Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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The following discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report.

Overview

Host Inc. operates as a self-managed and self-administered REIT that owns properties and conducts operations through Host L.P., of which Host Inc. is the sole general partner and of which it holds approximately 99% of its common OP units as of December 31, 2017. The remainder of Host L.P.’s common OP units are owned by various unaffiliated limited partners. Host Inc. has the exclusive and complete responsibility for Host L.P.’s day-to-day management and control.

Host Inc. is the largest lodging REIT in NAREIT’s composite index and one of the largest owners of luxury and upper upscale hotel properties. As of February 21, 2018, we own 93 hotels in the United States and internationally and have minority ownership interests in an additional 21 hotels through joint ventures in the United States, Europe and the Asia/Pacific region. These hotels are operated primarily under brand names that are among the most respected and widely recognized in the lodging industry. The majority of our hotels are located in central business districts of major cities, near airports and in resort/conference destinations.

Our customers fall into three broad groups: transient business, group business and contract business, which accounted for approximately 60%, 34%, and 6%, respectively, of our 2017 room sales. Transient business broadly represents individual business or leisure travelers. Business travelers make up the majority of transient demand at our hotels. Therefore, we will be significantly more affected by trends in business travel than trends in leisure demand. For a discussion of our customer categories, see “ – Our Customers”.

Understanding Our Performance

Our Revenues and Expenses. Our hotels are operated by third-party managers under long-term agreements, pursuant to which they typically earn base and incentive management fees based on the levels of revenues and profitability of each individual hotel. We provide operating funds, or working capital, which the managers use to purchase inventory and to pay wages, utilities, property taxes and other hotel-level expenses. We generally receive a cash distribution from our hotel managers each month, which distribution reflects hotel-level sales less property-level operating expenses (excluding depreciation).

Operations from our domestic portfolio account for approximately 98% of our total revenues and 2% relate to our international hotels. The following table presents the components of our hotel revenue as a percentage of our total revenue:


•	Rooms revenue. Occupancy and average daily room rate are the major drivers of rooms revenue. The business mix of the hotel (group versus transient and retail versus discount business) is a significant driver of room rates.	65%

•	Food and beverage revenue. Food & beverage revenue consists of revenue from group functions, which may include banquet revenue and audio and visual revenue, as well as outlet revenue from the restaurants and lounges at our properties.	29%

•	Other revenue. Occupancy, the nature of the property (e.g., resort, etc.) and its price point are the main drivers of other ancillary revenue, such as attrition and cancellation, parking, golf course, spa, entertainment and other guest services. This category also includes retail and apartment rental revenue.	6%

Hotel operating expenses represent approximately 98% of our total operating costs and expenses. The following table presents the components of our hotel operating expenses as a percentage of our total operating costs and expenses:


•	Rooms expense. These costs include housekeeping, reservation systems, room supplies, laundry services and front desk costs. Occupancy is the major driver of rooms expense. These costs can increase based on increases in salaries and wages, as well as on the level of service and amenities that are provided.	19%

•	Food and beverage expense. These expenses primarily include food, beverage and the associated labor costs and will correlate closely with food and beverage revenue. Group functions with banquet sales and audio and visual components generally will have lower overall costs as a percentage of revenues than outlet sales.	23%

•	Other departmental and support expenses. These expenses include labor and other costs associated with other ancillary revenue, such as parking, golf courses, spas, entertainment and other guest services, as well as labor and other costs associated with administrative departments, sales and marketing, repairs and minor maintenance and utility costs.	27%

•	Management fees. Base management fees are computed as a percentage of gross revenue. Incentive management fees generally are paid when operating profits exceed certain thresholds.	5%

•	Other property-level expenses. These expenses consist primarily of real and personal property taxes, ground rent, equipment rent and property insurance. Many of these expenses are relatively inflexible and do not necessarily change based on changes in revenues at our hotels.	8%

•	Depreciation and amortization expense. This is a non-cash expense that changes primarily based on the acquisition and disposition of hotel properties and the amounts of historical capital expenditures.	16%

The expense components listed above are based on those presented in our consolidated statements of operations. It also is worth noting that wage and benefit costs are spread among various line items. Taken separately, these costs represent approximately 57% of our rooms, food and beverage, and other departmental and support expenses.

Key Performance Indicators. The following key performance indicators are commonly used in the hospitality industry:

	•	hotel occupancy (a volume indicator);

	•	average daily rate (“ADR”) is a price indicator calculated by dividing room revenue by the number of rooms sold;

	•	revenue per available room (“RevPAR”) is to evaluate hotel operations. RevPAR is defined as the product of the average daily room rate charged and the average daily occupancy achieved. RevPAR does not include food and beverage, parking, or other guest service revenues generated by the property. Although RevPAR does not include these ancillary revenues, it is considered a key indicator of core revenues for many hotels; and

	•	total revenue per available room (“Total RevPAR”) is a summary measure of hotel results calculated by dividing the sum of room, food and beverage and other ancillary service revenue by room nights available to guests for the period. It includes ancillary revenues not included within RevPAR.

RevPAR changes that are driven by occupancy have different implications on overall revenue levels, as well as incremental operating profit, than do changes that are driven by average room rate. For example, increases in occupancy at a hotel will lead to increases in room revenues and ancillary revenues, such as food and beverage revenue, as well as additional incremental costs (including housekeeping services, utilities and room amenity costs). RevPAR increases due to higher room rates, however, will not result in additional room-related costs, with the exception of those charged as a percentage of revenue. As a result, changes in RevPAR driven by increases or decreases in average room rates have a greater effect on profitability than do changes in RevPAR caused by occupancy levels.

In discussing our operating results, we present RevPAR and certain other financial data for our hotels on a comparable hotel basis. Comparable hotels are those properties that we have owned for the entirety of the reporting periods being compared and which operations have been included in our consolidated results. Comparable hotels do not include the results of properties acquired or sold, or that incurred business interruption due to significant property damage or large scale capital improvements. We also present

RevPAR separately for our comparable consolidated domestic and international (both on a nominal and constant dollar basis) hotels, as well as for our joint venture in Europe. We provide RevPAR results in constant currency due to the number of consolidated properties we have internationally and the effect that exchange rates have on our reporting. We use constant currency because we believe it is useful to investors as it provides clarity on how the hotels are performing in their local markets. For all other measures (net income, operating profit, EBITDA, FFO, etc.), our discussion refers to nominal US$, which is consistent with our financial statement presentation under U.S. generally accepted accounting principles (“GAAP”).

We also evaluate the performance of our business through certain non-GAAP financial measures. Each of these non-GAAP financial measures should be considered by investors as supplemental measures to GAAP performance measures such as total revenues, operating profit, net income and earnings per share. We provide a more detailed discussion of these non-GAAP financial measures, how management uses such measures to evaluate our financial condition and operating performance and a discussion of certain limitations of such measures in “—Non-GAAP Financial Measures.” Our non-GAAP financial measures include:

	•	NAREIT Funds From Operations (“FFO”) and Adjusted FFO per diluted share. We use NAREIT FFO and Adjusted FFO per diluted share as supplemental measures of company-wide profitability. NAREIT adopted FFO in order to promote an industry-wide measure of REIT operating performance. We also adjust NAREIT FFO for gains and losses on extinguishment of debt, acquisition costs and litigation gains or losses outside the ordinary course of business.

	•	Comparable Hotel EBITDA. Hotel EBITDA measures property-level results before debt service, depreciation and corporate expenses (as this is a property level measure) and is a supplemental measure of aggregate property-level profitability. We use Hotel EBITDA and associated margins to evaluate the profitability of our comparable hotels.

	•	EBITDA, EBITDAre and Adjusted EBITDAre. Earnings before interest expense, income taxes, depreciation and amortization (“EBITDA”) is a supplemental measure of our operating performance and facilitates comparisons between us and other lodging REITs, hotel owners who are not REITs and other capital-intensive companies. NAREIT adopted EBITDA for real estate (“EBITDAre”) in order to promote an industry-wide measure of REIT operating performance. We also adjust EBITDAre for property insurance gains, the cumulative effect of a change in accounting principle, acquisition costs and litigation gains or losses outside the ordinary course of business (“Adjusted EBITDAre”).

Summary of 2017 Operating Results

The following table reflects certain line items from our audited consolidated statements of operations and the significant operating statistics for the three years ended December 31, 2017 (in millions, except per share and hotel statistics):

Historical Income Statement Data:

							Change						Change
	2017			2016			2016 to 2017			2015			2015 to 2016
Total revenues	$	5,387		$	5,430			(0.8	)%	$	5,350			1.5	%
Net income		571			771			(25.9	)%		565			36.5	%
Operating profit		676			684			(1.2	)%		631			8.4	%
Operating profit margin under GAAP		12.5	%		12.6	%		(10	bps)		11.8	%		80	bps
EBITDAre	$	1,510		$	1,483			1.8	%	$	1,421			4.4	%
Adjusted EBITDAre	$	1,510		$	1,482			1.9	%	$	1,420			4.4	%

Diluted earnings per share	$	.76		$	1.02			(25.5	)%	$	.74			37.8	%
NAREIT FFO per diluted share		1.68			1.69			(0.6	)%		1.49			13.4	%
Adjusted FFO per diluted share		1.69			1.69		—				1.54			9.7	%

Comparable Hotel Data:

	2017 Comparable Hotels (1)									2016 Comparable Hotels (1)
							Change									Change
	2017			2016			2016 to 2017			2016			2015			2015 to 2016
Comparable hotel revenues	$	4,840		$	4,808			0.7	%	$	4,908		$	4,776			2.8	%
Comparable hotel EBITDA		1,348			1,334			1.0	%		1,364			1,289			5.8	%
Comparable hotel EBITDA margin		27.85	%		27.75	%		10	bps		27.8	%		27.0	%		80	bps
Change in comparable hotel RevPAR - Constant US$ (2)		1.3	%								2.7	%
Change in comparable hotel RevPAR - Nominal US$ (2)		1.4	%								2.5	%
Change in comparable domestic RevPAR		1.7	%								2.5	%
Change in comparable international RevPAR - Constant US$ (2)		(12.2	)%								7.8	%
___________

(1)	Comparable hotel operating statistics for 2017 and 2016 are based on 87 comparable hotels as of December 31, 2017, while the comparable hotel operating statistics for 2016 and 2015 are based on 88 comparable hotels as of December 31, 2016.

(2)	For a discussion of our constant US$ and nominal US$ presentation, see “—Comparable Hotel Operating Statistics.”

Revenue per Available Room

In 2017, on a constant US$ basis, RevPAR at our comparable hotels increased 1.3% compared to 2016, representing the eighth consecutive year of positive RevPAR growth. While corporate demand has been softer than leisure transient demand in recent years, healthy consumer spending, strong consumer confidence and increased business spending led to near record occupancy for our hotels during the year. At the same time, supply growth has exceeded historic average growth rates in several of our major locations, including New York and Houston, and has inhibited room rate growth. We also believe that increased price transparency from online travel agencies has further subdued rate growth.

RevPAR growth in 2017 was both rate and occupancy driven, as room rates improved 0.5% on a constant US$ basis and occupancy improved 60 basis points to 79.2%. Transient revenues increased 0.8% for the year driven by a 0.8% increase in room nights sold, as average rate remained flat. Group business was hampered by the continued environment of political and economic uncertainty, which muted corporate meeting activity. Group revenue decreased 0.6%, as an increase in average rate of 1.5% was offset by a decline in room nights sold of 2.1%.

Comparable hotel RevPAR for our domestic portfolio increased 1.7% for the year, driven by a 70 basis point improvement in occupancy and a 0.8% improvement in room rates. Results were mixed across our portfolio during the year. Seattle, Denver and Philadelphia led our domestic portfolio with RevPAR increases of 11.8%, 7.5%, and 7.1%, respectively, driven by improvements in occupancy in each of the locations as well as an increase of 5.2% in room rates in Seattle. Our Washington D.C. (Central Business District “CBD”) and Northern Virginia hotels benefited from the Presidential Inauguration and Women’s March in January, with RevPAR growth of 6% and 5.8%, respectively. In addition, our Phoenix hotels outperformed the portfolio following the rebranding and renovation work at the Camby Hotel. Conversely, our New York properties continued to lag the portfolio due to the supply growth described above, as RevPAR decreased 1.4% in 2017. Additionally, our Miami and Houston locations experienced RevPAR decreases of 11.1% and 1.9%, respectively, during the year, primarily due to the impact of Hurricanes Irma and Harvey and the recent influx of new supply. Finally, RevPAR declined at our San Francisco hotels as a result of the ongoing construction at the Moscone Convention Center.

On a constant US$ basis, RevPAR for our comparable consolidated international hotels decreased 12.2% in 2017, due to the highly unfavorable comparison to the prior year, when Brazil hosted the 2016 Olympics and Paralympics, as well as economic and over-supply issues in Brazil. The decline in Brazil was partially offset by strong results at our Canadian properties. Comparable RevPAR in constant euros for the unconsolidated Euro JV properties increased 5.2% for the year.

Rooms

Total room revenues decreased 0.1% for the year, reflecting lost revenue from our 2017 and 2016 hotel dispositions, partially offset by the 1.3% increase in comparable RevPAR on a constant dollar basis. Total room expenses increased by 0.7%, primarily

reflecting an increase in wages and benefits, particularly in markets impacted by state or local minimum wage ordinances. The increase in wages and benefits was partially offset by productivity improvements and the effect of hotel sales. Comparable room revenues increased 1.1% for the year, while comparable room expenses increased 2.1%.

Food and Beverage

Food and beverage revenues decreased 2.4% for 2017, reflecting a 0.9% decrease at our comparable hotels and the lost revenue from our 2017 and 2016 hotel dispositions. The decrease was driven by the reduction in group business, which led to decreases in both outlet and banquet and audio visual revenue, as well as the negative impact of Hurricanes Harvey and Irma. Despite the revenue declines, food and beverage profitably increased as total food and beverage and comparable hotel food and beverage expenses decreased 3.9% and 1.8%, respectively.

Operating Profit

Operating margins (calculated based on GAAP operating profit as a percentage of GAAP revenues) decreased 10 basis points for 2017. These operating margins are affected significantly by several items, including dispositions, depreciation, and corporate expenses. Our comparable hotel EBITDA margins, which exclude these items, increased 10 basis points to 27.85%. The decline in GAAP operating profit margins was due in part to an increase in depreciation, while the improvement in comparable hotel EBITDA margins was driven by improvements in transient business during the year, coupled with decreases in insurance and sales and marketing costs, as well as cost efficiencies and productivity enhancements identified through our enterprise analytics. We also have focused on improving productivity at a number of our hotels over the past three years by initiating time and motion studies. These studies are designed to enable hotel managers to establish tighter labor model standards and improve and expand forecasting tools, to more effectively schedule labor based on demand and to minimize excess staffing, thereby reducing costs.

