic weighted average units outstanding736.3745.7748.9
Assuming weighted average units for conversion of exchangeable senior debentures——29.7
Assuming distribution of common units granted under the comprehensive stock plans, less units assumed purchased at market0.60.51.0
Diluted weighted average units outstanding (1)736.9746.2779.6
Basic earnings per common unit$1.05$.76$.99
Diluted earnings per common unit$1.05$.76$.99
___________
(1)There were approximately 25 million potentially dilutive units (on a weighted average basis) for the year ended December 31, 2015, related to our exchangeable senior debentures, which were anti-dilutive for the period. The exchangeable senior debentures were redeemed in 2015 and Host L.P. issued 31.3 million units.

Share-Based Payments

At December 31, 2016, 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-classified awards or liability-classified 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 liabilities to the extent that settlement features allow the recipient to determine the percentage of the restricted stock awards to be withheld to meet the recipients’ income 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 multiplied by 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.

Effective January 1, 2017, we implemented a new stock-based employee compensation plan. Based upon the cash settlement options and in conjunction with the adoption of ASU No. 2016-09, we anticipate that the awards under the new plan will be classified as equity. The plan includes awards that vest over a one-year, two-year and three-year period.

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, 2016 and 2015, our exposure to risk related to our derivative instruments totaled $12 million and $17 million, respectively, and the counterparties to such instruments are investment grade financial institutions. Our credit risk exposure with regard to our cash and the available capacity under the revolver portion of our credit facility is spread among a diversified group of investment grade financial institutions.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 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 May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new standard sets forth steps to determine the timing and amount of revenue to be recognized to depict the transfer of goods or services in an amount that reflects the consideration that the entity expects in exchange. In March, April, May and December 2016, the FASB issued ASUs Nos. 2016-08, 2016-10, 2016-12 and 2016-20, respectively, all related to Revenue from Contracts with Customers (Topic 606), which further clarify the application of the standard. 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. The new standards can be applied retrospectively or under a modified retrospective approach. Based on our assessment of this standard, it will not materially affect the amount or timing of revenue recognition for revenues from room, food and beverage, and other hotel level sales; however, it may allow for earlier gain recognition for certain sale transactions under which we have continuing involvement. Upon adoption, we expect to implement these standards using a modified retrospective approach with a cumulative effect recognized and no prior period restatements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which affects aspects of accounting for lease agreements. Under the new standard, all leases, including operating leases, will require recognition of the lease assets and lease liabilities by lessees on the balance sheet. However, the effect on the statement of operations and the statement of cash flows largely is unchanged. The standard is effective for fiscal years beginning after December 15, 2018, with early application permitted. The standard requires a modified retrospective approach, with restatement of the periods presented in the year of adoption. The primary impact of the new standard will be to the treatment of our 26 ground leases, which represent approximately 85% of all of our operating lease payments. While we have not completed our analysis, we believe that the application of this standard will result in the recording of a right of use asset and the related lease liability of between $400 million and $500 million for the ground leases, although changes in discount rates, ground lease terms or other variables may have a significant effect on this calculation. As noted above, we expect that the adoption of this standard will have minimal impact on our income statement.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which is intended to simplify accounting for share-based payment transactions and will affect the classification of certain share-based awards and related income tax withholdings. The standard is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. As a result of the standard, we anticipate that the majority of our share-based payment awards granted in 2017 will be deemed equity-classified awards, and the excess tax benefits or deficiencies that are incurred based on the difference between the

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

intrinsic value of the award and the grant-date fair value will be recognized as income tax expense or benefit on the income statement. However, we do not anticipate that the implementation of this standard will have a material effect on our financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that, on the statement of cash flows, amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending total amounts thereof. Upon adoption of this standard, amounts included in restricted cash and furniture, fixtures and equipment replacement fund on our consolidated balance sheet will be included with cash and cash equivalents on the statement of cash flows. These amounts totaled $175 million and $156 million for the years ended December 31, 2016 and 2015, respectively. The adoption of this standard will not change our balance sheet presentation. The standard is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We plan to adopt this standard beginning January 1, 2017.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The standard adopts a two-step approach, wherein, if substantially all of the fair value of the gross assets acquired is concentrated in a single (group of similar) identifiable asset(s), then the transaction would be considered an asset purchase. As a result of the standard, we anticipate that the majority of our hotel purchases will be considered asset purchases as opposed to business combinations, although the determination will be made on a transaction-by-transaction basis. This standard will be applied on a prospective basis and, therefore, it does not affect the accounting for any of our previous transactions. The standard is effective for annual periods beginning after December 15, 2017, with early adoption permitted.

2.Property and Equipment

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

As of December 31,
20162015
Land and land improvements$2,047$2,044
Buildings and leasehold improvements13,48313,472
Furniture and equipment2,3772,283
Construction in progress86289
17,99318,088
Less accumulated depreciation and amortization(7,848)(7,505)
$10,145$10,583

The aggregate cost of real estate for federal income tax purposes is approximately $10.6 billion at December 31, 2016.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.Investments in Affiliates

We own investments in joint ventures that are accounted for under the equity method of accounting. The debt of the European, Hyatt Place, Harbor Beach and Philadelphia Marriott Downtown joint ventures is non-recourse to, and not guaranteed by, us, and a default of the debt does not trigger a default under any of our debt. As of December 31, 2016, 100% of the $9 million construction loan for the Maui JV is jointly and severally guaranteed by the partners of the joint venture. Investments in affiliates consist of the following (in millions):

As of December 31, 2016
Ownership InterestsOur InvestmentOur Portion of DebtTotal DebtDistributions received in 2016 (1)Assets
Euro JV32.1 - 33.4%$227$236$744$18Ten hotels in Europe
Asia/Pacific JV (2)25%17——9A 36% interest in five operating hotels and two hotels in final stages of completion in India
Maui JV67%812741—131-unit vacation ownership project in Maui, HI
Hyatt Place JV (3)50%(12)306017One hotel in Nashville, TN
Harbor Beach JV49.9%(24)751496One hotel in Fort Lauderdale, FL
Philadelphia Marriott Downtown JV11%(6)242212One hotel in Philadelphia, PA
Fifth Wall Ventures3———Real estate industry technology investment
Total$286$392$1,215$52
As of December 31, 2015
Ownership InterestsOur InvestmentOur Portion of DebtTotal DebtDistributions received in 2015 (1)Assets
Euro JV (4)32.1 - 33.4%$251$252$797$115Ten hotels in Europe
Asia/Pacific JV25%25———A 36% interest in five operating hotels and two hotels under development in India
Maui JV67%724568—131-unit vacation ownership project in Maui, HI
Hyatt Place JV50%315318One hotel in Nashville, TN
Harbor Beach JV49.9%(21)751498One hotel in Fort Lauderdale, FL
Philadelphia Marriott Downtown JV11%(6)252242One hotel in Philadelphia, PA
Total$324$412$1,269$133
___________
(1)Distributions received were funded by cash from operations unless otherwise noted.
(2)Distributions received from the Asia/Pacific JV in 2016 were primarily related to the sale of the Four Points by Sheraton Perth in 2015.
(3)Distributions received from the Hyatt Place JV include $14 million of loan refinancing proceeds.
(4)Ninety-two percent of the 2015 distributions received from the Euro JV were funded by proceeds from the disposition of nine hotels, discussed below, while the remaining was funded with cash from operations.

European Joint Venture

We own general and limited partner interests in the Euro JV that consists of two separate funds, with the other partners being 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, 2016, the total assets of the Euro JV are approximately €1.5 billion. As asset manager of the Euro JV

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

funds, we earn asset management fees based on the amount of equity invested, which in 2016, 2015 and 2014 aggregated approximately $8 million, $11 million and $16 million, respectively.

As of December 31, 2016, 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. On June 27, 2016, the Euro JV Fund II partners amended the Euro JV partnership agreement to extend the equity commitment period for Euro JV Fund II by one year to June 27, 2017. The remaining equity commitment for Euro JV Fund I is limited in its use to capital expenditures and financing needs.