Net Income, Adjusted EBITDAre and Adjusted FFO per Diluted Share

Net income for Host Inc. decreased $200 million in 2017 to $571 million due primarily to a $145 million decrease in gains on dispositions, a $27 million increase in depreciation expense and a $13 million increase in interest expense. As a result, Host Inc.’s diluted income per common share decreased 25.5% to $0.76. Adjusted FFO per Diluted Share, which excludes gains on dispositions, debt extinguishment costs, and other real estate transactions, including depreciation, was $1.69 per share in both 2017 and 2016. Net income, NAREIT and Adjusted FFO and the related per share measures benefited from the following:

	•	Adjusted EBITDAre increased $28 million to $1,510 million, reflecting improvement in hotel operations, which offset a net reduction due to the results of hotels acquired or sold during the comparable periods; and

	•	Per share measures were improved by the repurchase of 14 million common shares during 2016. The anti-dilutive effect of these purchases is computed on a weighted average basis.

The trends and transactions described above for Host Inc. affected Host L.P., as the only significant difference between the Host Inc. and Host L.P. statements of operations relates to the treatment of income attributable to the outside partners of Host L.P. For the year, Host L.P.’s net income decreased $200 million to $571 million, and the diluted income per common unit decreased 25.7% to $0.78 per common unit.

2018 Outlook

We are cautiously optimistic about the United States economy in 2018. GDP grew at a rate of 2.3% in 2017 and is expected to continue to accelerate. Additionally, the recent passage of the Tax Cuts and Jobs Act, coupled with lower regulatory burdens, is expected to result in increased corporate profits and business investment in the coming year, which has historically correlated to strengthening business transient demand.

Strong consumer confidence and near record low unemployment have the potential to further buoy the corporate and leisure transient travel segment. However, supply growth continued to accelerate in 2017, and this trend is expected to carry into 2018. In particular, some of our markets, such as New York and Houston, have experienced above-average supply growth in 2017 that has significantly offset demand growth, which has made it more challenging for our operators to grow average rates. Additionally, we believe that rate growth is currently inhibited by the increasing popularity of online sharing sites such as Airbnb as well as online booking sites which increase price transparency. Therefore, while we have noted positive economic indicators for overall lodging demand, supply growth continues to constrain overall RevPAR growth for our portfolio.

The net result of these trends means we anticipate that we will continue to experience high levels of occupancy in 2018; however, rate growth is expected to continue to be restricted, leading to forecast RevPAR growth for our comparable hotels on a constant dollar basis of between 0.5% and 2.5% for the full year 2018. We expect the first quarter of 2018 to underperform, as the first quarter of 2017 included significant activity surrounding the Presidential inauguration and related activities. Additionally, comparisons between our 2017 and 2018 results will be affected by changes in our portfolio due to acquisitions and dispositions.

As noted above, the current outlook for the lodging industry is uncertain; therefore, there can be no assurances that any increases in hotel revenues or earnings at our properties will continue for any number of reasons, including, but not limited to, slower than anticipated growth in the economy and changes in travel patterns. See Part I Item 1A. “Risk Factors.”

Strategic Initiatives

During 2017, we were able to execute on a number of transactions that we believe will enhance the value of our portfolio and improve future operating performance. In 2017 and early 2018, we completed the following activities:

Acquisitions

	•	On February 16, 2017, we purchased The Don CeSar and the related Beach House Suites in St. Pete Beach, Florida for $214 million and selected Davidson Hotels & Resorts as manager. The hotel has been recognized for excellence by Historic Hotels of America, with 347 rooms and suites along the Florida Gulf coast, award-winning dining options and over 38,000 square feet of meeting space.

	•	On March 7, 2017, we acquired the 305-room W Hollywood in Hollywood, California for $219 million. The hotel includes approximately 11,000 square feet of high-quality retail space and seven prominent supergraphic billboard signs.

	•	On March 24, 2017, we acquired the ground lease at the Miami Marriott Biscayne Bay for $38 million.

	•	Subsequent to year end, we reached an agreement to acquire the 301-room Andaz Maui, 668-room Grand Hyatt San Francisco, and 454-room Hyatt Regency Coconut Point for $1 billion with a $25 million deposit at-risk. The assets are fee simple and the hotels will continue to be Hyatt-branded and managed by Hyatt pursuant to long-term management agreements. The transaction is anticipated to close by the end of the first quarter, subject to customary closing conditions, as well as partitioning of hotel property at the Grand Hyatt San Francisco from the adjacent retail property, which could delay the closing date beyond the first quarter. The transaction is expected to be funded through a combination of cash and drawing on the revolver portion of the credit facility.

Dispositions

	•	We completed the sale of five assets for proceeds of approximately $653 million, including the sale of the Key Bridge Marriott, subsequent to year end, for $190 million, including $8 million contributed to the hotel’s FF&E replacement fund by the purchaser. The sale of the Key Bridge Marriott represents the culmination of a multi-year effort that included the acquisition of the ground lease at the hotel in 2016 and working with numerous stakeholders to enhance its value. The 2017 sales also include the disposition of the Hilton Melbourne South Wharf, which completed our strategic exit from the Pacific region.

	•	Subsequent to year end, we reached an agreement to sell the W New York for $190 million, which we expect to close during the second quarter of 2018, subject to customary closing conditions.

Portfolio enhancements

	•	We rebranded The Ritz-Carlton, Buckhead in Atlanta to The Whitley, a Luxury Collection Hotel, that will be managed by HEI Hotels & Resorts. This rebranding represents an opportunity to better match the hotel with the operator and brand.

	•	We reached an agreement to franchise three additional properties and implemented HEI Hotels & Resorts as operator.

	•	We obtained approvals for the rezoning of the golf course land at The Phoenician, A Luxury Collection Resort, subject to customary appeals. Our revised masterplan includes an 18-hole golf course, new tennis complex and activity center

		and allows for 60 acres of residential development. The approved plan allows for a mix of single-family, townhome and condominium units, for a total of approximately 360 units. The subdivided land is being marketed to third parties for the residential development; however, we would not anticipate any sale until 2019.

For 2018, we intend to continue our disciplined approach to capital allocation to seek to strengthen our portfolio and deliver stockholder value through multiple levers. These may include over time acquiring assets, investing in our portfolio, buying back stock (depending on market conditions) or returning capital through a meaningful quarterly dividend. We intend to take advantage of our strong capital position and overall scale to seek to acquire upper-upscale and luxury properties, through single asset or portfolio acquisitions, that we believe have sustainable competitive advantages to drive long-term value. At the same time, we will opportunistically sell assets when market conditions permit, including the pursuit of exiting international markets to focus on our domestic portfolio. We also continue to critically analyze our portfolio to seek to take advantage of the inherent value of our real estate holdings for its highest and best use.

Capital Projects

We continue to pursue opportunities to enhance asset value through select capital improvements, including projects that are designed to increase the eco-efficiency of our hotels, incorporate elements of sustainable design and replace aging equipment and systems with more efficient technology. During 2017, we spent approximately $277 million on capital expenditures, of which $72 million was return on investment (“ROI”) capital expenditures and $205 million was on renewal and replacement projects.

For 2018, we expect capital expenditures of $475 million to $550 million, closer to our historical average spend. This total spend consists of $185 million to $220 million in ROI projects and $290 million to $330 million in renewal and replacement projects. Of the $185 million to $220 million of ROI project spend, $114 million is related to transformative repositioning, which is primarily occurring at the San Francisco Marriott Marquis. As a result, this hotel has been placed in our non-comparable hotel pool, effective January 1, 2018.

Return of capital

Stock Repurchase Program and Dividends. Host Inc.’s Board of Directors authorized a stock repurchase program in 2017 pursuant to which we can repurchase up to $500 million of common stock. The common stock may be purchased from time to time, depending upon market conditions, and repurchases may be made in the open market or through privately negotiated transactions or by other means, including through one or more trading plans designed to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. The number of shares to be purchased also will depend upon operating results, funds generated by sales activity, dividends that may be required by those sales and investment options that may be available, including reinvesting in the portfolio or acquiring new hotels, as well as maintaining our strong leverage position. The program does not obligate us to repurchase any specific number of shares and may be suspended at any time at our discretion. We did not repurchase any shares during 2017.

During 2017, Host Inc.’s Board of Directors declared dividends of $0.85 per share with respect to Host Inc.’s common stock. Accordingly, Host L.P. made distributions of $0.868270 per unit with respect to its common OP units for 2017. On February 21, 2018, the Board of Directors authorized a regular quarterly cash dividend of $0.20 per share on its common stock. The dividend will be paid on April 16, 2018, to stockholders of record on March 29, 2018. The amount of any future dividend will be determined by Host Inc.’s Board of Directors.

There can be no assurances that any future dividends or stock buybacks will match or exceed those set forth above for any number of reasons, including a decline in operations or an increase in liquidity needs. We believe that we have sufficient liquidity and access to the capital markets in order to meet our near-term debt maturities, fund our capital expenditures programs and take advantage of investment opportunities.

Financing transactions

We believe that our ability to maintain an investment grade balance sheet and well-laddered maturity schedule is an important factor in our investment strategy.

During 2017, we issued $400 million of 3⅞% Series G Senior Notes due April 2024 and amended and restated our credit facility, extending the maturity of the revolver portion to May 2021, with two six-month extension options (subject to certain conditions). The amendment also extended the $500 million term loan that was due to mature in June 2017 to May 2021, with one 12-month extension option (subject to certain conditions) and lowered the margin for an all-in interest rate of 2.67% at December 31, 2017, based on Host L.P.’s unsecured long-term debt rating. The maturity date for our second $500 million term loan was unchanged and matures in September 2020. As a result, we have no significant debt maturities until 2020. At December 31, 2017, our weighted average interest rate is 4.0% and our weighted average debt maturity is 5.1 years. We have a debt balance of $4.0 billion and a balanced maturity schedule wherein not more than 25% of our outstanding debt, representing 5% of our U.S. GAAP gross asset value, is due in any given year.

For a detailed discussion, see “—Liquidity and Capital Resources.” For a detailed discussion of our significant debt activities, see “Note 4. Debt” in the Notes to Consolidated Financial Statements.

Results of Operations

The following table reflects certain line items from our audited consolidated statements of operations for the three years ended December 31, 2017 (in millions, except percentages):

					Change					Change
	2017		2016		2016 to 2017			2015		2015 to 2016
Total revenues	$	5,387	$	5,430		(0.8	)%	$	5,350		1.5	%
Operating costs and expenses:
Property-level costs (1)		4,627		4,655		(0.6	)		4,627		0.6
Corporate and other expenses		98		106		(7.5	)		94		12.8
Gain on insurance and business interruption settlements		14		15		(6.7	)		2		650.0
Operating profit		676		684		(1.2	)		631		8.4
Interest expense		167		154		8.4			227		(32.2	)
Gain on sale of assets		108		253		(57.3	)		95		166.3
Provision for income taxes		80		40		100.0			9		344.4

Host Inc.:
Net income attributable to non- controlling interests		7		9		(22.2	)		7		28.6
Net income attributable to Host Inc.		564		762		(26.0	)		558		36.6

Host L.P.:
Net income attributable to non- controlling interests		—		—	—				—	—
Net income attributable to Host L.P.		571		771		(25.9	)		565		36.5
___________

(1)	Amounts represent total operating costs and expenses from our consolidated statements of operations, less corporate and other expenses and the gain on insurance and business interruption settlements.

Statement of Operations Results and Trends

For 2017 and 2016, the following items have affected the year-over-year comparability of our operations.

	•	The results of hotels acquired or sold during the comparable periods impacted year-over-year comparisons. Our operations were affected by the sale of four hotels in 2017, ten hotels in 2016 and eight hotels in 2015. These dispositions were partially offset by the acquisition of three hotels during this timeframe: The W Hollywood acquired in March 2017, The Don CeSar acquired in February 2017 and The Phoenician acquired in June 2015. The table below presents the net (reduction)/increase on revenues and earnings due to the results of hotels acquired or sold during the comparable periods, collectively the “Property Transactions” (in millions):

	2017		2016		Net (reduction)/increase 2016 to 2017			2015		Net (reduction)/increase 2015 to 2016
Total Revenues:
Acquisitions	$	188	$	112	$	76		$	55	$	57
Dispositions		46		252		(206	)		392		(140	)
Total Revenues	$	234	$	364	$	(130	)	$	447	$	(83	)
Net income (excluding gain on sale):
Acquisitions	$	18	$	12	$	6		$	—	$	12
Dispositions		8		27		(19	)		31		(4	)
Net income (excluding gain on sale)	$	26	$	39	$	(13	)	$	31	$	8

	•	The overall effect of disruptive renovation did not affect year-over-year comparability in 2017 compared to 2016. However, in 2016, we had fewer disruptive renovations compared to 2015. Additionally, in 2016, we had a full year of operations for four hotels that had been closed for portions of 2015 for redevelopment.

	•	Over the past few years, we have strategically exited international markets, including the disposition of one hotel in Australia in 2017 and six international properties in 2016. As a result, we have reduced our foreign currency exchange risk so that there now is minimal impact on our results of operations.

The following table presents revenues in accordance with GAAP and includes both comparable and non-comparable hotels for the three years ended December 31, 2017 (in millions, except percentages):

					Change					Change
	2017		2016		2016 to 2017			2015		2015 to 2016
Revenues:
Rooms	$	3,490	$	3,492		(0.1	)%	$	3,465		0.8	%
Food and beverage		1,561		1,599		(2.4	)		1,568		2.0
Other		336		339		(0.9	)		317		6.9
Total revenues	$	5,387	$	5,430		(0.8	)	$	5,350		1.5

The net decrease in total revenues in 2017 of $43 million primarily reflects a net reduction due to Property Transactions, in addition to lost revenues caused by the hurricanes in the third quarter of 2017. Total revenues for our comparable properties increased 0.7% in 2017. The increase of $80 million in 2016 was driven by an increase of 2.8% in revenues for our comparable properties. Total revenues for 2016 also were positively impacted by our non-comparable properties that were under renovation in 2015.

Rooms. Room revenues decreased $2 million in 2017 and increased $27 million in 2016, reflecting an increase in constant dollar RevPAR of 1.3% and 2.7%, respectively, at our comparable hotels, offset by a net decrease of $66 million in 2017 and $81 million in 2016 as a result of a net reduction due to Property Transactions.