Signification transactions for the Euro JV during 2016 and 2015 were as follows:

•During 2016, the Euro JV completed amendments to two of its mortgage loan agreements, extending their final maturity and reducing the overall weighted average interest rate by 20 basis points.
•During 2015, the Euro JV sold nine properties for €526 million, repaid €229 million of mortgage loans secured by the properties and distributed €328.5 million to its partners. The earnings in 2015 include €39 million ($43 million) related to our portion of the gains recognized on the sale of the nine properties.

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 May 2017 and January 2018. We have hedged €177 million (approximately $199 million) of our investment via 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 has expired. Certain funding commitments remain, however, related to its existing investments in India.

As of December 31, 2016, the Asia/Pacific JV partners have invested approximately $103 million (of which our share was $26 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 joint venture opened the Pullman & Novotel New Delhi Aerocity. As a result, this joint venture owns two hotels in Bangalore, one in Chennai, two in New Delhi and two additional properties in the final stages of completion in Chennai. The hotels 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), of which our portion is included in the 2015 earnings.

Maui Joint Venture

We have a 67% non-controlling interest in a joint venture that owns a 131-unit vacation ownership development in Maui, Hawaii adjacent to our Hyatt Regency Maui Resort & Spa (the “Maui JV”). The project opened in December 2014. Since 2012, we have contributed approximately $87 million to the Maui JV, which includes the contribution of land valued at $36 million. As of December 31, 2016, approximately $9 million was outstanding on the joint venture’s construction loan, which is jointly and severally guaranteed by us and Hyatt Hotels Corporation. Additionally, the joint venture has $32 million of outstanding debt used to facilitate the sales of the vacation ownership units, which is not guaranteed by us.

Hyatt Place Joint Venture

We own a 50% interest in a joint venture with White Lodging Services that owns the 255-room Hyatt Place Nashville Downtown in Tennessee. In August 2016, the Hyatt Place joint venture refinanced its $31 million construction loan with a new $60 million mortgage loan due August 2019, with two 12-month extension options. The loan bears interest at 1-month USD LIBOR plus 300 basis points, or 3.8%, at December 31, 2016. Upon repayment of the construction loan, the partners were released of their guarantee on such loan.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Harbor Beach Joint Venture

We have a non-controlling 49.9% interest in a joint venture with R/V-C Association that owns the 650-room Fort Lauderdale Marriott Harbor Beach Resorts & Spa in Florida. The joint venture has an outstanding $149 million mortgage loan with a maturity date of January 1, 2024. The loan bears interest at 4.75%. Only monthly interest payments are being made on the loan. No principal payments are due until the loan maturity date of January 1, 2024.

Combined Financial Information of Unconsolidated Investees

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

As of December 31,
20162015
Property and equipment, net$1,634$1,708
Timeshare inventory137157
Other assets514538
Total assets$2,285$2,403
Debt$1,215$1,269
Other liabilities319302
Equity751832
Total liabilities and equity$2,285$2,403

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

Year ended December 31,
201620152014
Total revenues$599$769$810
Operating expenses
Expenses(437)(558)(577)
Depreciation and amortization(73)(84)(99)
Operating profit89127134
Interest income53—
Interest expense(57)(80)(86)
Gain (loss) on dispositions(2)14112
Net income$35$191$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,
20162015
Series Z senior notes, with a rate of 6% due October 2021$297$297
Series B senior notes, with a rate of 5¼% due March 2022347347
Series C senior notes, with a rate of 4¾% due March 2023446445
Series D senior notes, with a rate of 3¾% due October 2023398397
Series E senior notes, with a rate of 4% due June 2025496495
Series F senior notes, with a rate of 4½% due February 2026396395
Total senior notes2,3802,376
Credit facility revolver209295
2014 Credit facility term loan due June 2017500499
2015 Credit facility term loan due September 2020497497
Mortgage debt (non-recourse), with an average interest rate of 3.4% and 4.7% at December 31, 2016 and 2015, respectively, maturing through November 201763200
Total debt$3,649$3,867

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, 2016 and 2015 was $2.4 billion. The senior notes balances as of December 31, 2016 and 2015 are net of discounts and deferred financing costs of approximately $20 million and $24 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, 2016, we are in compliance with all of these covenants.

We completed the following senior notes transactions in 2015:

•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.

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 redemption price of 100% of the principal amount, plus accrued interest. 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 in 2015 totaled $21 million, including $8 million of cash interest expense and $13 million of non-cash discount amortization.

Authorization for Repurchase of Senior Notes. In February 2017, Host Inc.’s Board of Directors authorized repurchases of up to $250 million of senior notes and mortgage debt (other than in accordance with their terms).

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2016, 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. Based on our unsecured debt rating at December 31, 2016, the loan has a floating interest rate of LIBOR plus 110 bps (or approximately a 1.9% 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 repayments under the credit facility were $82 million in 2016, while in 2015 we drew $120 million, net. As of December 31, 2016, we have $788 million of 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 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 statements 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, 2016, 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, 2016, our leverage ratio was 2.4x.

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2016, we have mortgage debt secured by one asset, with an average interest rate of 3.4%, which mortgage debt matures in 2017. Interest is payable quarterly. As of December 31, 2016, we are in compliance with the covenants under our mortgage debt obligation.

We have made the following mortgage debt repayments since January 2015:

Maturity
Transaction DatePropertyRateDateAmount
Repayments
September 2016Novotel and ibis Christchurch3.6%2/18/2018$(17)
April 2016Hyatt Regency Reston3.5%7/1/2016(100)
March 2016ibis Wellington3.7%2/18/2018(11)
February 2016Novotel Wellington5.7%2/18/2018(9)
November 2015Novotel Queenstown Lakeside6.7%2/18/2016(20)
October 2015Novotel Auckland Ellerslie and ibis Auckland Ellerslie6.4%2/18/2016(15)

Aggregate Debt Maturities

Aggregate debt maturities are as follows (in millions):

As of December 31, 2016
2017$562
2018211
2019—
2020500
2021300
Thereafter2,100
3,673
Deferred financing costs(23)
Unamortized (discounts) premiums, net(2)
Capital lease obligations1
$3,649

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Interest

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

Year ended December 31,
20162015(1)2014(1)
Interest expense$154$227$207
Amortization of debt premiums/discounts, net (2)(1)(13)(16)
Amortization of deferred financing costs(6)(8)(8)
Non-cash losses on debt extinguishments—(11)(2)
Change in accrued interest(3)121
Interest paid (3)$144$207$182
___________
(1)Interest expense and interest paid for 2015 and 2014 include cash prepayment premiums of approximately $30 million and $2 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 $3 million, $5 million and $7 million for 2016, 2015 and 2014, respectively.

Our debt repayments resulted in debt extinguishment costs included in interest expense for 2015 and 2014 of $41 million and $4 million, respectively. No debt extinguishment costs were incurred in 2016.

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 737.8 million and 750.3 million were outstanding as of December 31, 2016 and 2015, respectively. Fifty million shares of no par value preferred stock are authorized; none of such preferred shares were outstanding as of December 31, 2016 and 2015.

Capital of Host L.P.

As of December 31, 2016, 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, 2016 and 2015, Host L.P. had 730.8 million and 743.7 million OP units outstanding, respectively, of which Host Inc. held 722.2 million and 734.5 million, respectively.

Repurchases and Issuances of Common Stock and Common OP Units

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 2016, we repurchased 13.8 million shares at an average price of $15.79 for a total purchase price of approximately $218 million. In 2015, we repurchased 38.3 million shares at an average price of $17.64 for a total purchase price of approximately $675 million. The shares repurchased constitute authorized but unissued shares. As of December 31, 2016, the purchasing authority under the program has expired. On February 21, 2017, the Board of Directors authorized a new program to repurchase up to $500 million of common stock through December 31, 2017.

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

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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The dividends that were taxable to our stockholders in 2016 were considered 66% ordinary income (non-qualified dividend income), 4% qualified dividend income, 24% capital gain distribution and 6% unrecaptured Section 1250 gain. 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 table below presents the amount of common dividends declared per share and common distributions per unit as follows:

Year ended December 31,
201620152014
Common stock$.85$.80$.75
Common OP units.868.817.766

On February 21, 2017, 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 17, 2017, to stockholders of record on March 31, 2017.