Food and beverage. F&B revenues decreased $38 million and increased $31 million in 2017 and 2016, respectively, reflecting a reduction of group business in 2017 and an increase in 2016. For our comparable hotels, F&B revenues decreased 0.9% and increased 1.7%, respectively, for 2017 and 2016, as banquet and audio visual revenues decreased 1.4% in 2017 and increased 2.0% in 2016. 2017 results also were negatively impacted by Hurricanes Harvey and Irma. Year-over-year comparisons also reflect a net decrease of $41 million for 2017 and $20 million for 2016 as a result of a net reduction due to Property Transactions.

Other revenues. Other revenues decreased $3 million, or 0.9%, in 2017, as an increase in other revenues at our comparable hotels was offset by a net reduction due to Property Transactions. For our comparable hotels, other revenues increased 3.2%, primarily driven by an increase in amenity fees and additional rental income from the New York Marriott Marquis retail space. In 2016, other revenues increased $22 million, primarily due to increased amenity fees and attrition and cancellation fees at our comparable hotels.

Property-level Operating Expenses

The following table presents consolidated property-level operating expenses in accordance with GAAP and includes both comparable and non-comparable hotels for the three years ended December 31, 2017 (in millions, except percentages):

					Change					Change
	2017		2016		2016 to 2017			2015		2015 to 2016
Expenses:
Rooms	$	899	$	893		0.7	%	$	902		(1.0	)%
Food and beverage		1,071		1,114		(3.9	)		1,110		0.4
Other departmental and support expenses		1,273		1,306		(2.5	)		1,295		0.8
Management fees		239		236		1.3			226		4.4
Other property-level expenses		394		382		3.1			386		(1.0	)
Depreciation and amortization		751		724		3.7			708		2.3
Total property-level operating expenses	$	4,627	$	4,655		(0.6	)	$	4,627		0.6

Our operating costs and expenses, which consist of both fixed and variable components, are affected by a number of factors. Rooms expense is affected mainly by occupancy, which drives costs related to items such as housekeeping, reservation systems, room supplies, laundry services and front desk costs. Food and beverage expense correlates closely with food and beverage revenue, and is affected by occupancy and the mix of business between banquet and audio-visual and outlet sales. However, the most significant expense for room, food and beverage, and other departmental and support expenses is wages and employee benefits, which comprise approximately 57% of these expenses in any year. During 2017, these expenses increased approximately 1%, in part due to union contracts, government mandated wage increases and competition for labor in certain markets. Other property-level expenses consist of property taxes, which are highly dependent on local taxing authorities, and property and general liability insurance, and do not necessarily change based on changes in revenues at our hotels.

Rooms. Rooms expense increased $6 million during 2017, reflecting the increase at our comparable properties of 2.1%, as a result of overall growth in wage rates, partially offset by a net decrease due to Property Transactions. In 2016, rooms expense decreased $9 million reflecting the net effect of recent Property Transactions, while at our comparable properties rooms expense increased 1.4%, driven by increases in wages, benefits and group travel agent commissions. Year-over-year comparisons reflect net decreases of $17 million in 2017 and $23 million in 2016 as a result of a net reduction due to Property Transactions.

Food and beverage. The decrease in F&B expenses of $43 million in 2017 and increase of $4 million in 2016 reflect the year-over-year decrease of 1.8% and increase of 0.3% in comparable F&B expenses in 2017 and 2016, respectively. The changes are consistent with the decline in F&B revenues in 2017 and increase in revenues in 2016. Overall, F&B hourly productivity improved in both 2017 and 2016, resulting in declines in F&B costs as a percentage of revenues. Year-over-year comparisons also reflect net decreases of $28 million in 2017 and $18 million in 2016 as a result of a net reduction due to Property Transactions.

Other departmental and support expenses. Other departmental and support expenses decreased $33 million and increased $11 million in 2017 and 2016, respectively. For 2017, the decrease primarily reflects the net reduction due to Property Transactions, as other departmental and support expenses for our comparable properties increased 0.3%. The increase in 2016 primarily reflects increases in hourly wages and loyalty and reward program expenses, offset by a 6.4% decrease in administrative and general costs and an 8.1% decrease in utilities expense. Year-over-year comparisons also reflect net decreases of $39 million in 2017 and $25 million in 2016 as a result of a net reduction due to Property Transactions.

Management fees. Management fees, which generally are calculated as a percentage of revenues and operating profit, increased 1.3% and 4.4% for 2017 and 2016, respectively. At our comparable hotels, base management fees, which are calculated as a percentage of total revenues, decreased 0.5% in 2017 and increased 1.0% in 2016, while incentive management fees increased 7.0% in 2017 and 14.8% in 2016. The increase in incentive management fees at our comparable hotels reflects the improvements in hotel operations. Year-over-year comparisons also include net decreases of $4 million in 2017 and $6 million in 2016 as a result of a net reduction due to Property Transactions.

Other property-level expenses. These expenses generally do not vary significantly based on occupancy and include expenses such as property taxes and insurance. Other property-level expenses increased $12 million, or 3.1%, in 2017, and decreased $4 million, or 1.0%, in 2016. Other property-level expenses at our comparable hotels increased 3.2% and 2.1% for 2017 and 2016,

respectively. Both reflect an increase in property taxes and ground rent, partially offset by a decline in insurance expense, while the year-over-year changes for total other property-level expenses also reflect net decreases of $5 million in 2017 and $6 million in 2016 as a result of a net reduction due to Property Transactions.

Depreciation and amortization. Depreciation and amortization expense increased $27 million, or 3.7%, to $751 million in 2017 and increased $16 million, or 2.3%, to $724 million in 2016. The increase in 2017 is due to an impairment expense of $43 million at one property, while 2016 reflects the depreciation of our recent capital expenditures, both partially offset as a result of a net reduction due to Property Transactions.

Other Income and Expense

Corporate and other expenses. Corporate and other expenses include the following items (in millions):

	Year ended December 31,
	2017		2016			2015
General and administrative costs	$	86	$	95		$	87
Non-cash stock-based compensation expense		11		12			11
Litigation accruals and acquisition costs, net		1		(1	)		(4	)
Total	$	98	$	106		$	94

General and administrative costs primarily consist of wages and benefits, travel, corporate insurance, legal fees, audit fees, building rent and systems costs. The 2016 corporate and other expenses include approximately $10 million of severance costs paid to our prior chief executive officer.

Gain on insurance and business interruption settlements. We received $13 million of business interruption proceeds in 2017, which includes proceeds related to hurricane disruption that occurred in the third quarter of 2017 and proceeds from a facility funded by BP related to the 2010 Deepwater Horizon oil spill for disruption at several of our Florida gulf coast properties. In 2016, we received $12 million of business interruption proceeds for the disruption of operations at the New Orleans Marriott caused by the 2010 Deepwater Horizon oil spill.

Interest expense. Interest expense increased $13 million, or 8.4%, in 2017 as compared to 2016, due to the issuance of the Series G Senior Notes. Interest expense decreased $73 million, or 32.2%, in 2016, due to the reduction of debt extinguishment costs as well as a reduction in the overall debt balance. The following table presents certain components of interest expense (in millions):

	Year ended December 31,
	2017		2016		2015
Cash interest expense(1)	$	159	$	147	$	161
Cash incremental interest expense (1)(2)		—		—		4
Non-cash interest expense		7		7		21
Cash debt extinguishment costs(1)		1		—		30
Non-cash debt extinguishment costs		—		—		11
Total interest expense	$	167	$	154	$	227
___________

(1)	Total cash interest expense paid was $158 million, $144 million, and $207 million in 2017, 2016 and 2015, respectively, which includes an increase (decrease) due to the change in accrued interest of $(2) million, $(3) million and $12 million for 2017, 2016 and 2015, respectively.

(2)	Incremental interest expense reflects the cash interest expense for refinanced debt subsequent to the issuance of the new financing and prior to the repayment of the refinanced debt.

Gain on sale of assets. The following table presents the gains recognized on the sale of assets (in millions):

	Year ended December 31,
	2017		2016		2015
JW Marriott Desert Springs Resort & Spa	$	14	$	—	$	—
Sheraton Memphis Downtown		27		—		—
Hilton Melbourne South Wharf		49		—		—
Sheraton Indianapolis Hotel at Keystone Crossing		9		—		—
San Diego Marriott Mission Valley		—		47		—
Manhattan Beach Marriott		—		48		—
Sheraton Santiago Hotel & Convention Center and San Cristobal Tower, Chile		—		19		—
Atlanta Marriott Perimeter Center		—		39		—
Seattle Airport Marriott		—		69		—
Four hotels in New Zealand		—		21		—
Delta Meadowvale Hotel & Conference Centre		—		—		2
Sheraton Needham		—		—		18
Park Ridge Marriott and Chicago Marriott O'Hare		—		—		36
Kansas City Airport Marriott		—		—		3
Three hotels in New Zealand		—		—		30
The Ritz-Carlton San Francisco (1)		—		4		4
Maui Timeshare land (2)		2		2		2
Chicago Marriott O'Hare commercial land		4		—		—
Other		3		4		—
	$	108	$	253	$	95
___________

(1)	Represents the recognition of previously deferred gains related to the 2012 sale of The Ritz-Carlton San Francisco.

(2)	Represents amortization of the previously deferred gain related to the land contributed to the Maui JV.

Equity in Earnings of Affiliates. Equity in earnings of affiliates primarily reflects our interest in the operations of the Euro JV and our domestic joint ventures owning three hotels and a vacation ownership project. The increase in equity in earnings of affiliates in 2017 primarily reflects improved operations at the Euro JV hotels, while the decrease in 2016 was due to the sale of nine properties in 2015 by the Euro JV.

Benefit (provision) for income taxes. We lease substantially all of our properties to consolidated subsidiaries designated as TRS for federal income tax purposes. The difference between hotel-level operating cash flow and the aggregate rent paid to Host L.P. by the TRS represents taxable income or loss, on which we record an income tax provision or benefit. The tax provision in 2017 primarily reflects $17 million of capital gain tax on the sale of our hotel in Australia, the reduction of certain deferred tax assets as a result of the Tax Cuts and Jobs Act passed in December 2017 in the amount of $11 million and an increase in domestic corporate income taxes resulting from increased profitability of hotel operations retained by the TRS. The tax provision in 2016 primarily relates to domestic and foreign corporate income taxes on hotel operations retained by the TRS and $9 million of capital gain tax on the sale of our two properties in Chile.

Comparable Hotel Sales Overview

While management evaluates the performance of each individual hotel against its competitive set in a given market, we also evaluate our overall portfolio operating results by geographic location and by mix of business (i.e. transient, group or contract). As of December 31, 2017, 87 of our 94 owned hotels have been classified as comparable hotels. See “Comparable Hotel Operating Statistics” for a complete description of our comparable hotels.

2017 Compared to 2016

Comparable Hotel Sales by Location.

The following table sets forth performance information for our comparable hotels by location as of December 31, 2017 and 2016:

Comparable Hotels by Location in Constant US$(1)

	As of December 31, 2017				Year ended December 31, 2017							Year ended December 31, 2016
Location	No. of Properties		No. of Rooms		Average Room Rate		Average Occupancy Percentage			RevPAR		Average Room Rate		Average Occupancy Percentage			RevPAR		Percent Change in RevPAR
Maui/Oahu		3		1,682	$	340.98		90.7	%	$	309.15	$	330.98		90.6	%	$	299.86		3.1	%
Florida Gulf Coast		3		1,043		362.53		71.4			258.86		360.91		71.4			257.54		0.5
New York		6		6,000		292.24		88.5			258.67		297.49		88.2			262.33		(1.4	)
Jacksonville		1		446		349.70		71.0			248.28		337.37		71.5			241.38		2.9
San Francisco/San Jose		4		2,912		259.12		83.1			215.30		261.08		83.2			217.23		(0.9	)
Washington, D.C. (CBD)		5		3,238		257.16		82.2			211.42		244.72		81.5			199.37		6.0
Seattle		2		1,315		232.84		83.7			194.80		221.43		78.7			174.27		11.8
Los Angeles		3		1,414		218.15		89.0			194.24		211.73		89.5			189.44		2.5
Boston		4		3,185		234.25		81.5			190.88		231.16		80.2			185.42		2.9
San Diego		3		2,981		216.93		82.0			177.82		206.98		84.2			174.35		2.0
Philadelphia		2		810		199.69		82.4			164.54		208.55		73.6			153.58		7.1
Chicago		6		2,392		197.52		79.4			156.83		203.33		77.4			157.43		(0.4	)
Phoenix		4		1,518		206.51		73.9			152.54		211.64		68.3			144.50		5.6
Atlanta		5		1,939		195.60		77.0			150.69		193.33		78.0			150.86		(0.1	)
Orange County		4		1,429		188.85		79.2			149.51		191.92		76.7			147.25		1.5
Denver		2		735		179.96		79.0			142.20		179.94		73.5			132.25		7.5
New Orleans		1		1,333		175.51		77.0			135.13		179.79		76.5			137.53		(1.7	)
Northern Virginia		6		2,502		179.18		75.3			134.88		171.96		74.1			127.49		5.8
San Antonio		2		1,513		181.55		72.2			131.01		177.04		70.1			124.08		5.6
Houston		4		1,716		178.11		72.1			128.50		178.43		73.4			130.96		(1.9	)
Orlando		1		2,004		179.30		70.1			125.62		175.58		69.6			122.17		2.8
Miami		2		843		157.48		75.0			118.14		157.15		84.6			132.92		(11.1	)
Other		8		3,596		166.34		72.8			121.10		166.38		72.2			120.11		0.8
Domestic		81		46,546		228.89		79.8			182.76		227.06		79.1			179.70		1.7

International		6		1,811		179.64		62.9			113.05		201.66		63.9			128.79		(12.2	)
All Locations - Constant US$		87		48,357		227.42		79.2			180.14		226.28		78.6			177.79		1.3

Comparable Hotels in Nominal US$
	As of December 31, 2017				Year ended December 31, 2017							Year ended December 31, 2016
	No. of Properties		No. of Rooms		Average Room Rate		Average Occupancy Percentage			RevPAR		Average Room Rate		Average Occupancy Percentage			RevPAR		Percent Change in RevPAR
International		6		1,811	$	179.64		62.9	%	$	113.05	$	195.31		63.9	%	$	124.73		(9.4	)%
Domestic		81		46,546		228.89		79.8			182.76		227.06		79.1			179.70		1.7
All Locations		87		48,357		227.42		79.2			180.14		226.09		78.6			177.64		1.4

(1)	For a discussion of constant US$ and nominal US$ presentation, see “—Comparable Hotel Operating Statistics.”