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 beginning January 1, 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, generally we will not be subject to federal and state 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 and state 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 and state income and excise taxes on our undistributed taxable income.

We have recorded a 100% valuation allowance of approximately $22 million against the deferred tax asset related to the net operating loss carryovers as of December 31, 2016 with respect to our hotel in Mexico. During 2016, we reversed the $3 million valuation allowance previously recorded against the deferred tax asset related to the net operating loss carryovers of our hotels in Canada. We expect that the net operating loss and alternative minimum tax and investment tax credit carryovers for U.S. federal income tax purposes will be realized. The net decrease in the valuation allowance for the year ending December 31, 2016 and December 31, 2015 is approximately $1 million and $22 million, respectively. The primary components of our net deferred tax assets are as follows (in millions):

As of December 31,
20162015
Deferred tax assets
Related party interest expense$—$7
Net operating loss and capital loss carryovers4363
Alternative minimum tax and investment tax credits85
Property and equipment44
Investments in domestic affiliates23
Deferred revenue and expenses4252
Foreign exchange net losses (AOCI)1218
Other22
Total gross deferred tax assets113154
Less: Valuation allowance(22)(23)
Total deferred tax assets, net of valuation allowance$91$131
Deferred tax liabilities
Property and equipment(11)(16)
Investments in domestic and foreign affiliates(7)(12)
Other(2)(2)
Total gross deferred tax liabilities(20)(30)
Net deferred tax assets$71$101

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At December 31, 2016, we have aggregate gross domestic and foreign net operating loss and capital loss carryovers of approximately $137 million. We have deferred tax assets related to these loss carryovers of approximately $43 million, with a valuation allowance of approximately $22 million. Our net operating loss carryovers expire through 2035, and our foreign capital loss carryovers have no expiration period. Our alternative minimum tax and investment tax credit carryovers have no expiration period. We believe that it is more likely than not that the results of future operations will generate sufficient taxable income to realize our total deferred tax assets, net of a valuation allowance of $22 million, of $91 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,
201620152014
U.S. income$763$530$738
Foreign income484417
Total$811$574$755

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

Year ended December 31,
201620152014
Current—Federal$—$2$3
—State1(1)2
—Foreign12310
13415
Deferred—Federal242(1)
—State6—(1)
—Foreign(3)31
275(1)
Income tax provision – continuing operations$40$9$14

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,
201620152014
Statutory federal income tax provision$284$204$265
Adjustment for nontaxable income of Host Inc.(260)(203)(268)
State income tax provision, net711
Provision for uncertain tax positions—15
Foreign income tax provision9611
Income tax provision$40$9$14

Cash paid for income taxes, net of refunds received, was $15 million, $9 million, and $22 million in 2016, 2015, and 2014, respectively.

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

20162015
Balance at January 1$11$10
State decreases—(2)
Other increases—3
Balance at December 31$11$11

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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2016, the tax years that remain subject to examination by major tax jurisdictions generally include 2013-2016.

There were no material interest or penalties recorded for the years ended December 31, 2016, 2015 and 2014.

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 has redeveloped and expanded the existing retail space, as well as created 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, 2016, all or a portion of 26 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 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 $12 million as of December 31, 2016. We, however, consider 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 upon 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 operating leases for which we are the lessee (in millions):

As of December 31, 2016
2017$43
201841
201938
202038
202137
Thereafter1,264
Total minimum lease payments$1,461

Minimum payments for the operating leases have not been reduced by aggregate minimum sublease rentals from restaurants of approximately $7 million that are payable to us under non-cancelable subleases.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Rent expense is included in other property-level expenses and consists of (in millions):

Year ended December 31,
201620152014
Minimum rentals on operating leases$45$46$47
Additional rentals based on sales383332
Less: sublease rentals(2)(2)(3)
$81$77$76
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 awards 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 its common stock and options to purchase our common stock, and the Employee Stock Purchase Plan (“ESPP”). At December 31, 2016, there were approximately 14 million shares of Host Inc.’s common stock reserved and available for issuance under the 2009 Comprehensive Plan.

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-classified or liability-classified awards. Equity-classified awards are measured based on their fair value as of the date of grant. In contrast, liability-classified awards are re-measured to fair value each reporting period.

During 2016, 2015 and 2014, we recorded stock-based compensation expense of approximately $12 million, $11 million and $22 million, respectively. Shares granted in 2016, 2015 and 2014 totaled 2.3 million, 1.8 million and 2.0 million, respectively, while 1.2 million, 0.8 million and 1.3 million shares, respectively, vested during those years.

Senior Executive Plan

During 2016, Host Inc. granted 1.6 million shares of restricted stock awards and 0.6 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 $14.26 per share for performance year 2016. The restricted stock awards and stock option awards vest on an annual basis; therefore, no unvested awards were outstanding at December 31, 2016.

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 income tax requirements in excess of the statutory minimum income tax 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, 2016 stock price. Of the awards granted in 2016, 99% 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-classified awards. The fair value of these equity-classified awards is based on the fair value on the grant date, and is not adjusted for subsequent movements in fair value.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During 2016, 2015 and 2014, we recorded compensation expense of approximately $10 million, $8 million and $18 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, 2016:

Year ended December 31,
201620152014
SharesFair ValueSharesFair ValueSharesFair Value
(in millions)(per share)(in millions)(per share)(in millions)(per share)
Balance, at beginning of year—$——$——$—
Granted1.6181.3161.518
Vested (1)(0.6)19(0.4)15(0.8)24
Forfeited/expired(1.0)19(0.9)15(0.7)24
Balance, at end of year——————
Issued in calendar year (1)0.2150.5240.419
___________
(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 0.2 million shares issued in 2016 include shares vested at December 31, 2015, after adjusting for shares withheld to meet employee tax requirements. The shares withheld for employee tax requirements were valued at $2.4 million, $9.8 million and $6.1 million for 2016, 2015 and 2014, respectively.

Stock Option Awards

As of December 31, 2016, 1.3 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 $17.78 per share. During 2016, 2015 and 2014, stock option grants totaled 596,000, 366,000 and 393,000, respectively. Stock option compensation expense was $1.5 million for 2016, and $1.8 million for each of 2015 and 2014, and all stock option awards outstanding as of December 31, 2016 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, the amount of awards expected to be forfeited, and our expected dividend yield. To calculate the fair value of stock option awards granted from 2014 to 2016, 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 5%, 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-classified awards that vest within three years of the grant date and compensation 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 discount of 10% of the lower of the beginning and ending stock price each quarter. During 2016, 2015 and 2014, we granted 118,000 shares, 116,000 shares and 118,000 shares, respectively, under both of these programs and recorded expense of $1.6 million, $1.9 million and $2.2 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 liability recorded for this obligation is not material. Payments for these items were not material for the three years ended December 31, 2016.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.Dispositions

We disposed of ten hotels in 2016, eight hotels in 2015 and five hotels in 2014. The following table provides summary results of operations for these hotels, which are included in continuing operations (in millions):

Year ended December 31,
201620152014
Revenues$58$214$353
Income before taxes and gain on disposal102527
Gain on disposals24389229

Subsequent to year end, we sold the JW Marriott Desert Springs Resort & Spa for $172 million, including the $12 million FF&E replacement fund retained at the hotel. The hotel was classified as held for sale at December 31, 2016.

11.Acquisitions

Business Combinations

On June 8, 2015, we acquired the 643-room Phoenician hotel for approximately $400 million and recorded $1 million of acquisition related expenses. Subsequent to year end, on February 16, 2017 we acquired the 347-room Don CeSar, including the adjacent Beach House Suites for $214 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; however, we still are in the process of obtaining appraisals and finalizing the accounting for the acquisition of The Don CeSar. The estimated fair value of the assets acquired related to this acquisition is $214 million.