Hotel Sales by Business Mix.

The majority of our customers fall into three broad categories: transient, group and contract business. The information below is derived from business mix results from 87 comparable hotels for which 2017 and 2016 business mix information is available. In 2017, overall revenue growth for our comparable hotels was driven by increases in transient and contract revenue of 0.8% and 16.2%, respectively. The increase in transient revenue was driven by an increase in room nights sold of 0.8% while transient average rate remained consistent with 2016. Contract business benefited from a 15.9% increase in room nights due to additional airline contracts at hotels in markets where new supply or demand concerns warranted negotiating multi-year contracts at average rates exceeding $200 per night. Group revenues declined 0.6% compared to the prior year, due to a decline in group room nights sold of 2.1%, partially offset by a 1.5% average room rate increase. Group volume was negatively impacted by difficult comparisons with the Olympics in 2016 for our properties in Brazil and a decline in corporate group business.

2016 Compared to 2015

Comparable Hotel Sales by Location.

As of December 31, 2016, 88 of our 96 owned hotels were classified as comparable hotels. See “Comparable Hotel Operating Statistics” for a complete description of 88 comparable hotels. The following table sets forth performance information for our comparable hotels by geographic location as of December 31, 2016 and 2015:

Comparable Hotels by Location in Constant US$(1)

	As of December 31, 2016				Year ended December 31, 2016							Year ended December 31, 2015
Location	No. of Properties		No. of Rooms		Average Room Rate		Average Occupancy Percentage			RevPAR		Average Room Rate		Average Occupancy Percentage			RevPAR		Percent Change in RevPAR
Maui/Oahu		3		1,682	$	330.98		90.6	%	$	299.86	$	323.10		88.7	%	$	286.48		4.7	%
Florida Gulf Coast		3		1,043		360.91		71.4			257.54		353.68		73.6			260.48		(1.1	)
New York		6		5,999		297.49		88.2			262.33		307.40		89.0			273.48		(4.1	)
San Francisco/San Jose		4		2,912		261.08		83.2			217.23		253.52		83.2			210.81		3.0
Jacksonville		1		446		337.37		71.5			241.38		327.75		73.4			240.52		0.4
Washington, D.C. (CBD)		5		3,238		244.72		81.5			199.37		235.56		77.4			182.38		9.3
Boston		4		3,185		231.16		80.2			185.42		228.47		79.6			181.85		2.0
Philadelphia		1		419		185.65		84.3			156.52		186.63		81.9			152.85		2.4
Chicago		6		2,392		203.33		77.4			157.43		202.05		75.7			152.87		3.0
Los Angeles		3		1,414		211.73		89.5			189.44		194.18		87.9			170.73		11.0
Seattle		2		1,315		221.43		78.7			174.27		216.74		80.7			174.96		(0.4	)
Atlanta		5		1,939		193.33		78.0			150.86		189.83		75.7			143.73		5.0
Phoenix		3		1,241		215.97		71.1			153.51		210.15		71.1			149.42		2.7
San Diego		3		2,981		206.98		84.2			174.35		201.70		82.0			165.31		5.5
New Orleans		1		1,333		179.79		76.5			137.53		172.38		71.9			123.94		11.0
Denver		2		735		179.94		73.5			132.25		175.63		72.8			127.88		3.4
Houston		3		1,143		196.50		71.3			140.14		204.14		69.4			141.65		(1.1	)
Miami		2		843		157.15		84.6			132.92		160.20		86.0			137.78		(3.5	)
Orange County		4		1,429		191.92		76.7			147.25		188.86		73.5			138.83		6.1
Northern Virginia		6		2,501		171.96		74.1			127.49		170.55		73.3			125.04		2.0
San Antonio		2		1,513		177.04		70.1			124.08		178.36		69.1			123.21		0.7
Orlando		1		2,004		175.58		69.6			122.17		173.78		69.9			121.46		0.6
Other		11		5,473		166.94		70.8			118.22		162.81		67.1			109.17		8.3
Domestic		81		47,180		226.07		79.0			178.61		224.23		77.7			174.18		2.5

International		7		2,196		198.82		68.5			136.15		188.26		67.1			126.27		7.8
All Locations - Constant US$		88		49,376		225.01		78.5			176.71		222.83		77.2			172.04		2.7


Comparable Hotels in Nominal US$
	As of December 31, 2016				Year ended December 31, 2016							Year ended December 31, 2015
	No. of Properties		No. of Rooms		Average Room Rate		Average Occupancy Percentage			RevPAR		Average Room Rate		Average Occupancy Percentage			RevPAR		Percent Change in RevPAR
International		7		2,196	$	198.82		68.5	%	$	136.15	$	197.89		67.1	%	$	132.73		2.6	%
Domestic		81		47,180		226.07		79.0			178.61		224.23		77.7			174.18		2.5
All Locations - Nominal US$		88		49,376		225.01		78.5			176.71		223.21		77.2			172.33		2.5
___________

(1)	For a discussion of constant US$ and nominal US$ presentation, see “—Comparable Hotel Operating Statistics.”

Hotel Sales by Business Mix.

The information below is derived from business mix results from 88 comparable hotels for which 2016 and 2015 business mix information is available. In 2016, overall revenue growth was due to both group and transient growth. Overall, group revenues improved 4.5% compared to the prior year, consisting of a 2.4% average room rate increase coupled with a 2.1% growth in group room nights sold. Our hotels were able to drive group business through higher-rated association business, which led to a 7.5% increase in revenue. Corporate group revenue increased 5.8% while government and leisure group declined 2.9%. Revenue from our transient business increased 1.2%, reflecting an increase of 0.7% in average rate and an increase of 0.5% in room nights sold. Special corporate

rooms declined 3.6%, as weakness in corporate business travel resulted in a negative mix shift, as operators replaced higher rated corporate business with lower rated business, such as contract, discount or government.

Liquidity and Capital Resources

Liquidity and Capital Resources of Host Inc. and Host L.P. The liquidity and capital resources of Host Inc. and Host L.P. are derived primarily from the activities of Host L.P., which generates the capital required by our business from hotel operations, the incurrence of debt, the issuance of OP units or the sale of properties. Host Inc. is a REIT and its only significant asset is the ownership of partnership interests of Host L.P.; therefore, its financing and investing activities are conducted through Host L.P., except for the issuance of its common and preferred stock. Proceeds from stock issuances by Host Inc. are contributed to Host L.P. in exchange for OP units. Additionally, funds used by Host Inc. to pay dividends or to repurchase stock are provided by Host L.P. Therefore, while we have noted those areas in which it is important to distinguish between Host Inc. and Host L.P., we have not included a separate discussion of liquidity and capital resources as the discussion applies both to Host Inc. and Host L.P.

Overview. We look to maintain a capital structure and liquidity profile with an appropriate balance of cash, debt and equity in order to provide financial flexibility given the inherent volatility in the lodging industry. We believe this strategy will result in a lower overall cost of capital, allow us to complete opportunistic investments and acquisitions and will position us to manage potential declines in operations throughout the lodging cycle. Over the past several years, we have decreased our leverage as measured by our net debt-to-EBITDA ratio and reduced our debt service obligations, leading to an increase in our fixed charge coverage ratio.

We intend to use available cash predominantly for acquisitions or other investments in our portfolio. If we are unable to find appropriate investment opportunities, we will consider other uses, such as a return of capital through dividends or common stock repurchases, the amounts of which will be determined by our operations and other market factors. Significant factors we review to determine the amount and timing of common stock repurchases include our current stock price compared to our determination of the underlying value of our assets, current and forecast operating results and the completion of hotel sales.

We have structured our debt profile to maintain a balanced maturity schedule and to minimize the number of assets that are encumbered by mortgage debt. Currently, none of our consolidated hotels are encumbered by mortgage debt. We have access to multiple types of financing as substantially all of our debt consists of senior notes and borrowings under our credit facility, none of which are collateralized by specific hotel properties. Our senior unsecured debt is rated investment grade by Moody’s Investor Services, Fitch Ratings and Standard & Poor’s Rating Service, which has allowed us to borrow capital at lower rates than previously achieved. We believe that we have sufficient liquidity and access to the capital markets to take advantage of opportunities to enhance our portfolio, withstand declines in operating cash flow, pay near-term debt maturities and fund our capital expenditures programs. We may continue to access the capital markets if favorable conditions exist in order to further enhance our liquidity and to fund cash needs. During 2017, we issued $400 million of senior notes and amended and restated our credit facility, extending its maturity.

If, at any time, we determine that market conditions are favorable, after taking into account our liquidity requirements, we may cause Host L.P. to issue senior notes or debentures exchangeable for shares of Host Inc. common stock. Given the total amount of our debt and maturity schedule, we will continue to redeem or refinance senior notes from time to time, taking advantage of favorable market conditions. In February 2018, Host Inc.’s Board of Directors authorized repurchases of up to $250 million of senior notes and mortgage debt other than in accordance with its terms, of which the entire amount remains available under this authority. We may purchase senior notes for cash through open market purchases, privately negotiated transactions, a tender offer or, in some cases, through the early redemption of such securities pursuant to their terms. Repurchases of debt will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. Any refinancing or retirement before the maturity date of our debt will affect earnings and NAREIT FFO per diluted share as a result of the payment of any applicable call premiums and the acceleration of previously deferred financing costs. In addition, while we intend to use any available cash predominantly for acquisitions or other investments in our hotel portfolio, to the extent we do not identify appropriate investments, we may elect in the future to use available cash for other purposes, including share repurchases, subject to market conditions. Accordingly, in light of our priorities in managing our capital structure and liquidity profile and given prevailing conditions and relative pricing in the capital markets, we may, at any time, subject to applicable securities laws, be considering, or be in discussions with respect to the repurchase or issuance of exchangeable debentures and/or senior notes or the repurchase or sale of common stock. Any such transactions may, subject to applicable securities laws, occur simultaneously.

We continue to explore potential acquisitions and dispositions. We anticipate that any such future acquisitions will be funded primarily by proceeds from sales of properties, but also potentially from equity offerings of Host Inc., issuances of OP units by Host L.P., incurrence of debt, available cash or advances under our credit facility. Given the nature of these transactions, we can make no assurances that we will be successful in acquiring any one or more hotels that we may review, bid on or negotiate to purchase or that we will be successful in disposing of any one or more of our properties. We may acquire additional properties or dispose of properties through various structures, including transactions involving single assets, portfolios, joint ventures, acquisitions of the securities or assets of other REITs or spin off distributions of hotel properties to our stockholders.

Cash Requirements. We use cash for acquisitions, capital expenditures, debt payments, operating costs, corporate and other expenses, as well as for dividends and distributions to stockholders and unitholders. As a REIT, Host Inc. is required to distribute to its stockholders at least 90% of its taxable income, excluding net capital gain, on an annual basis. Funds used by Host Inc. to pay dividends are provided by Host L.P. Our primary sources of cash include cash from operations, proceeds from the sale of assets, borrowings under our credit facility and debt and equity issuances. We have no significant debt maturities until 2020.

Capital Resources. As of December 31, 2017, we had $913 million of cash and cash equivalents and $822 million of available capacity remaining under the revolver portion of the credit facility. We depend primarily on external sources of capital to finance future growth, including acquisitions. As a result, the liquidity and debt capacity provided by our credit facility and the ability to issue senior unsecured debt are key components of our capital structure. Our financial flexibility (including our ability to incur debt, make distributions and make investments) is contingent on our ability to maintain compliance with the financial covenants of such indebtedness, which include, among other things, the allowable amounts of leverage, interest coverage and fixed charges.

Sources and Uses of Cash. In 2017, our primary sources of cash included cash from operations, proceeds from asset sales, and the issuance of senior notes. Our primary uses of cash during the year consisted of acquisitions, capital expenditures, operating costs, debt repayments, and distributions to equity holders. We anticipate that our sources and uses of cash will be similar during 2018.

Cash Provided by Operations. Our cash provided by operations for 2017 decreased $72 million to $1,230 million compared to 2016, as an overall increase in earnings at the property-level was offset by increases in income taxes and interest paid. The decline also reflects an increase in receivables due from our managers and other assets compared to 2016.

Cash Used in Investing Activities. Approximately $267 million of cash was used in investing activities during 2017 compared to $99 million in 2016. In addition to the acquisition and disposition activity detailed in the charts below, we spent approximately $277 million on capital expenditures, compared to $519 million in 2016. Additionally, we have capitalized certain internal costs and interest expense associated with our capital expenditures projects in accordance with GAAP. These capitalized costs were $8 million, $10 million and $13 million for 2017, 2016 and 2015, respectively. Cash provided by investing activities consisted of proceeds from the sale of four hotels in 2017 and ten hotels in 2016, property insurance proceeds in 2017, as well as the return of investment from joint ventures in both 2017 and 2016.

The following tables summarize significant acquisitions, dispositions and return of investments in affiliates from January 1, 2016 through February 21, 2018 (in millions):

Transaction Date		Description of Transaction	Investment
Acquisitions
December	2017	Investment in Euro JV - Acquisition of Hilton Amsterdam Airport Schiphol	$	(27	)
March	2017	Acquisition of the Miami Marriott Biscayne Bay ground lease		(38	)
March	2017	Acquisition of the W Hollywood		(219	)
February	2017	Acquisition of The Don CeSar and Beach House Suites complex		(214	)
June - July	2016	Acquisition of the Key Bridge Marriott ground lease		(54	)
		Total acquisitions	$	(552	)

Transaction Date		Description of Transaction	Net Proceeds(1)		Sales Price
Dispositions/Return of Investments in Affiliates
January	2018	Disposition of Key Bridge Marriott	$	181	$	190
December	2017	Distribution from Euro JV		9	N/A
September	2017	Disposition of Sheraton Indianapolis at Keystone Crossing		64		66
July	2017	Disposition of Hilton Melbourne South Wharf(2)		182		184
April	2017	Disposition of Sheraton Memphis Downtown		66		67
January	2017	Disposition of JW Marriott Desert Springs Resort & Spa		160		172
September	2016	Disposition of Novotel Christchurch Cathedral Square and ibis Christchurch		26		31
August	2016	Distribution from Hyatt Place Nashville JV		14	N/A
June	2016	Disposition of Atlanta Marriott Perimeter Center		68		71
June	2016	Disposition of Seattle Airport Marriott		90		97
June	2016	Disposition of Sheraton Santiago Hotel & Convention Center and San Cristobal Tower, Chile		89		95
May	2016	Disposition of Manhattan Beach Marriott		78		82
February - March	2016	Disposition of Novotel Wellington and ibis Wellington		44		45
February	2016	Disposition of San Diego Marriott Mission Valley		72		76
February	2016	Distribution from Asia/Pacific JV		9		9
		Total	$	1,152
___________

(1)	Proceeds are net of transfer taxes, other sales costs and FF&E replacement funds deposited directly to the property or hotel manager by the purchaser.

(2)	Immediately prior to the sale, we acquired the 25% interest from the non-controlling partner for $27 million.

Cash Used in Financing Activities. Net cash used in financing activities was $402 million for 2017, as compared to $1,037 million in 2016. Cash provided by financing activities in 2017 included the issuance of the Series G senior notes. Cash used in financing activities in 2017 primarily consisted of dividend payments and the repayment of mortgage debt, while 2016 also included the repurchase of Host Inc. common stock.

The following table summarizes significant issuances, net of deferred financing costs and issuance discounts, that have been completed from January 1, 2016 through February 21, 2018 (in millions):

Transaction Date		Description of Transaction	Net Proceeds
Debt Issuances
March	2017	Proceeds from the issuance of $400 million 3⅞% Series G senior notes	$	395
		Total issuances	$	395

The following table presents significant debt repayments, including prepayment premiums, that have been completed from January 1, 2016 through February 21, 2018 (in millions):

			Transaction
Transaction Date		Description of Transaction	Amount
Debt Repayments
January - December	2017	Net repayment on the revolver portion of credit facility	$	(55	)
July	2017	Repayment of A$86 million mortgage loan on Hilton Melbourne South Wharf		(69	)
January - December	2016	Net repayment on the revolver portion of credit facility		(82	)
September	2016	Repayment of NZ$23 million mortgage loan on Novotel and ibis Christchurch		(17	)
April	2016	Repayment of mortgage loan on the Hyatt Regency Reston hotel		(100	)
February - March	2016	Repayment of NZ$30 million mortgage loan on Novotel and ibis Wellington		(20	)
		Total cash repayments	$	(343	)

Equity/Capital Transactions. The following table summarizes significant equity transactions that have been completed from January 1, 2016 through February 21, 2018 (in millions):

			Transaction
Transaction Date		Description of Transaction	Amount
Equity of Host Inc.
January	2018	Dividend payment (1)(2)	$	(185	)
January - December	2017	Dividend payments (2)		(628	)
January - December	2016	Dividend payments (2)		(596	)
January - December	2016	Repurchase of 13.8 million shares of Host Inc. common stock		(218	)
		Cash payments on equity transactions	$	(1,627	)

(1)	Our dividend payment for the fourth quarter of 2017 was made in January 2018, but was accrued at December 31, 2017.

(2)	In connection with the dividends, Host L.P. made distributions of $187 million in 2018, $635 million in 2017 and $603 million in 2016 to its common unit holders.

Financial Condition

As of December 31, 2017, our total debt was approximately $4.0 billion, of which 70% carried a fixed rate of interest. Total debt was comprised of the following (in millions):

	As of December 31,
	2017		2016
Series Z senior notes, with a rate of 6% due October 2021	$	298	$	297
Series B senior notes, with a rate of 5¼% due March 2022		348		347
Series C senior notes, with a rate of 4¾% due March 2023		447		446
Series D senior notes, with a rate of 3¾% due October 2023		398		398
Series E senior notes, with a rate of 4% due June 2025		496		496
Series F senior notes, with a rate of 4½% due February 2026		396		396
Series G senior notes, with a rate of 3⅞% due April 2024		395		—
Total senior notes		2,778		2,380
Credit facility revolver		174		209
2017 Credit facility term loan due May 2021		498		500
2015 Credit facility term loan due September 2020		498		497
Mortgage debt (non-recourse) and other, with an average interest rate of 8.8% and 3.4% at December 31, 2017 and 2016, respectively, maturing through February 2024		6		63
Total debt	$	3,954	$	3,649

Aggregate debt maturities at December 31, 2017 are as follows (in millions):

	Senior notes
	and			Mortgage debt
	credit facility			and other		Total
2018	$	—		$	—	$	—
2019		—			—		—
2020		500			—		500
2021		978			—		978
2022		350			—		350
Thereafter		2,150			5		2,155
		3,978			5		3,983
Deferred financing costs		(27	)		—		(27	)
Unamortized (discounts) premiums, net		(3	)		—		(3	)
Capital lease obligations		—			1		1
	$	3,948		$	6	$	3,954

Senior Notes. The following summary is a description of the material provisions of the indentures governing the various senior notes issued by Host L.P., to which we refer collectively as the senior notes indenture. We pay interest on each series of our

outstanding senior notes semi-annually in arrears at the respective annual rates indicated on the table above. Under the terms of our senior notes indenture, our senior notes are equal in right of payment with all of Host L.P.’s unsubordinated indebtedness and senior to all subordinated obligations of Host L.P.

Guarantees. Under the senior notes indentures, all Host L.P. subsidiaries which guarantee Host L.P. debt are required to similarly guarantee debt issuances under the indenture.

Senior Notes Indenture Covenants

Covenants for Senior Notes Issued After We Attained an Investment Grade Rating

On March 20, 2017, Host L.P. completed an underwritten public offering of $400 million aggregate principal amount of its 3.875% Series G senior notes due 2024. At any time, upon not less than 15 nor more than 60 days’ notice, the Series G senior notes will be redeemable at Host L.P.’s option, in whole or in part, at a redemption price equal to 100% of the principal amount, plus a make-whole premium as set forth in the Indenture, plus accrued and unpaid interest to the redemption date. Host L.P. also may redeem the Series G senior notes within the period beginning 60 days prior to the April 1, 2024 maturity date, in whole or in part, upon not less than 15 nor more than 60 days’ notice, at a redemption price equal to 100% of the principal amount of the Series G senior notes to be redeemed, plus accrued and unpaid interest to the redemption date. No senior notes were issued in 2016.

The Series G senior notes have covenants customary for investment grade debt, primarily limitations on our ability to incur debt. There are no restrictions on our ability to pay dividends. These senior notes have covenants similar to our Series D, E, and F senior notes, but are different than the covenants applicable to our prior series of senior notes issued before we attained our investment grade rating.

Under the terms of the Series D, E, F and G senior notes, Host L.P.’s ability to incur indebtedness is subject to restrictions and the satisfaction of various conditions, including the achievement of an EBITDA-to-interest coverage ratio of at least 1.5x by Host L.P. As calculated, this ratio excludes from interest expense items such as call premiums and deferred financing charges that are included in interest expense on Host L.P.’s consolidated statement of operations. In addition, the calculation is based on Host L.P.’s pro forma results for the four prior fiscal quarters, giving effect to certain transactions, such as acquisitions, dispositions and financings, as if they had occurred at the beginning of the period. Other covenants limiting Host L.P.’s ability to incur indebtedness include maintaining total indebtedness of less than 65% of adjusted total assets (using undepreciated real estate book values), maintaining secured indebtedness of less than 40% of adjusted total assets (using undepreciated real estate book values) and maintaining total unencumbered assets of at least 150% of the aggregate principal amount of outstanding unsecured indebtedness of Host L.P. and its subsidiaries. So long as Host L.P. maintains the required level of interest coverage and satisfies these and other conditions in the senior notes indenture, it may incur additional debt.

We are in compliance with all of the financial covenants applicable to our Series D, E, F and G senior notes. The following table summarizes the financial tests contained in the senior notes indenture for our Series D, E, F and G senior notes and our actual credit ratios as of December 31, 2017:

			Covenant Requirement
Unencumbered assets tests	498	%	Minimum ratio of 150%
Total indebtedness to total assets	20	%	Maximum ratio of 65%
Secured indebtedness to total assets	0	%	Maximum ratio of 40%
EBITDA-to-interest coverage ratio	9.3	x	Minimum ratio of 1.5x

Covenants for Senior Notes Issued Before We Attained an Investment Grade Rating

Currently, our senior notes have an investment grade rating from Moody's, Standard & Poor's and Fitch Ratings. As a result, many of the restrictive covenants contained in the senior notes indenture and the supplemental indentures for our prior series of senior notes are not applicable, as they do not apply for so long as such series of notes maintain an investment grade rating from both Moody's and Standard & Poor's. The following primary covenants continue to apply to our existing senior notes (other than our Series D, E, F and G senior notes):

	•	restrict our ability to sell all or substantially all of our assets or merge with or into other companies; and

	•	require us to make an offer to repurchase the existing senior notes then currently outstanding upon the occurrence of a change of control.

If our senior notes no longer are rated investment grade by either or both of Moody's and Standard & Poor's, then the following covenants and other restrictions will be reinstated for our senior notes (but will not apply to the Series D, E, F and G senior notes which have different covenants):

	•	our ability to incur indebtedness and make distributions will be subject to restrictions and the satisfaction of various conditions, including the achievement of an EBITDA-tointerest coverage ratio of at least 2.0x. We will be able to make distributions to enable Host Inc. to pay dividends on its preferred stock, if any, under the senior notes indenture when our EBITDA-to-interest coverage ratio is above 1.7 to 1.0. This ratio is calculated in accordance with the terms of our senior notes indenture applicable to our non-investment grade senior notes based on pro forma results for the four prior fiscal quarters, giving effect to transactions such as acquisitions, dispositions and financings as if they had occurred at the beginning of the period. Interest expense excludes items such as the gains and losses on the extinguishment of debt, deferred financing charges related to the senior notes or the credit facility, and amortization of debt premiums or discounts that were recorded at acquisition of a loan in order to establish the debt at fair value. These amounts are included in interest expense on our consolidated statements of operations;

	•	other covenants limiting our ability to incur indebtedness and make distributions would include maintaining total indebtedness of less than 65% of adjusted total assets (using undepreciated real estate book values), excluding intangible assets, and maintaining secured indebtedness and subsidiary indebtedness of less than 45% of adjusted total assets (using undepreciated real estate book values). So long as we maintain the required level of interest coverage and satisfy these and other conditions in the senior notes indenture applicable to our existing senior notes, we may make preferred or common OP unit distributions and incur additional debt, including debt incurred in connection with an acquisition. Even if we are below the coverage levels otherwise required to incur debt and make distributions when our senior notes no longer are rated investment grade, we still will be permitted to incur certain types of debt, including (i) credit facility debt, (ii) refinancing debt, (iii) up to $400 million of mortgage debt, which proceeds would be used to repay debt under the credit facility (and permanently reduce our ability to borrow under the credit facility by such amount), and (iv) up to $150 million of other debt. We also will be permitted to make distributions of estimated taxable income that are necessary to maintain Host Inc.'s REIT status;

	•	a requirement to maintain unencumbered assets, based on undepreciated book values, of not less than 125% of the aggregate amount of senior note debt, plus other debt not secured by mortgages. This coverage requirement must be maintained at all times and is distinct from the coverage requirements necessary to incur debt or make distributions discussed above (which consequences, where we fall below the coverage level, are limited to restricting our ability to incur new debt or make distributions, but which would not otherwise cause a default under our senior notes indenture); and

	•	our ability to make distributions on, redeem or repurchase our OP units; permit payment or distribution restrictions on certain of our subsidiaries; sell assets; enter into transactions with affiliates; and create certain liens will be restricted.

The following summarizes the actual credit ratios for our senior notes (other than the Series D, E, F and G senior notes) as of December 31, 2017 and the covenant requirements contained in the senior notes indenture that would be applicable at such times as our senior notes no longer are rated investment grade by either of Moody’s or Standard & Poor’s. Even if we were to lose the investment grade rating, we would be in compliance with all of our financial covenants under the senior notes indenture:

			Covenant Requirement
Unencumbered assets tests	504	%	Minimum ratio of 125%
Total indebtedness to total assets	20	%	Maximum ratio of 65%
Secured indebtedness to total assets	0	%	Maximum ratio of 45%
EBITDA-to-interest coverage ratio	9.2	x	Minimum ratio of 2.0x
___________

	*	Because of differences in the calculation methodology between our Series D, Series E, Series F and Series G senior notes and our other senior notes, our actual ratios as reported can be slightly different.

Credit Facility. On May 31, 2017 we entered into the fourth amended and restated senior revolving credit and term loan 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. The revolver also includes a foreign currency subfacility for Canadian dollars, Australian dollars, 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 Mexican pesos borrowings. The credit facility also provides for the existing term loan facility of $1 billion (which is fully utilized), a subfacility of up to $100 million for swingline borrowings in U.S. dollars, Canadian dollars, Euros or British pounds 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

revolving credit facility and/or term loan facility of the credit facility by up to $500 million, subject to obtaining additional loan commitments and the satisfaction of certain conditions.

The revolving credit facility has an initial scheduled maturity of May 2021, with the option for Host L.P. to extend the term for two additional six-month terms, subject to certain conditions, including the payment of an extension fee and the accuracy of representations and warranties, and $500 million of term loans have an initial scheduled maturity of May 2021, with an option for Host L.P. to extend the term for one additional year, subject to similar conditions. A second $500 million of term loans was not affected by the restatement and is scheduled to mature in September 2020.

Neither the revolving credit facility nor the term loans, as applicable, requires any scheduled amortization payments prior to maturity. The term loans otherwise are subject to the same terms and conditions as those in the credit facility regarding subsidiary guarantees, operational covenants, financial covenants and events of default (as discussed below).

Guarantees. The credit facility requires all Host L.P. subsidiaries which guaranty Host L.P. debt to similarly guarantee obligations under the credit facility but otherwise removed the requirement under the prior agreement that guarantees and pledges are required 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.

Prepayments. Voluntary prepayments of revolver borrowings and term loans under the credit facility are permitted in whole or in part without premium or penalty. The loans under the credit facility are required to be prepaid in the event that asset sales reduce adjusted total assets (using undepreciated real estate book values) to below $10 billion if we do not reinvest the proceeds of those asset sales in new properties. At December 31, 2017, we have adjusted total assets, as defined in our credit facility, of $20 billion.

Financial Covenants. The credit facility contains covenants concerning allowable leverage, fixed charge coverage and unsecured interest coverage. We are permitted to make borrowings 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 under the credit facility. Thus, so long as there are no amounts outstanding thereunder and the term loans are repaid, 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 revolver portion of the credit facility in the future if we were ever 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 the 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 its fair value and non-cash interest expense, 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, pursuant to which cash and cash equivalents in excess of $100 million are deducted from our total debt balance.

We are in compliance with all of our financial covenants under the credit facility. The following table summarizes the financial tests contained in the credit facility as of December 31, 2017:

			Covenant Requirement for all years
Leverage ratio	2.2	x	Maximum ratio of 7.25x
Fixed charge coverage ratio	6.6	x	Minimum ratio of 1.25x
Unsecured interest coverage ratio (1)	9.8	x	Minimum ratio of 1.75x
___________

(1)	If at any time our leverage ratio is above 7.0x, our minimum unsecured interest coverage ratio will be reduced to 1.5x.

Interest and Fees. We pay interest on revolver borrowings under the credit facility at floating rates equal to LIBOR plus a margin. The margin ranges from 82.5 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, 2017, we are able to borrow at a rate of LIBOR plus 100 basis points and pay a facility fee of 20 basis points. Interest on the term loans consists of floating rates equal to LIBOR plus a margin ranging from 90 to 175 basis points (depending on Host L.P.’s unsecured long-term debt rating). Based on Host L.P.’s long-term debt rating as of December 31, 2017, our applicable margin on LIBOR loans under both term loans is 110 basis points.

Other Covenants and Events of Default. The credit facility contains restrictive covenants on customary matters. Certain covenants are less restrictive at any time that our leverage ratio is below 6.0x, as currently is the case. 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, dividends and distributions contained in the credit facility will be superseded by the generally less restrictive corresponding covenants in our senior notes indenture to the extent applicable, while our senior notes maintain an investment grade rating. Additionally, the credit facility’s restrictions on incurrence of debt and the payment of dividends and distributions generally are consistent with our senior notes indenture. 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.

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 due 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 due under the credit facility automatically will become due and payable and the lenders’ commitments automatically will terminate.

Mortgage Debt of Unconsolidated Partner Interests. We own non-controlling interests in partnerships and joint ventures that are not consolidated and that are accounted for under the equity method. The portion of the mortgage and other debt of these partnerships and joint ventures attributable to us, based on our ownership percentage thereof, was $472 million at December 31, 2017. The mortgage debt related to the hotels owned by our Euro JV contains operating covenants that could result in the joint venture being required to escrow cash from operations or to make principal payments without penalty. The debt of our unconsolidated joint ventures is non-recourse to us. See “—Off-Balance Sheet Arrangements and Contractual Obligations.”

Distribution/Dividend. Host Inc.’s policy on common dividends generally is to distribute, over time, at least 100% of its taxable income, which primarily is dependent on our results of operations, as well as gains and losses on property sales. Host Inc. paid a regular quarterly cash dividend of $0.20 per share and a special cash dividend of $0.05 per share on its common stock on January 16, 2018 to stockholders of record as of December 29, 2017. The $0.20 per share dividend represents Host Inc.’s intended regular quarterly cash dividend for the next several quarters, subject to Board approval. While Host Inc. intends to use available cash predominantly for acquisitions or other investments in its portfolio, to the extent that we do not identify appropriate investments, we may elect in the future, subject to market conditions, to use available cash for other purposes, such as common stock repurchases or increased dividends, which dividends could be in excess of taxable income. Any special dividend will be subject to approval by Host Inc.’s Board of Directors.

Funds used by Host Inc. to pay dividends are provided through distributions from Host L.P. As of December 31, 2017, Host Inc. is the owner of approximately 99% of Host L.P.’s common OP units. The remaining common OP units are owned by various unaffiliated limited partners. Each OP unit may be offered for redemption by the holders for cash or, at the election of Host Inc., Host Inc. common stock based on the then current conversion ratio. The current conversion ratio is 1.021494 shares of Host Inc. common stock for each OP unit.

Investors should take into account the 1% non-controlling position of Host L.P. OP units when analyzing dividend payments by Host Inc. to its stockholders, as these holders of OP units share, on a pro rata basis, in amounts being distributed by Host L.P. to holders of its OP units. For example, if Host Inc. paid a $1 per share dividend on its common stock, it would be based on the payment of a $1.021494 per common unit distribution by Host L.P. to Host Inc., as well as to the other common OP unitholders.

Counterparty Credit Risk. We are subject to counterparty credit risk, which relates to the ability of counterparties to meet their contractual payment obligations or the potential non-performance of counterparties to deliver contracted commodities or services at the contracted price. We assess the ability of our counterparties to fulfill their obligations to determine the impact, if any, of counterparty bankruptcy or insolvency on our financial condition. 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. Our credit exposure in each of these cases is limited. Our exposure with regard to our cash and the available capacity under the revolver portion of our credit facility is mitigated, as the credit risk is spread among a diversified group of investment grade financial institutions. At December 31, 2017, all our derivative contracts were in liability positions. Therefore, we had no exposure risk related to our derivative contracts.

Off-Balance Sheet Arrangements and Contractual Obligations

Off-Balance Sheet Arrangements. We are party to various transactions, agreements or other contractual arrangements with unconsolidated entities (which we refer to as “off-balance sheet arrangements”), pursuant to which we have certain contingent liabilities and/or guarantees. Contingencies included on our balance sheet are discussed in Part II Item 8. “Financial Statements and Supplementary Data – Note 16. “Guarantees and Contingencies.” As of December 31, 2017, we are party to the following material off-balance sheet arrangements:

European Joint Venture. The Euro JV consists of two separate funds, with our partners APG Strategic Real Estate Pool NV, an affiliate of a Dutch Pension Fund (“APG”) 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 serve as the general partner for the joint venture and have a combined general and limited partner interest of 32.1% of Euro JV Fund I and 33.4% of Euro JV Fund II. Due to the ownership 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 Euro JV is not consolidated in our financial statements. As of December 31, 2017, the book value of the total assets of the Euro JV are approximately €1.7 billion.

Our investment and partners’ funding as of December 31, 2017 is as follows:

	Host's Net Investment				Total Partner Funding
	Euros (in millions)		US$ (in millions)		Euros (in millions)
Euro JV Fund I	€	105	$	126	€	440
Euro JV Fund II		121		145		371
	€	226	$	271	€	811

The commitment period for both funds for acquisitions has expired. The remaining commitment is limited to investments in the current portfolio of hotels, including capital expenditures and debt repayments.

As asset manager of the Euro JV funds, we earn an asset management fee based on the amount of equity invested, which in 2017, 2016 and 2015 aggregated approximately $8 million, $8 million and $11 million, respectively.

During 2017, the Euro JV distributed €82 million to its partners, of which Host’s share was €26 million ($31 million). During 2016, the Euro JV distributed €47 million to its partners, of which Host’s share was €15 million ($18 million). In 2015, the Euro JV distributed €328.5 million to its partners, of which Host’s share was €107 million ($115 million), which distribution primarily was funded by proceeds from the disposition of nine hotels. The Euro JV invested approximately €22 million in 2017 and €23 million in both 2016 and 2015, in capital expenditures projects.

In December 2017, the Euro JV acquired the Hilton Amsterdam Airport Schiphol for €148 million ($175 million). In connection with the acquisition, the partnership entered into a mortgage loan in the amount of €81.4 million which matures on December 13, 2022 and the partners contributed €70 million, of which Host contributed €23 million ($27 million).

The Euro JV has €857 million of debt, all of which is non-recourse to us. A default of the Euro JV mortgage debt does not trigger a default under any of our debt. The weighted average interest rate of the Euro JV debt is 2.4% and it has a weighted average maturity of 3.7 years.

Asia/Pacific Joint Venture. We have a 25% interest in the Asia/Pacific JV with RECO Hotels JV Private Limited, an affiliate of GIC RE. The agreement may be terminated by either partner at any time, which would trigger the liquidation of the JV. 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 equity contributions to the Asia/Pacific JV has expired. Certain funding commitments remain, however, related to its existing investments in India.

As of December 31, 2017, the partners have invested approximately $104 million (of which our share is $26 million) in a separate joint venture in India with Accor S.A. and InterGlobe Enterprises Limited, in which the Asia/Pacific JV holds a 36% interest. This joint venture owns seven hotels in Delhi, Bangalore and Chennai, totaling approximately 1,720 rooms. The hotels are managed by AccorHotels under the Pullman, ibis and Novotel brands.

Maui Joint Venture. We own a 67% interest in a joint venture with an affiliate of HV Global Group, a subsidiary of Interval Leisure Group (“Interval”), that owns a 131-unit vacation ownership development in Maui, Hawaii adjacent to our Hyatt Regency Maui Resort & Spa (the “Maui JV”). Our ownership is a non-controlling interest as a result of the significant economic rights held by the Interval member, which also is the managing member. Since 2012, we have contributed approximately $87 million to the Maui JV, which includes the contribution of land valued at $36 million. During 2017, the Maui JV repaid its outstanding construction loan, releasing us of our guarantees, and it began making distributions to its partners. During 2017, we received a distribution of $7 million from the Maui JV. During 2017, 2016 and 2015, the Maui JV recognized $54 million, $55 million and $76 million, respectively, of sales of timeshare units.

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. The joint venture has a $60 million mortgage loan that is non-recourse to us. Due to the significant participating rights of our partner, we do not consolidate the joint venture in our financial statements. During 2017, we received approximately $3 million of distributions from the joint venture as a result of excess cash from operations.

Harbor Beach Joint Venture. We own a 49.9% interest in a joint venture with R/V-C Association that owns the 650-room Fort Lauderdale Marriott Harbor Beach Resort & Spa in Florida. The joint venture has approximately $150 million of mortgage debt that is non-recourse to us. Due to significant participating rights of our partner, we do not consolidate the joint venture in our financial statements. During 2017, we received approximately $7 million of distributions from the joint venture as a result of excess cash from operations.

For additional discussion on each of our joint venture investments, see Part II Item 8. Financial Statements and Supplementary Data – Note 3. “Investments in Affiliates.”

Contractual Obligations. The table below summarizes our obligations for principal and estimated interest payments on our debt, future minimum lease payments on our operating and capital leases, projected capital expenditures and other long-term liabilities, each as of December 31, 2017 (in millions):

	Payments due by period
			Less than						More than
	Total		1 year		1 to 3 years		3 to 5 years		5 years
Long-term debt obligations (1)	$	4,821	$	158	$	811	$	1,553	$	2,299
Capital lease obligations		1		1		—		—		—
Operating lease obligations		1,487		42		80		76		1,289
Purchase obligations (2)		210		181		29		—		—
Other long-term liabilities reflected on the balance sheet (3)		26		1		6		—		19
Total	$	6,545	$	383	$	926	$	1,629	$	3,607
___________

(1)	The amounts shown include amortization of principal, debt maturities and estimated interest payments. Interest payments have been reflected based on the weighted average interest rate.

(2)	Our only purchase obligations consist of commitments for capital expenditures at our hotels. Under our contracts, we have the ability to defer some of these expenditures into later years.

(3)	The amounts shown include deferred management fees, obligations to third-parties related to prior property transactions and the estimated amount of tax expense related to uncertain tax liabilities.

Tax Sharing Arrangements. Under tax sharing agreements with former affiliated companies (such as Marriott International, Inc., HMS Host and Barceló Crestline Corporation), we are obligated to pay certain taxes (federal, state, local and foreign, including any related interest and penalties) relating to periods in which the companies were affiliated with us. For example, a taxing authority could adjust an item deducted by a former affiliate during the period that such former affiliate was owned by us. This adjustment could result in a tax liability that we may be obligated to pay under the tax sharing agreement. Additionally, under the partnership agreement between Host Inc. and Host L.P., Host L.P. is obligated to pay certain taxes (federal, state, local and foreign, including any related interest and penalties) incurred by Host Inc., as well as any liabilities the IRS may successfully assert against Host Inc. We do not expect any amounts paid under these tax sharing arrangements to be material.

Tax Indemnification Agreements. As a result of certain federal and state income tax considerations of the former owners of two hotels currently owned by Host L.P., we have agreed to restrictions on selling such hotels, or repaying or refinancing mortgage debt, for varying periods. One of these agreements expires in 2028 and the other in 2031.

Guarantees. We have entered into certain guarantees, which consist of commitments we have made to third parties for leases or debt, that are not recorded on our books due to various dispositions, spin-offs and contractual arrangements, but that we have agreed to pay in the event of certain circumstances, including default by an unrelated party. We consider the likelihood of any material payments under these guarantees to be remote. For a discussion of the largest guarantees (by dollar amount) see “Item 8. Financial Statements and Supplementary Data - Note 16. Guarantees and Contingencies.”

Critical Accounting Policies

Our consolidated financial statements have been prepared in conformity with GAAP, which requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the

reported amounts of revenues and expenses during the reporting period. While we do not believe the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. We evaluate our estimates and judgments, including those related to the impairment of long-lived assets, on an ongoing basis. We base our estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances. All of our significant accounting policies are disclosed in the notes to our consolidated financial statements. For a detailed discussion of the following critical accounting policies that require us to exercise our business judgment or make significant estimates see “Item 8. Financial Statements and Supplementary Data - Note 1. Summary of Significant Accounting Policies:”

	•	Business Combinations;

	•	Property and Equipment – Impairment testing;

	•	Property and Equipment – Other-than-Temporary Impairment of an Investment;

	•	Property and Equipment – Classification of Assets as “Held for Sale”; and

	•	Basis of Presentation and Principles of Consolidation.

Application of New Accounting Standards

See Note 1 to the Consolidated Financial Statements in Item 8 for information regarding accounting standards we adopted in 2017 and other new accounting standards that have been issued by the Financial Accounting Standards Board (“FASB”) but are not effective until after December 31, 2017.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The 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. Beginning in 2015, the FASB issued a number of ASUs to provide further clarification related to this standard and to defer the effective date to reporting periods beginning after December 15, 2017. Additionally, in February 2017, the FASB issued ASU No. 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20), which is required to be adopted concurrently, as it provides further guidance on accounting for the derecognition of and partial sales of a nonfinancial asset. 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 pursuant to which we have continuing involvement with the asset. Upon adoption, we will implement these standards using a modified retrospective approach with a cumulative effect recognized with no restatements of prior period amounts.

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, the share-based payment awards granted in 2017 are equity-classified awards, and the excess tax benefits or deficiencies that are generated or incurred based on the difference between the intrinsic value of the award and the grant-date fair value is recognized as income tax benefit or expense on the income statement. The adoption of this standard has not had a material effect on our consolidated 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. We adopted this standard beginning January 1, 2017. As a result, amounts included in restricted cash and furniture, fixtures and equipment replacement fund on our consolidated balance sheet are included with cash and cash equivalents on the consolidated statement of cash flows. These items

totaled $196 million, $172 million and $156 million for the years ended December 31, 2017, 2016 and 2015, respectively. The adoption of this standard did not change our balance sheet presentation.

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 the fair value of the gross assets acquired is concentrated in a single (group of similar) identifiable asset(s), then the transaction will be considered an asset purchase. As a result of this 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.

Our Customers

Our customers fall into three broad groups: transient business, group business and contract business. Similar to the majority of the lodging industry, we further categorize business within these broad groups based on characteristics they have in common as follows:

Transient business broadly represents individual business or leisure travelers. Business travelers make up the majority of transient demand at our hotels. Therefore, we will be significantly more affected by trends in business travel than trends in leisure demand. The four key subcategories of the transient business group are:

	•	Retail: This is the benchmark rate that a hotel publishes and offers to the general public. It typically is the rate charged to travelers that do not have access to negotiated or discounted rates. It includes the “rack rate,” which typically is applied to rooms during high demand periods and is the highest rate category available. Retail room rates will fluctuate more freely depending on anticipated demand levels (e.g. seasonality and weekday vs. weekend stays).

	•	Non-Qualified Discount: These include special rates offered by the hotels, including packages, advance-purchase discounts and promotional offers. These also include rooms booked through online travel agencies (OTAs).

	•	Special Corporate: This is a negotiated rate offered to companies and organizations that provide significant levels of room night demand to the hotel or to hotel brands generally. These rates typically are negotiated annually at a discount to the anticipated retail rate. In addition, this category includes rates offered at the prevailing per diem for approved government travel.

	•	Qualified Discount: This category encompasses all discount programs, such as AAA and AARP discounts, rooms booked through wholesale channels, frequent guest program redemptions, and promotional rates and packages offered by a hotel.

Group business represents clusters of guestrooms booked together, usually with a minimum of 10 rooms. The three key sub-categories of the group business category are:

	•	Association: group business related to national and regional association meetings and conventions.

	•	Corporate: group business related to corporate meetings (e.g., product launches, training programs, contract negotiations, and presentations).

	•	Other: group business predominately related to social, military, education, religious, fraternal and youth and amateur sports teams, otherwise known as SMERF business.

Contract business refers to blocks of rooms sold to a specific company for an extended period of time at significantly discounted rates. Airline crews are typical generators of contract demand for our airport hotels. Additionally, contract rates may be utilized by hotels that are located in markets that are experiencing consistently lower levels of demand.

Comparable Hotel Operating Statistics

To facilitate a year-to-year comparison of our operations, we present certain operating statistics (i.e., RevPAR, average daily rate and average occupancy) and operating results (revenues, expenses, hotel EBITDA and associated margins) for the periods included in this report on a comparable hotel basis to enable our investors to better evaluate our operating performance.

Because these statistics and operating results relate only to our hotel properties, they exclude results for our non-hotel properties and other real estate investments. We define our comparable hotels as properties:

	(i)	that are owned or leased by us and the operations of which are included in our consolidated results, whether as continuing operations or discontinued operations, for the entirety of the reporting periods being compared; and

	(ii)	that have not sustained substantial property damage or business interruption, or undergone large-scale capital projects (as further defined below) during the reporting periods being compared.

The hotel business is capital-intensive and renovations are a regular part of the business. Generally, hotels under renovation remain comparable hotels. A large scale capital project that would cause a hotel to be excluded from our comparable hotel set is an extensive renovation of several core aspects of the hotel, such as rooms, meeting space, lobby, bars, restaurants and other public spaces. Both quantitative and qualitative factors are taken into consideration in determining if the renovation would cause a hotel to be removed from the comparable hotel set, including unusual or exceptional circumstances such as: a reduction or increase in room count, rebranding, a significant alteration of the business operations, or the closing of the hotel during the renovation.

We do not include an acquired hotel in our comparable hotel set until the operating results for that hotel have been included in our consolidated results for one full calendar year. For example, we acquired The Don CeSar in February 2017. The hotel will not be included in our comparable hotel set until January 1, 2019. Hotels that we sell are excluded from the comparable hotel set once the transaction has closed. Similarly, hotels are excluded from our comparable hotel set from the date that they sustain substantial property damage or business interruption or commence a large-scale capital project. In each case, these hotels are returned to the comparable hotel set when the operations of the hotel have been included in our consolidated results for one full calendar year after completion of the repair of the property damage or cessation of the business interruption, or the completion of large-scale capital projects, as applicable.

Of the 94 hotels that we owned on December 31, 2017, 87 have been classified as comparable hotels. The operating results of the following hotels that we owned as of December 31, 2017 are excluded from comparable hotel results for these periods:

	•	The Denver Marriott Tech Center, removed in the first quarter of 2016 (business disruption due to extensive renovations, including conversion of 64 rooms to 41 suites, conversion of the concierge lounge into three meeting rooms, and the repositioning of the public space and food and beverage areas);

	•	The Hyatt Regency San Francisco Airport, removed in the first quarter of 2016 (business disruption due to extensive renovations, including all guestrooms and bathrooms, meeting space, the repositioning of the atrium into a new restaurant and lounge, and conversion of the existing restaurant to additional meeting space);

	•	Marriott Marquis San Diego Marina, removed in the first quarter of 2015 (business interruption due to the demolition of the existing conference center and construction of the new exhibit hall);

	•	The Phoenician (acquired in June 2015 and, beginning in second quarter 2016, business disruption due to extensive renovations, including all guestrooms and suites, a redesign of the lobby and public areas, renovation of pools, recreation areas and a restaurant and a re-configured spa and fitness center);

	•	Axiom Hotel (acquired as the Powell Hotel in January 2014, then closed during 2015 for extensive renovations and reopened in January 2016);

	•	The Don CeSar and Beach House Suites complex (acquired February 2017); and

	•	W Hollywood (acquired March 2017).

The operating results of 14 hotels disposed of in 2017 and 2016 are not included in comparable hotel results for the periods presented herein. None of our hotels have been excluded from our comparable hotel results due to Hurricanes Harvey or Irma. In 2018, the following hotels will be excluded from our comparable hotel results because they will be undergoing large-scale capital projects during the comparable periods reported: the San Francisco Marriott Marquis; The Ritz-Carlton, Naples; and The Phoenician. We also will exclude the Key Bridge Marriott, which we sold in January, along with any hotels acquired or sold during 2018.

As of December 31, 2016, 88 of our 96 hotels were classified as comparable. The operating results of the following hotels that we owned as of December 31, 2016 are excluded from comparable hotel results for these periods:

	•	The Denver Marriott Tech Center, removed in the first quarter of 2016 (business disruption due to extensive renovations, including conversion of 64 rooms to 41 suites, conversion of the concierge lounge into three meeting rooms, and the repositioning of the public space and food and beverage areas);

	•	The Hyatt Regency San Francisco Airport, removed in the first quarter of 2016 (business disruption due to extensive renovations, including all guestrooms and bathrooms, meeting space, the repositioning of the atrium into a new restaurant and lounge, and conversion of the existing restaurant to additional meeting space);

	•	The Camby Hotel (previously The Ritz-Carlton, Phoenix), removed in the third quarter of 2015 (business interruption due to rebranding, including closure of the hotel in July 2015 for extensive renovation work);

	•	The Logan (previously the Four Seasons Philadelphia), removed in the first quarter of 2015 (business interruption due to rebranding, including closure of the hotel in order to expedite renovation efforts);

	•	Houston Airport Marriott at George Bush Intercontinental, removed in the first quarter of 2015 (business interruption due to complete repositioning of the hotel, including guest room renovations and the closure of two restaurants to create a new food and beverage outlet and lobby experience);

	•	Marriott Marquis San Diego Marina, removed in the first quarter of 2015 (business interruption due to the demolition of the existing conference center and construction of the construction of the new exhibit hall);

	•	The Phoenician (acquired in June 2015 and, beginning in second quarter 2016, business disruption due to extensive renovations, including all guestrooms and suites, a redesign of the lobby and public areas, renovation of pools, recreation areas and a restaurant and a re-configured spa and fitness center); and

	•	Axiom Hotel (acquired as the Powell Hotel in January 2014, then closed during 2015 for extensive renovations and reopened in January 2016).

Constant US$ and Nominal US$

Operating results denominated in foreign currencies are translated using the prevailing exchange rates on the date of the transaction, or monthly based on the weighted average exchange rate for the period. For comparative purposes, we also present the RevPAR results for 2016 assuming the results of our foreign operations were translated using the same exchange rates that were effective for the comparable periods in 2017, thereby eliminating the effect of currency fluctuation for the year-over-year comparisons. We believe this presentation is useful to investors as it provides clarity with respect to the growth in RevPAR in the local currency of the hotel consistent with the manner in which we would evaluate our domestic portfolio. However, the effect of changes in foreign currency has been reflected in the actual results of net income, EBITDA, Adjusted EBITDAre, earnings per diluted share and Adjusted FFO per diluted share. Nominal US$ results include the effect of currency fluctuations consistent with our financial statement presentation.

Non-GAAP Financial Measures

We use certain “non-GAAP financial measures,” which are measures of our historical financial performance that are not calculated and presented in accordance with GAAP, within the meaning of applicable SEC rules. These measures are as follows: (i) EBITDA, EBITDAre and Adjusted EBITDAre as a measure of performance for Host Inc. and Host L.P., (ii) Funds From Operations (“FFO”) and FFO per diluted share (both NAREIT and Adjusted), as a measure of performance for Host Inc., and (iii) comparable hotel property level operating results, as a measure of performance for Host Inc. and Host L.P.

We calculate EBITDAre and NAREIT FFO per diluted share in accordance with standards established by NAREIT, which may not be comparable to measures calculated by other companies that do not use the NAREIT definition of EBITDAre and FFO or do not calculate FFO per diluted share in accordance with NAREIT guidance. In addition, although EBITDAre and FFO per diluted share are useful measures when comparing our results to other REITs, they may not be helpful to investors when comparing us to non-REITs. We also calculate Adjusted FFO per diluted share, which measure is not in accordance with NAREIT guidance and may not be comparable to measures calculated by other REITs. EBITDA and Adjusted EBITDAre, as presented, also may not be comparable to measures calculated by other companies. This information should not be considered as an alternative to net income, operating profit, cash from operations or any other operating performance measure calculated in accordance with GAAP. Cash expenditures for various long-term assets (such as renewal and replacement capital expenditures), interest expense (for EBITDA, EBITDAre, and Adjusted EBITDAre purposes only) and other items have been and will be made and are not reflected in the EBITDA, EBITDAre, Adjusted EBITDAre, NAREIT FFO per diluted share and Adjusted FFO per diluted share presentations. Management compensates for these limitations by separately considering the impact of these excluded items to the extent they are material to operating decisions or assessments of our operating performance. Our consolidated statements of operations and cash flows include interest expense, capital expenditures, and other excluded items, all of which should be considered when evaluating our performance, as well as the usefulness of our non-GAAP financial measures. Additionally, NAREIT FFO per diluted share, Adjusted FFO per diluted share, EBITDA, EBITDAre and Adjusted EBITDAre should not be considered as measures of our liquidity or indicative of funds available to fund our cash needs, including our ability to make cash distributions. In addition, NAREIT FFO per diluted share and Adjusted FFO per diluted share do not measure, and should not be used as measures of, amounts that accrue directly to stockholders’ benefit.

Similarly, EBITDAre, Adjusted EBITDAre, NAREIT FFO and Adjusted FFO per diluted share include adjustments for the pro rata share of our equity investments and NAREIT FFO and Adjusted FFO include adjustments for non-controlling partners in consolidated partnerships. Our equity investments consist of interests ranging from 11% to 67% in seven domestic and international partnerships that own a total of 21 properties and a vacation ownership development. Due to the voting rights of the outside owners, we do not control and, therefore, do not consolidate these entities. The non-controlling partners in consolidated partnerships primarily consist of the approximate 1% interest in Host LP held by outside partners and interests ranging from 15% to 48% held by outside partners in two partnerships, each owning one hotel for which we do control the entity and, therefore, consolidate its operations. These pro rata results for NAREIT FFO and Adjusted FFO per diluted share, EBITDAre and Adjusted EBITDAre are calculated as set forth below. Readers should be cautioned that the pro rata results presented in these measures for consolidated partnerships (for NAREIT FFO and Adjusted FFO per diluted share) and equity investments may not accurately depict the legal and economic implications of our investments in these entities. The following discussion defines these terms and presents why we believe they are useful measures of our performance.

EBITDA, EBITDAre and Adjusted EBITDAre

EBITDA

Earnings before Interest Expense, Income Taxes, Depreciation and Amortization (“EBITDA”) is a commonly used measure of performance in many industries. Management believes EBITDA provides useful information to investors regarding our results of operations because it helps us and our investors evaluate the ongoing operating performance of our properties after removing the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization). Management also believes the use of EBITDA facilitates comparisons between us and other lodging REITs, hotel owners that are not REITs and other capital-intensive companies. Management uses EBITDA to evaluate property-level results and as one measure in determining the value of acquisitions and dispositions and, like FFO and Adjusted FFO per diluted share, it is widely used by management in the annual budget process and for compensation programs.

EBITDAre and Adjusted EBITDAre

We present EBITDAre in accordance with NAREIT guidelines, as defined in its September 2017 white paper “Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate,” to provide an additional performance measure to facilitate the evaluation and comparison of our results with other REITs. NAREIT defines EBITDAre as net income (calculated in accordance with GAAP) excluding interest expense, income tax, depreciation and amortization, gains or losses on disposition of depreciated property (including gains or losses on change of control), impairment write-downs of depreciated property and of investments in unconsolidated affiliates caused by a decrease in value of depreciated property in the affiliate, and adjustments to reflect the entity’s pro rata share of EBITDAre of unconsolidated affiliates.

We make additional adjustments to EBITDAre when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance. We believe that the presentation of Adjusted EBITDAre, when combined with the primary GAAP presentation of net income, is beneficial to an investor’s understanding of our operating performance. Adjusted EBITDAre also is similar to what is used in calculating certain credit ratios for our credit facility and senior notes. We adjust EBITDAre for the following items, which may occur in any period, and refer to this measure as Adjusted EBITDAre:

	•	Property Insurance Gains – We exclude the effect of property insurance gains reflected in our consolidated statements of operations because we believe that including them in Adjusted EBITDAre is not consistent with reflecting the ongoing performance of our assets. In addition, property insurance gains could be less important to investors given that the depreciated asset book value written off in connection with the calculation of the property insurance gain often does not reflect the market value of real estate assets.

	•	Cumulative Effect of a Change in Accounting Principle – Infrequently, the FASB promulgates new accounting standards that require the consolidated statements of operations to reflect the cumulative effect of a change in accounting principle. We exclude these one-time adjustments because they do not reflect our actual performance for that period.

	•	Acquisition Costs – Under GAAP, costs associated with completed property acquisitions are expensed in the year incurred. We exclude the effect of these costs because we believe they are not reflective of the ongoing performance of the company.

	•	Litigation Gains and Losses – We exclude the effect of gains or losses associated with litigation recorded under GAAP that we consider outside the ordinary course of business. We believe that including these items is not consistent with our ongoing operating performance.

In unusual circumstances, we also may adjust EBITDAre for gains or losses that management believes are not representative of the Company’s current operating performance. The last such adjustment was a 2013 exclusion of a gain from an eminent domain claim.

In the past, we presented Adjusted EBITDA as a supplemental measure of our performance. That metric is calculated in a similar manner as Adjusted EBITDAre presented here, with the exception of the adjustment for non-controlling partners’ pro rata share of Adjusted EBITDA, which totaled $11 million in 2016. The rationale for including 100% of EBITDAre for consolidated affiliates with non-controlling interests is that the full amount of any debt of these affiliates is reported in our consolidated balance sheet and therefore metrics using total debt to EBITDAre provide a better understanding of the Company’s leverage. This is also consistent with NAREIT’s definition of EBITDAre.

The following table provides a reconciliation of net income to EBITDA, EBITDAre and Adjusted EBITDAre (in millions):

Reconciliation of Net Income to EBITDA, EBITDAre and Adjusted EBITDAre for Host Inc. and Host L.P.

	Year ended December 31,
	2017			2016
Net income (1)	$	571		$	771
Interest expense		167			154
Depreciation and amortization		708			724
Income taxes		80			40
EBITDA (1)		1,526			1,689
Gain on dispositions (2)		(100	)		(250	)
Non-cash impairment loss		43			—
Equity investment adjustments:
Equity in earnings of Euro JV (3)		(18	)		(8	)
Equity in earnings of affiliates other than Euro JV		(12	)		(13	)
Pro rata EBITDAre of Euro JV (3)		40			36
Pro rata EBITDAre of equity investments other than Euro JV		31			29
EBITDAre (1)(4)		1,510			1,483
Adjustments to EBITDAre:
Acquisition costs		1			—
Gain on property insurance settlement		(1	)		(1	)
Adjusted EBITDAre (1)(4)	$	1,510		$	1,482
___________

(1)	Net Income, EBITDA, EBITDAre, Adjusted EBITDAre, NAREIT FFO and Adjusted FFO include a gain of $2 million for each of the years ended December 31, 2017 and 2016 for the sale of the portion of land attributable to individual units sold by the Maui timeshare joint venture and a gain of $4 million for the year ended December 31, 2017 for the sale of excess land in Chicago.

(2)	Reflects the sale of four hotels in 2017 and the sale of ten hotels in 2016.

(3)	Represents our share of earnings from our European Joint Venture (“Euro JV”) in which we hold an approximate one-third non-controlling interest.

(4)

Effective December 31, 2017, we present EBITDAre, reported in accordance with NAREIT guidelines, and Adjusted EBITDAre as supplemental measures of our performance. Our prior year results have been restated to conform with the current year presentation. Under the new presentation, we include all of the EBITDA of consolidated partnerships, including the non-controlling partners’ share, which has increased the previously reported 2016 Adjusted EBITDA by $11 million.

NAREIT FFO, NAREIT FFO per Diluted Share and Adjusted FFO per Diluted Share. We present NAREIT FFO and NAREIT FFO per diluted share as non-GAAP measures of our performance in addition to our earnings per share (calculated in accordance with GAAP). We calculate NAREIT FFO per diluted share as our NAREIT FFO (defined as set forth below) for a given operating period, as adjusted for the effect of dilutive securities, divided by the number of fully diluted shares outstanding during such period in accordance with NAREIT guidelines. NAREIT defines FFO as net income (calculated in accordance with GAAP), excluding gains (losses) from sales of real estate, the cumulative effect of changes in accounting principles, real estate-related depreciation, amortization and impairments and adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect our pro rata share of the FFO of those entities on the same basis.

We believe that NAREIT FFO per diluted share is a useful supplemental measure of our operating performance and that the presentation of NAREIT FFO per diluted share, when combined with the primary GAAP presentation of earnings per share, provides beneficial information to investors. By excluding the effect of real estate depreciation, amortization, impairments and gains and losses from sales of real estate, all of which are based on historical cost accounting and which may be of lesser significance in evaluating current performance, we believe such measures can facilitate comparisons of operating performance between periods and with other

REITs, even though NAREIT FFO per diluted share does not represent an amount that accrues directly to holders of our common stock. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. As noted by NAREIT in its April 2002 “White Paper on Funds From Operations,” since real estate values historically have risen or fallen with market conditions, many industry investors have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. For these reasons, NAREIT adopted the FFO metric in order to promote an industry-wide measure of REIT operating performance.

We also present Adjusted FFO per diluted share when evaluating our performance because management believes that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance. Management historically has made the adjustments detailed below in evaluating our performance, in our annual budget process and for our compensation programs. We believe that the presentation of Adjusted FFO per diluted share, when combined with both the primary GAAP presentation of earnings per share and FFO per diluted share as defined by NAREIT, provides useful supplemental information that is beneficial to an investor’s understanding of our operating performance. We adjust NAREIT FFO per diluted share for the following items, which may occur in any period, and refer to this measure as Adjusted FFO per diluted share:

	•	Gains and Losses on the Extinguishment of Debt – We exclude the effect of finance charges and premiums associated with the extinguishment of debt, including the acceleration of the write off of deferred financing costs from the original issuance of the debt being redeemed or retired and incremental interest expense incurred during the refinancing period. We also exclude the gains on debt repurchases and the original issuance costs associated with the retirement of preferred stock. We believe that these items are not reflective of our ongoing finance costs.

	•	Acquisition Costs –Under GAAP, costs associated with completed property acquisitions are expensed in the year incurred. We exclude the effect of these costs because we believe they are not reflective of the ongoing performance of the company.

	•	Litigation Gains and Losses – We exclude the effect of gains or losses associated with litigation recorded under GAAP that we consider outside the ordinary course of business. We believe that including these items is not consistent with our ongoing operating performance.

In unusual circumstances, we also may adjust NAREIT FFO for gains or losses that management believes are not representative of our current operating performance. As a result of the reduction of corporate income tax rates from 35% to 21% caused by the Tax Cuts and Jobs Act, we remeasured our domestic deferred tax assets as of December 31, 2017 and recorded a one-time adjustment to reduce the deferred tax assets and increase the provision for income taxes by approximately $11 million. Additionally, similar corporate income tax rate reductions affected our European Joint Venture, causing the remeasurement of the net deferred tax assets and liabilities in France and Belgium, resulting in a net tax benefit to us of $5 million. We do not consider these adjustments to be reflective of our ongoing operating performance and therefore have excluded these items from Adjusted FFO. The last such adjustment prior to this was a 2013 exclusion of a gain from an eminent domain claim.

The following table provides a reconciliation of net income to NAREIT FFO and Adjusted FFO (separately and on a per diluted share basis) for Host Inc. (in millions, except per share amounts):

Host Inc. Reconciliation of Net Income

to NAREIT and Adjusted Funds From Operations per Diluted Share

	Year ended December 31,
	2017			2016
Net income (1)	$	571		$	771
Less: Net loss attributable to non-controlling interests		(7	)		(9	)
Net income attributable to Host Inc.		564			762
Adjustments:
Gain on dispositions (2)		(100	)		(250	)
Tax on dispositions		18			9
Gain on property insurance settlement		(1	)		(1	)
Depreciation and amortization		704			720
Non-cash impairment loss		43			—
Equity investment adjustments:
Equity in earnings of affiliates		(30	)		(21	)
Pro rata FFO of equity investments		56			48
Consolidated partnership adjustments:
FFO adjustment for non-controlling partnerships		(4	)		(4	)
FFO adjustments for non-controlling interests of Host L.P.		(8	)		(6	)
NAREIT FFO (1)		1,242			1,257
Adjustments to NAREIT FFO:
Acquisition costs		1			—
Adjustment for Tax Reform (3)		6			—
Loss on debt extinguishment		1			—
Adjusted FFO (1)	$	1,250		$	1,257

For calculation on a per share basis (4):
Diluted weighted average shares outstanding - EPS, NAREIT FFO and Adjusted FFO		739.1			743.7
NAREIT FFO per diluted share	$	1.68		$	1.69
Adjusted FFO per diluted share	$	1.69		$	1.69
___________

(1-2)	Refer to the corresponding footnote on the Reconciliation of Net Income to EBITDA, EBITDAre and Adjusted EBITDAre for Host Inc. and Host L.P.

(3)

As a result of the reduction of corporate income tax rates from 35% to 21% caused by the Tax Cuts and Jobs Act, we remeasured our domestic deferred tax assets as of December 31, 2017 and recorded a one-time adjustment to reduce the deferred tax assets and increase the provision for income taxes by approximately $11 million. Additionally, similar corporate income tax rate reductions affected our European Joint Venture, causing the remeasurement of the net deferred tax assets and liabilities in France and Belgium, resulting in a net tax benefit to us of $5 million. We do not consider these adjustments to be reflective of our ongoing operating performance and therefore have excluded these items from Adjusted FFO.

(4)

Earnings per diluted share and NAREIT FFO and Adjusted FFO per diluted share are adjusted for the effects of dilutive securities. Dilutive securities may include shares granted under comprehensive stock plans, preferred OP units held by non-controlling partners, exchangeable debt securities and other non-controlling interests that have the option to convert their limited partner interests to common OP units. No effect is shown for securities if they are anti-dilutive.

Comparable Hotel Property Level Operating Results. We present certain operating results for our hotels, such as hotel revenues, expenses, food and beverage profit and EBITDA (and the related margins) on a comparable hotel, or “same store,” basis as supplemental information for investors. Our comparable hotel results present operating results for hotels owned during the entirety of the periods being compared without giving effect to any acquisitions or dispositions, significant property damage or large scale capital improvements incurred during these periods. We present comparable hotel EBITDA to help us and our investors evaluate the ongoing operating performance of our comparable properties after removing the impact of our capital structure (primarily interest expense), and its asset base (primarily depreciation and amortization). Other corporate-level costs and expenses are also removed to arrive at property-level results. We believe these property-level results provide investors with supplemental information into the ongoing operating performance of our comparable hotels. We eliminate depreciation and amortization because, even though depreciation and amortization are property-level expenses, these non-cash expenses, which are based on historical cost accounting for real estate assets, implicitly assume that the value of real estate assets diminishes predictably over time. As noted earlier, because real estate values historically have risen or fallen with market conditions, many real estate industry investors have considered presentation of historical cost accounting for operating results to be insufficient by themselves.

As a result of the elimination of corporate-level costs and expenses and depreciation and amortization, the comparable hotel operating results we present do not represent our total revenues, expenses, operating profit or net income and should not be used to evaluate our performance as a whole. Management compensates for these limitations by separately considering the impact of these excluded items to the extent they are material to operating decisions or assessments of our operating performance. Our consolidated statements of operations include such amounts, all of which should be considered by investors when evaluating our performance.

We present these hotel operating results on a comparable hotel basis because we believe that doing so provides investors and management with useful information for evaluating the period-to-period performance of our hotels and facilitates comparisons with other hotel REITs and hotel owners. In particular, these measures assist management and investors in distinguishing whether increases or decreases in revenues and/or expenses are due to growth or decline of operations at comparable hotels (which represent the vast majority of our portfolio) or from other factors, such as the effect of acquisitions or dispositions. While management believes that presentation of comparable hotel results is a “same store” supplemental measure that provides useful information in evaluating our ongoing performance, this measure is not used to allocate resources or to assess the operating performance of each of these hotels, as these decisions are based on data for individual hotels and are not based on comparable hotel results. For these reasons, we believe that comparable hotel operating results, when combined with the presentation of GAAP operating profit, revenues and expenses, provide useful information to investors and management.

The following table presents certain operating results and statistics for our comparable hotels for the periods presented herein:

Comparable Hotel Results for Host Inc. and Host L.P.

(in millions, except hotel statistics)

	Year ended December 31,
	2017			2016
Number of hotels		87			87
Number of rooms		48,357			48,357
Change in comparable hotel RevPAR -
Constant US$		1.3	%		—
Nominal US$		1.4	%		—
Operating profit margin (1)		12.5	%		12.6	%
Comparable hotel EBITDA margin (1)		27.85	%		27.75	%
Food and beverage profit margin (1)		31.4	%		30.3	%
Comparable hotel food and beverage profit margin (1)		31.2	%		30.5	%

Net income	$	571		$	771
Depreciation and amortization		751			724
Interest expense		167			154
Provision for income taxes		80			40
Gain on sale of property and corporate level income/expense		(44	)		(175	)
Non-comparable hotel results, net (2)		(177	)		(180	)
Comparable hotel EBITDA	$	1,348		$	1,334

	Year ended December 31, 2017											Year ended December 31, 2016
				Adjustments											Adjustments
	GAAP Results			Non-comparable hotel results, net(2)			Depreciation and corporate level items			Comparable Hotel Results		GAAP Results			Non-comparable hotel results, net(2)			Depreciation and corporate level items			Comparable Hotel Results
Revenues
Room	$	3,490		$	(310	)	$	—		$	3,180	$	3,492		$	(348	)	$	—		$	3,144
Food and beverage		1,561			(178	)		—			1,383		1,599			(204	)		—			1,395
Other		336			(59	)		—			277		339			(70	)		—			269
Total revenues		5,387			(547	)		—			4,840		5,430			(622	)		—			4,808
Expenses
Room		899			(77	)		—			822		893			(88	)		—			805
Food and beverage		1,071			(119	)		—			952		1,114			(144	)		—			970
Other		1,906			(188	)		—			1,718		1,924			(225	)		—			1,699
Depreciation and amortization		751			—			(751	)		—		724			—			(724	)		—
Corporate and other expenses		98			—			(98	)		—		106			—			(106	)		—
Gain on insurance and business interruption settlements		(14	)		14			—			—		(15	)		15			—			—
Total expenses		4,711			(370	)		(849	)		3,492		4,746			(442	)		(830	)		3,474
Operating Profit - Comparable Hotel EBITDA	$	676		$	(177	)	$	849		$	1,348	$	684		$	(180	)	$	830		$	1,334
___________

(1)	Profit margins are calculated by dividing the applicable operating profit by the related revenue amount. GAAP operating profit margins are calculated using amounts presented in the consolidated statements of operations. Comparable hotel margins are calculated using amounts presented in the above table.

(2)	Non-comparable hotel results, net, includes the following items: (i) the results of operations of our non-comparable hotels and sold hotels, which operations are included in our consolidated statements of operations as continuing operations, (ii) gains on insurance settlements and business interruption proceeds, and (iii) the results of our office buildings.

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