Asset Acquisitions

For 2016 and 2015, our other asset acquisitions were as follows:

•In October 2016, we purchased eight apartments at the Hilton Melbourne South Wharf for $4 million (A$5 million).
•In July 2016, we purchased the ground lease at the Key Bridge Marriott for $54 million.
•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.
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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables detail the fair value of our financial assets and liabilities that are required to be measured at fair value on a recurring basis (in millions):

Fair Value at Measurement Date Using
Balance at December 31, 2016Quoted 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)$12$—$12$—
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)—
___________
(1)These derivative contracts have been designated as hedging instruments.

Derivatives and Hedging

Foreign Investment Hedging Instruments. 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 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 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.

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 Range20162015
May 2014-January 2016€100$118May 2017-January 2018$5$13
November 2016C$25$19November 2018$—$3
November 2016NZ$45$32February 2017$1$—

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 Currency20162015
Canadian dollars (1)$34C$46$(1)$5
Euros$81€77$3$10
Australian dollars$36A$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.

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 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 liabilities is shown below (in millions):

December 31, 2016December 31, 2015
Carrying AmountFair ValueCarrying AmountFair Value
Financial liabilities
Senior notes (Level 1)$2,380$2,477$2,376$2,452
Credit facility (Level 2)1,2061,2111,2911,298
Mortgage debt and other, excluding capital leases (Level 2)6262199199
13.Relationship with Marriott International

We have entered into various agreements with Marriott, including for the management of approximately 77% of our hotels (as measured by revenues), the partnership agreement for the JW Marriott Hotel Mexico City, Mexico and certain limited administrative services.

In 2016, 2015 and 2014, we paid Marriott $159 million, $138 million and $142 million, respectively, of hotel management fees and approximately $4.6 million, $2.6 million and $1.4 million, respectively, of franchise fees.

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 and Hyatt represent 77% and 13% 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. 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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

operating profit after the owner has received a priority return on its investment. In the case of our hotels operating under the W®, Westin®, Sheraton®, Luxury Collection® and St. Regis® brands and managed by Marriott following its acquisition of Starwood Hotels & Resorts Worldwide, Inc. on September 23, 2016, the base management fee is 1% of annual gross revenues, but that amount is supplemented by license fees payable to Marriott 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, Marriott generally receives 5% of gross revenues attributable to room sales and 2% of gross revenues attributable to food and beverage sales in addition to the 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 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 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 retail and office spaces) 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 four countries as of December 31, 2016. 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):

201620152014
RevenuesProperty and Equipment, netRevenuesProperty and Equipment, netRevenuesProperty and Equipment, net
United States$5,259$9,913$5,129$10,294$5,044$10,030
Australia3485348839102
Brazil346330533682
Canada547158668782
Chile9—25443244
Mexico291329182926
New Zealand11—452054128
Total$5,430$10,145$5,350$10,583$5,321$10,494

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 properties 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 $12 million as of December 31, 2016.
•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 $8 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.

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. This amount is recorded on our consolidated balance sheet.

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 $5 million as of December 31, 2016. We have estimated that, in the aggregate, our losses related to these proceedings could be as much as $17 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)
2016
FirstSecondThirdFourth
QuarterQuarterQuarterQuarter
(in millions, except per share/unit amounts)
Host Hotels & Resorts, Inc.:
Revenues$1,339$1,459$1,295$1,337
Operating profit151239144150
Net income184351108128
Net income attributable to Host Hotels & Resorts, Inc.182347107126
Basic earnings per common share.24.47.14.17
Diluted earnings per common share.24.47.14.17
Host Hotels & Resorts, L.P.(1):
Net income attributable to Host Hotels & Resorts, L.P.184352108127
Basic earnings per common unit.25.48.15.17
Diluted earnings per common unit.25.48.15.17

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2015
FirstSecondThirdFourth
QuarterQuarterQuarterQuarter
(in millions, except per share/unit amounts)
Host Hotels & Resorts, Inc.:
Revenues$1,302$1,439$1,283$1,326
Operating profit133222133143
Net income9921487165
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
___________
(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.

Previous: Item 7A. Quantitative and Qualitative Disclosures about Market Risk · Next: Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure