filings.toolsItem 8. Financial Statements and Supplementary Data
162K characters. Original on sec.gov · Markdown
Item 8. Financial Statements and Supplementary Data
The following financial information is included on the pages indicated:
Host Hotels & Resorts, Inc. & Host Hotels & Resorts, L.P.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors Host Hotels & Resorts, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Host Hotels & Resorts, Inc. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes and financial statement schedule III (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 26, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
McLean, Virginia February 26, 2018
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors Host Hotels & Resorts, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Host Hotels & Resorts, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes and financial statement schedule III (collectively, the “consolidated financial statements”), and our report dated February 26, 2018 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
McLean, Virginia February 26, 2018
Report of Independent Registered Public Accounting Firm
The Partners Host Hotels & Resorts, L.P.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Host Hotels & Resorts, L.P. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), capital, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes and financial statement schedule III (collectively, the “consolidated financial statements.”) In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
McLean, Virginia February 26, 2018
HOST HOTELS & RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2017 and 2016
(in millions, except per share amounts)
| December 31, 2017 | December 31, 2016 | |||||||
|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||
| Property and equipment, net | $ | 9,692 | $ | 10,145 | ||||
| Assets held for sale | 250 | 150 | ||||||
| Due from managers | 79 | 55 | ||||||
| Advances to and investments in affiliates | 327 | 286 | ||||||
| Furniture, fixtures and equipment replacement fund | 195 | 173 | ||||||
| Other | 236 | 225 | ||||||
| Restricted cash | 1 | 2 | ||||||
| Cash and cash equivalents | 913 | 372 | ||||||
| Total assets | $ | 11,693 | $ | 11,408 | ||||
| LIABILITIES, NON-CONTROLLING INTERESTS AND EQUITY | ||||||||
| Debt | ||||||||
| Senior notes | $ | 2,778 | $ | 2,380 | ||||
| Credit facility, including term loans of $996 million and $997 million, respectively | 1,170 | 1,206 | ||||||
| Mortgage debt and other | 6 | 63 | ||||||
| Total debt | 3,954 | 3,649 | ||||||
| Accounts payable and accrued expenses | 283 | 278 | ||||||
| Other | 287 | 283 | ||||||
| Total liabilities | 4,524 | 4,210 | ||||||
| Non-controlling interests - Host Hotels & Resorts, L.P. | 167 | 165 | ||||||
| Host Hotels & Resorts, Inc. stockholders’ equity: | ||||||||
| Common stock, par value $.01, 1,050 million shares authorized, 739.1 million shares and 737.8 million shares issued and outstanding, respectively | 7 | 7 | ||||||
| Additional paid-in capital | 8,097 | 8,077 | ||||||
| Accumulated other comprehensive loss | (60 | ) | (83 | ) | ||||
| Deficit | (1,071 | ) | (1,007 | ) | ||||
| Total equity of Host Hotels & Resorts, Inc. stockholders | 6,973 | 6,994 | ||||||
| Non-controlling interests—other consolidated partnerships | 29 | 39 | ||||||
| Total equity | 7,002 | 7,033 | ||||||
| Total liabilities, non-controlling interests and equity | $ | 11,693 | $ | 11,408 |
See Notes to Consolidated Financial Statements.
HOST HOTELS & RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2017, 2016 and 2015
(in millions, except per common share amounts)
| 2017 | 2016 | 2015 | ||||||||||
| REVENUES | ||||||||||||
| Rooms | $ | 3,490 | $ | 3,492 | $ | 3,465 | ||||||
| Food and beverage | 1,561 | 1,599 | 1,568 | |||||||||
| Other | 336 | 339 | 317 | |||||||||
| Total revenues | 5,387 | 5,430 | 5,350 | |||||||||
| EXPENSES | ||||||||||||
| Rooms | 899 | 893 | 902 | |||||||||
| Food and beverage | 1,071 | 1,114 | 1,110 | |||||||||
| Other departmental and support expenses | 1,273 | 1,306 | 1,295 | |||||||||
| Management fees | 239 | 236 | 226 | |||||||||
| Other property-level expenses | 394 | 382 | 386 | |||||||||
| Depreciation and amortization | 751 | 724 | 708 | |||||||||
| Corporate and other expenses | 98 | 106 | 94 | |||||||||
| Gain on insurance and business interruption settlements | (14 | ) | (15 | ) | (2 | ) | ||||||
| Total operating costs and expenses | 4,711 | 4,746 | 4,719 | |||||||||
| OPERATING PROFIT | 676 | 684 | 631 | |||||||||
| Interest income | 6 | 3 | 4 | |||||||||
| Interest expense | (167 | ) | (154 | ) | (227 | ) | ||||||
| Gain on sale of assets | 108 | 253 | 95 | |||||||||
| Gain (loss) on foreign currency transactions and derivatives | (2 | ) | 4 | (5 | ) | |||||||
| Equity in earnings of affiliates | 30 | 21 | 76 | |||||||||
| INCOME BEFORE INCOME TAXES | 651 | 811 | 574 | |||||||||
| Provision for income taxes | (80 | ) | (40 | ) | (9 | ) | ||||||
| NET INCOME | 571 | 771 | 565 | |||||||||
| Less: Net income attributable to non-controlling interests | (7 | ) | (9 | ) | (7 | ) | ||||||
| NET INCOME ATTRIBUTABLE TO HOST HOTELS & RESORTS, INC. | $ | 564 | $ | 762 | $ | 558 | ||||||
| Basic earnings per common share | $ | .76 | $ | 1.03 | $ | .74 | ||||||
| Diluted earnings per common share | $ | .76 | $ | 1.02 | $ | .74 |
See Notes to Consolidated Financial Statements.
HOST HOTELS & RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, 2017, 2016 and 2015
(in millions)
| 2017 | 2016 | 2015 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| NET INCOME | $ | 571 | $ | 771 | $ | 565 | ||||||
| OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: | ||||||||||||
| Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates | 23 | — | (71 | ) | ||||||||
| Change in fair value of derivative instruments | (14 | ) | 7 | 11 | ||||||||
| Amounts reclassified from other comprehensive income (loss) | 14 | 17 | 3 | |||||||||
| OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX | 23 | 24 | (57 | ) | ||||||||
| COMPREHENSIVE INCOME | 594 | 795 | 508 | |||||||||
| Less: Comprehensive income attributable to non-controlling interests | (8 | ) | (8 | ) | (5 | ) | ||||||
| COMPREHENSIVE INCOME ATTRIBUTABLE TO HOST HOTELS & RESORTS, INC. | $ | 586 | $ | 787 | $ | 503 |
See Notes to Consolidated Financial Statements.
HOST HOTELS & RESORTS, INC. AND SUBISIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
Years Ended December 31, 2017, 2016 and 2015
(in millions)
| Common Shares Outstanding | Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings / (Deficit) | Non-controlling Interest of Other Consolidated Partnerships | Non-controlling Interests of Host Hotels & Resorts, L.P. | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 755.8 | Balance, December 31, 2014 | $ | 8 | $ | 8,476 | $ | (50 | ) | $ | (1,098 | ) | $ | 52 | $ | 225 | |||||||||||||
| — | Net income | — | — | — | 558 | — | 7 | |||||||||||||||||||||
| — | Other changes in ownership | — | 81 | — | — | (10 | ) | (78 | ) | |||||||||||||||||||
| — | Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates | — | — | (71 | ) | — | (2 | ) | — | |||||||||||||||||||
| — | Change in fair value of derivative instruments | — | — | 11 | — | — | — | |||||||||||||||||||||
| — | Amounts reclassified from Other Comprehensive Income | — | — | 3 | — | — | — | |||||||||||||||||||||
| 32.1 | Common stock issuances | — | 401 | — | — | — | — | |||||||||||||||||||||
| 0.6 | Comprehensive stock and employee stock purchase plans | — | 16 | — | — | — | — | |||||||||||||||||||||
| — | Common stock dividends | — | — | — | (599 | ) | — | — | ||||||||||||||||||||
| 0.1 | Redemptions of limited partner interests for common stock | — | 3 | — | — | — | (3 | ) | ||||||||||||||||||||
| — | Contributions from non- controlling interests of consolidated partnerships | — | — | — | — | 2 | — | |||||||||||||||||||||
| — | Distributions to non-controlling interests | — | — | — | — | (2 | ) | (8 | ) | |||||||||||||||||||
| (38.3 | ) | Repurchase of common stock | — | (675 | ) | — | — | — | — | |||||||||||||||||||
| 750.3 | Balance, December 31, 2015 | $ | 8 | $ | 8,302 | $ | (107 | ) | $ | (1,139 | ) | $ | 40 | $ | 143 | |||||||||||||
| — | Net income | — | — | — | 762 | — | 9 | |||||||||||||||||||||
| — | Other changes in ownership | — | (30 | ) | — | — | — | 31 | ||||||||||||||||||||
| — | Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates | — | — | — | — | (1 | ) | — | ||||||||||||||||||||
| — | Change in fair value of derivative instruments | — | — | 7 | — | — | — | |||||||||||||||||||||
| — | Amounts reclassified from Other Comprehensive Income | — | — | 17 | — | — | — | |||||||||||||||||||||
| 0.3 | Common stock issuances | — | 4 | — | — | — | — | |||||||||||||||||||||
| 0.4 | Comprehensive stock and employee stock purchase plans | — | 8 | — | — | — | — | |||||||||||||||||||||
| — | Common stock dividends | — | — | — | (630 | ) | — | — | ||||||||||||||||||||
| 0.6 | Redemptions of limited partner interests for common stock | — | 10 | — | — | — | (10 | ) | ||||||||||||||||||||
| — | Distributions to non-controlling interests | — | — | — | — | — | (8 | ) | ||||||||||||||||||||
| (13.8 | ) | Repurchase of common stock | (1 | ) | (217 | ) | — | — | — | — | ||||||||||||||||||
| 737.8 | Balance, December 31, 2016 | $ | 7 | $ | 8,077 | $ | (83 | ) | $ | (1,007 | ) | $ | 39 | $ | 165 | |||||||||||||
| — | Net income | — | — | — | 564 | — | 7 | |||||||||||||||||||||
| — | Other changes in ownership | — | (8 | ) | — | — | 4 | 8 | ||||||||||||||||||||
| — | Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates | — | — | 23 | — | 1 | — | |||||||||||||||||||||
| — | Change in fair value of derivative instruments | — | — | (14 | ) | — | — | — | ||||||||||||||||||||
| — | Amounts reclassified from Other Comprehensive Income | — | — | 14 | — | — | — | |||||||||||||||||||||
| 0.5 | Common stock issuances | — | 9 | — | — | — | — | |||||||||||||||||||||
| 0.5 | Comprehensive stock and employee stock purchase plans | — | 13 | — | — | — | — | |||||||||||||||||||||
| — | Common stock dividends | — | — | — | (628 | ) | — | — | ||||||||||||||||||||
| 0.3 | Redemptions of limited partner interests for common stock | — | 6 | — | — | — | (6 | ) | ||||||||||||||||||||
| — | Distributions to non-controlling interests | — | — | — | — | (15 | ) | (7 | ) | |||||||||||||||||||
| 739.1 | Balance, December 31, 2017 | $ | 7 | $ | 8,097 | $ | (60 | ) | $ | (1,071 | ) | $ | 29 | $ | 167 |
See Notes to Consolidated Financial Statements.
HOST HOTELS & RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2017, 2016 and 2015
(in millions)
| 2017 | 2016 | 2015 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| OPERATING ACTIVITIES | ||||||||||||
| Net income | $ | 571 | $ | 771 | $ | 565 | ||||||
| Adjustments to reconcile net income to net cash provided by operations: | ||||||||||||
| Depreciation and amortization | 751 | 724 | 708 | |||||||||
| Amortization of finance costs, discounts and premiums, net | 7 | 7 | 21 | |||||||||
| Non-cash loss on extinguishment of debt | — | — | 11 | |||||||||
| Stock compensation expense | 11 | 12 | 11 | |||||||||
| Deferred income taxes | 38 | 27 | 5 | |||||||||
| Gain on sale of assets | (108 | ) | (253 | ) | (95 | ) | ||||||
| (Gain) loss on foreign currency transactions and derivatives | 2 | (4 | ) | 5 | ||||||||
| Gain on property insurance settlement | (1 | ) | (1 | ) | (2 | ) | ||||||
| Equity in earnings of affiliates | (30 | ) | (21 | ) | (76 | ) | ||||||
| Change in due from managers | (27 | ) | (6 | ) | 17 | |||||||
| Distributions from investments in affiliates | 40 | 29 | 27 | |||||||||
| Changes in other assets | (18 | ) | 11 | 19 | ||||||||
| Changes in other liabilities | (6 | ) | 6 | (56 | ) | |||||||
| Net cash provided by operating activities | 1,230 | 1,302 | 1,160 | |||||||||
| INVESTING ACTIVITIES | ||||||||||||
| Proceeds from sales of assets, net | 481 | 465 | 275 | |||||||||
| Return of investments in affiliates | 13 | 23 | 106 | |||||||||
| Advances to and investments in affiliates | (30 | ) | (5 | ) | (4 | ) | ||||||
| Acquisitions | (468 | ) | (63 | ) | (438 | ) | ||||||
| Capital expenditures: | ||||||||||||
| Renewals and replacements | (205 | ) | (293 | ) | (383 | ) | ||||||
| Return on investment | (72 | ) | (226 | ) | (275 | ) | ||||||
| Property insurance proceeds | 14 | — | 11 | |||||||||
| Net cash used in investing activities | (267 | ) | (99 | ) | (708 | ) | ||||||
| FINANCING ACTIVITIES | ||||||||||||
| Financing costs | (9 | ) | — | (11 | ) | |||||||
| Issuances of debt | 404 | — | 898 | |||||||||
| Draws on credit facility | 340 | 734 | 845 | |||||||||
| Term loan issuance | — | — | 500 | |||||||||
| Repayment of credit facility | (395 | ) | (816 | ) | (725 | ) | ||||||
| Repurchase/redemption of senior notes | — | — | (1,001 | ) | ||||||||
| Mortgage debt and other prepayments and scheduled maturities | (69 | ) | (137 | ) | (35 | ) | ||||||
| Common stock repurchase | — | (218 | ) | (675 | ) | |||||||
| Dividends on common stock | (628 | ) | (596 | ) | (646 | ) | ||||||
| Distributions and payments to non-controlling interests | (49 | ) | (8 | ) | (10 | ) | ||||||
| Other financing activities | 4 | 4 | 3 | |||||||||
| Net cash used in financing activities | (402 | ) | (1,037 | ) | (857 | ) | ||||||
| Effects of exchange rate changes on cash held | 4 | 1 | (16 | ) | ||||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | 565 | 167 | (421 | ) | ||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF YEAR | 544 | 377 | 798 | |||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR | $ | 1,109 | $ | 544 | $ | 377 |
See Notes to Consolidated Financial Statements.
HOST HOTELS & RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years Ended December 31, 2017, 2016 and 2015
(in millions)
Supplemental disclosure of cash flow information (in millions):
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the balance sheet to the amount shown within the statements of cash flows:
| December 31, 2017 | December 31, 2016 | December 31, 2015 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash and cash equivalents | $ | 913 | $ | 372 | $ | 221 | ||||||
| Restricted cash | 1 | 2 | 15 | |||||||||
| Cash included in furniture, fixtures and equipment replacement fund | 195 | 170 | 141 | |||||||||
| Total cash and cash equivalents and restricted cash shown in the statements of cash flows | $ | 1,109 | $ | 544 | $ | 377 |
Supplemental schedule of noncash investing and financing activities:
During 2017, 2016 and 2015, Host Inc. issued approximately 0.3 million, 0.6 million and 0.1 million shares of common stock, respectively, upon the conversion of Host L.P. units, or OP units, held by non-controlling interests valued at $6 million, $10 million and $3 million, respectively.
During 2015, holders of $399 million of our 2.5% Exchangeable Senior Debentures due 2029 elected to convert their debentures into 32 million shares of Host Inc. common stock.
See Notes to Consolidated Financial Statements.
HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2017 and 2016
(in millions)
| December 31, 2017 | December 31, 2016 | |||||||
|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||
| Property and equipment, net | $ | 9,692 | $ | 10,145 | ||||
| Assets held for sale | 250 | 150 | ||||||
| Due from managers | 79 | 55 | ||||||
| Advances to and investments in affiliates | 327 | 286 | ||||||
| Furniture, fixtures and equipment replacement fund | 195 | 173 | ||||||
| Other | 236 | 225 | ||||||
| Restricted cash | 1 | 2 | ||||||
| Cash and cash equivalents | 913 | 372 | ||||||
| Total assets | $ | 11,693 | $ | 11,408 | ||||
| LIABILITIES, LIMITED PARTNERSHIP INTERESTS OF THIRD PARTIES AND CAPITAL | ||||||||
| Debt | ||||||||
| Senior notes | $ | 2,778 | $ | 2,380 | ||||
| Credit facility, including term loans of $996 million and $997 million, respectively | 1,170 | 1,206 | ||||||
| Mortgage debt and other | 6 | 63 | ||||||
| Total debt | 3,954 | 3,649 | ||||||
| Accounts payable and accrued expenses | 283 | 278 | ||||||
| Other | 287 | 283 | ||||||
| Total liabilities | 4,524 | 4,210 | ||||||
| Limited partnership interests of third parties | 167 | 165 | ||||||
| Host Hotels & Resorts, L.P. capital: | ||||||||
| General partner | 1 | 1 | ||||||
| Limited partner | 7,032 | 7,076 | ||||||
| Accumulated other comprehensive loss | (60 | ) | (83 | ) | ||||
| Total Host Hotels & Resorts, L.P. capital | 6,973 | 6,994 | ||||||
| Non-controlling interests—consolidated partnerships | 29 | 39 | ||||||
| Total capital | 7,002 | 7,033 | ||||||
| Total liabilities, limited partnership interest of third parties and capital | $ | 11,693 | $ | 11,408 |
See Notes to Consolidated Financial Statements.
HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2017, 2016 and 2015
(in millions, except per common unit amounts)
| 2017 | 2016 | 2015 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| REVENUES | ||||||||||||
| Rooms | $ | 3,490 | $ | 3,492 | $ | 3,465 | ||||||
| Food and beverage | 1,561 | 1,599 | 1,568 | |||||||||
| Other | 336 | 339 | 317 | |||||||||
| Total revenues | 5,387 | 5,430 | 5,350 | |||||||||
| EXPENSES | ||||||||||||
| Rooms | 899 | 893 | 902 | |||||||||
| Food and beverage | 1,071 | 1,114 | 1,110 | |||||||||
| Other departmental and support expenses | 1,273 | 1,306 | 1,295 | |||||||||
| Management fees | 239 | 236 | 226 | |||||||||
| Other property-level expenses | 394 | 382 | 386 | |||||||||
| Depreciation and amortization | 751 | 724 | 708 | |||||||||
| Corporate and other expenses | 98 | 106 | 94 | |||||||||
| Gain on insurance and business interruption settlements | (14 | ) | (15 | ) | (2 | ) | ||||||
| Total operating costs and expenses | 4,711 | 4,746 | 4,719 | |||||||||
| OPERATING PROFIT | 676 | 684 | 631 | |||||||||
| Interest income | 6 | 3 | 4 | |||||||||
| Interest expense | (167 | ) | (154 | ) | (227 | ) | ||||||
| Gain on sale of assets | 108 | 253 | 95 | |||||||||
| Gain (loss) on foreign currency transactions and derivatives | (2 | ) | 4 | (5 | ) | |||||||
| Equity in earnings of affiliates | 30 | 21 | 76 | |||||||||
| INCOME BEFORE INCOME TAXES | 651 | 811 | 574 | |||||||||
| Provision for income taxes | (80 | ) | (40 | ) | (9 | ) | ||||||
| NET INCOME | 571 | 771 | 565 | |||||||||
| Less: Net loss attributable to non-controlling interests | — | — | — | |||||||||
| NET INCOME ATTRIBUTABLE TO HOST HOTELS & RESORTS, L.P. | $ | 571 | $ | 771 | $ | 565 | ||||||
| Basic earnings per common unit | $ | .78 | $ | 1.05 | $ | .76 | ||||||
| Diluted earnings per common unit | $ | .78 | $ | 1.05 | $ | .76 |
See Notes to Consolidated Financial Statements.
HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, 2017, 2016 and 2015
(in millions)
| 2017 | 2016 | 2015 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| NET INCOME | $ | 571 | $ | 771 | $ | 565 | ||||||
| OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: | ||||||||||||
| Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates | 23 | — | (71 | ) | ||||||||
| Change in fair value of derivative instruments | (14 | ) | 7 | 11 | ||||||||
| Amounts reclassified from other comprehensive income (loss) | 14 | 17 | 3 | |||||||||
| OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX | 23 | 24 | (57 | ) | ||||||||
| COMPREHENSIVE INCOME | 594 | 795 | 508 | |||||||||
| Less: Comprehensive (income) loss attributable to non- controlling interests | (1 | ) | 1 | 2 | ||||||||
| COMPREHENSIVE INCOME ATTRIBUTABLE TO HOST HOTELS & RESORTS, L.P. | $ | 593 | $ | 796 | $ | 510 |
See Notes to Consolidated Financial Statements.
HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITAL
Years Ended December 31, 2017, 2016 and 2015
(in millions)
| Common OP Units Outstanding | General Partner | Limited Partner | Accumulated Other Comprehensive Income (Loss) | Non-controlling Interests of Consolidated Partnerships | Limited Partnership Interests of Third Parties | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 739.9 | Balance, December 31, 2014 | $ | 1 | $ | 7,385 | $ | (50 | ) | $ | 52 | $ | 225 | ||||||||||||
| — | Net income | — | 558 | — | — | 7 | ||||||||||||||||||
| — | Other changes in ownership | — | 81 | — | (10 | ) | (78 | ) | ||||||||||||||||
| — | Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates | — | — | (71 | ) | (2 | ) | — | ||||||||||||||||
| — | Change in fair value of derivative instruments | — | — | 11 | — | — | ||||||||||||||||||
| — | Amounts reclassified from Other Comprehensive Income | — | — | 3 | — | — | ||||||||||||||||||
| 31.4 | Common OP unit issuances | — | 401 | — | — | — | ||||||||||||||||||
| 0.6 | Units issued to Host Inc. for the comprehensive stock and employee stock purchase plans | — | 16 | — | — | — | ||||||||||||||||||
| — | Distributions on common OP units | — | (599 | ) | — | — | (8 | ) | ||||||||||||||||
| 0.1 | Redemptions of limited partner interests for common stock | — | 3 | — | — | (3 | ) | |||||||||||||||||
| — | Contributions from non- controlling interests of consolidated partnerships | — | — | — | 2 | — | ||||||||||||||||||
| — | Distributions to non-controlling interests | — | — | — | (2 | ) | — | |||||||||||||||||
| (37.5 | ) | Repurchase of common OP units | — | (675 | ) | — | — | — | ||||||||||||||||
| 734.5 | Balance, December 31, 2015 | $ | 1 | $ | 7,170 | $ | (107 | ) | $ | 40 | $ | 143 | ||||||||||||
| — | Net income | — | 762 | — | — | 9 | ||||||||||||||||||
| — | Other changes in ownership | — | (30 | ) | — | — | 31 | |||||||||||||||||
| — | Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates | — | — | — | (1 | ) | — | |||||||||||||||||
| — | Change in fair value of derivative instruments | — | — | 7 | — | — | ||||||||||||||||||
| — | Amounts reclassified from Other Comprehensive Income | — | — | 17 | — | — | ||||||||||||||||||
| 0.2 | Common OP unit issuances | — | 4 | — | — | — | ||||||||||||||||||
| 0.4 | Units issued to Host Inc. for the comprehensive stock and employee stock purchase plans | — | 8 | — | — | — | ||||||||||||||||||
| — | Distributions on common OP units | — | (630 | ) | — | — | (8 | ) | ||||||||||||||||
| 0.6 | Redemptions of limited partner interests for common stock | — | 10 | — | — | (10 | ) | |||||||||||||||||
| (13.5 | ) | Repurchase of common OP units | — | (218 | ) | — | — | — | ||||||||||||||||
| 722.2 | Balance, December 31, 2016 | $ | 1 | $ | 7,076 | $ | (83 | ) | $ | 39 | $ | 165 | ||||||||||||
| — | Net income | — | 564 | — | — | 7 | ||||||||||||||||||
| — | Other changes in ownership | — | (8 | ) | — | 4 | 8 | |||||||||||||||||
| — | Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates | — | — | 23 | 1 | — | ||||||||||||||||||
| — | Change in fair value of derivative instruments | — | — | (14 | ) | — | — | |||||||||||||||||
| — | Amounts reclassified from Other Comprehensive Income | — | — | 14 | — | — | ||||||||||||||||||
| 0.5 | Common OP unit issuances | — | 9 | — | — | — | ||||||||||||||||||
| 0.5 | Units issued to Host Inc. for the comprehensive stock and employee stock purchase plans | — | 13 | — | — | — | ||||||||||||||||||
| — | Distributions on common OP units | — | (628 | ) | — | — | (7 | ) | ||||||||||||||||
| 0.3 | Redemptions of limited partner interests for common stock | — | 6 | — | — | (6 | ) | |||||||||||||||||
| — | Distributions to non-controlling interests | — | — | — | (15 | ) | — | |||||||||||||||||
| 723.5 | Balance, December 31, 2017 | $ | 1 | $ | 7,032 | $ | (60 | ) | $ | 29 | $ | 167 | ||||||||||||
See Notes to Consolidated Financial Statements.
HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2017, 2016 and 2015
(in millions)
| 2017 | 2016 | 2015 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| OPERATING ACTIVITIES | ||||||||||||
| Net income | $ | 571 | $ | 771 | $ | 565 | ||||||
| Adjustments to reconcile net income to net cash provided by operations: | ||||||||||||
| Depreciation and amortization | 751 | 724 | 708 | |||||||||
| Amortization of finance costs, discounts and premiums, net | 7 | 7 | 21 | |||||||||
| Non-cash loss on extinguishment of debt | — | — | 11 | |||||||||
| Stock compensation expense | 11 | 12 | 11 | |||||||||
| Deferred income taxes | 38 | 27 | 5 | |||||||||
| Gain on sale of assets | (108 | ) | (253 | ) | (95 | ) | ||||||
| (Gain) loss on foreign currency transactions and derivatives | 2 | (4 | ) | 5 | ||||||||
| Gain on property insurance settlement | (1 | ) | (1 | ) | (2 | ) | ||||||
| Equity in earnings of affiliates | (30 | ) | (21 | ) | (76 | ) | ||||||
| Change in due from managers | (27 | ) | (6 | ) | 17 | |||||||
| Distributions from investments in affiliates | 40 | 29 | 27 | |||||||||
| Changes in other assets | (18 | ) | 11 | 19 | ||||||||
| Changes in other liabilities | (6 | ) | 6 | (56 | ) | |||||||
| Net cash provided by operating activities | 1,230 | 1,302 | 1,160 | |||||||||
| INVESTING ACTIVITIES | ||||||||||||
| Proceeds from sales of assets, net | 481 | 465 | 275 | |||||||||
| Return of investments in affiliates | 13 | 23 | 106 | |||||||||
| Advances to and investments in affiliates | (30 | ) | (5 | ) | (4 | ) | ||||||
| Acquisitions | (468 | ) | (63 | ) | (438 | ) | ||||||
| Capital expenditures: | ||||||||||||
| Renewals and replacements | (205 | ) | (293 | ) | (383 | ) | ||||||
| Return on investment | (72 | ) | (226 | ) | (275 | ) | ||||||
| Property insurance proceeds | 14 | — | 11 | |||||||||
| Net cash used in investing activities | (267 | ) | (99 | ) | (708 | ) | ||||||
| FINANCING ACTIVITIES | ||||||||||||
| Financing costs | (9 | ) | — | (11 | ) | |||||||
| Issuances of debt | 404 | — | 898 | |||||||||
| Draws on credit facility | 340 | 734 | 845 | |||||||||
| Term loan issuance | — | — | 500 | |||||||||
| Repayment of credit facility | (395 | ) | (816 | ) | (725 | ) | ||||||
| Repurchase/redemption of senior notes | — | — | (1,001 | ) | ||||||||
| Mortgage debt and other prepayments and scheduled maturities | (69 | ) | (137 | ) | (35 | ) | ||||||
| Repurchase of common OP units | — | (218 | ) | (675 | ) | |||||||
| Distributions on common OP units | (635 | ) | (603 | ) | (654 | ) | ||||||
| Distributions and payments to non-controlling interests | (42 | ) | (1 | ) | (2 | ) | ||||||
| Other financing activities | 4 | 4 | 3 | |||||||||
| Net cash used in financing activities | (402 | ) | (1,037 | ) | (857 | ) | ||||||
| Effects of exchange rate changes on cash held | 4 | 1 | (16 | ) | ||||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | 565 | 167 | (421 | ) | ||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF YEAR | 544 | 377 | 798 | |||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR | $ | 1,109 | $ | 544 | $ | 377 |
See Notes to Consolidated Financial Statements.
HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2017, 2016 and 2015
(in millions)
Supplemental disclosure of cash flow information (in millions):
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the balance sheet to the amount shown in the statements of cash flows:
| December 31, 2017 | December 31, 2016 | December 31, 2015 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash and cash equivalents | $ | 913 | $ | 372 | $ | 221 | ||||||
| Restricted cash | 1 | 2 | 15 | |||||||||
| Cash included in furniture, fixtures and equipment replacement fund | 195 | 170 | 141 | |||||||||
| Total cash and cash equivalents and restricted cash shown in the statements of cash flows | $ | 1,109 | $ | 544 | $ | 377 |
Supplemental schedule of noncash investing and financing activities:
During 2017, 2016 and 2015, non-controlling partners converted common operating partnership units (“OP units”) valued at $6 million, $10 million and $3 million, respectively, in exchange for 0.3 million, 0.6 million and 0.1 million shares, respectively, of Host Inc. common stock.
During 2015, holders of $399 million of our 2.5% Exchangeable Senior Debentures due 2029 elected to convert their debentures into 32 million shares of Host Inc. common stock. In connection with the debentures exchanged for Host Inc. common stock, Host L.P. issued 31.3 million common OP units.
See Notes to Consolidated Financial Statements.
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. | Summary of Significant Accounting Policies |
|---|
Description of Business
Host Hotels & Resorts, Inc. operates as a self-managed and self-administered real estate investment trust, or REIT, with its operations conducted solely through Host Hotels & Resorts, L.P. Host Hotels & Resorts, L.P., a Delaware limited partnership, operates through an umbrella partnership structure, with Host Hotels & Resorts, Inc., a Maryland corporation, as its sole general partner. In the notes to the consolidated financial statements, we use the terms “we” or “our” to refer to Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. together, unless the context indicates otherwise. We also use the term “Host Inc.” to refer specifically to Host Hotels & Resorts, Inc. and the term “Host L.P.” to refer specifically to Host Hotels & Resorts, L.P. in cases where it is important to distinguish between Host Inc. and Host L.P. Host Inc. holds approximately 99% of Host L.P.’s partnership interests, or OP units.
Consolidated Portfolio
As of December 31, 2017, the hotels in our consolidated portfolio are located in the following countries:
| Hotels | |||
|---|---|---|---|
| United States | 88 | ||
| Brazil | 3 | ||
| Canada | 2 | ||
| Mexico | 1 | ||
| Total | 94 |
European Joint Venture
We own a non-controlling interest in a joint venture in Europe (“Euro JV”) that owns hotels in two separate funds. We own a 32.1% interest in the first fund (“Euro JV Fund I”) (3 hotels) and a 33.4% interest in the second fund (“Euro JV Fund II”) (8 hotels).
As of December 31, 2017, the Euro JV hotels are located in the following countries:
| Hotels | |||
|---|---|---|---|
| Belgium | 1 | ||
| France | 3 | ||
| Germany | 1 | ||
| Spain | 2 | ||
| Sweden | 1 | ||
| The Netherlands | 2 | ||
| United Kingdom | 1 | ||
| Total | 11 |
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the consolidated accounts of Host Inc., Host L.P. and their subsidiaries and controlled affiliates, including joint ventures and partnerships. We consolidate subsidiaries when we have the ability to control them. For the majority of our hotel and real estate investments, we consider those control rights to be (i) approval or amendment of developments plans, (ii) financing decisions, (iii) approval or amendments of operating budgets, and (iv) investment strategy decisions.
We also evaluate our subsidiaries to determine if they are variable interest entities (“VIEs”). If a subsidiary is a VIE, it is subject to the consolidation framework specifically for VIEs. Typically, the entity that has the power to direct the activities that most significantly impact economic performance consolidates the VIE. We consider an entity a VIE if equity investors own an interest therein that does not have the characteristics of a controlling financial interest or if such investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. We review our subsidiaries and affiliates at least annually to determine if (i) they should be considered VIEs, and (ii) whether we should change our consolidation determination based on changes in the characteristics thereof.
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three partnerships are considered VIE’s, as the general partner maintains control over the decisions that most significantly impact the partnerships. The first VIE is the operating partnership, Host L.P., which is consolidated by Host Inc., of which Host Inc. is the general partner and holds 99% of the limited partner interests. Host Inc.’s sole significant asset is its investment in Host L.P. and, consequently, substantially all of Host Inc.’s assets and liabilities represent assets and liabilities of Host L.P. All of Host Inc.’s debt is an obligation of Host L.P. and may be settled only with assets of Host L.P. The consolidated partnership that owns the Houston Airport Marriott at George Bush Intercontinental, of which we are the general partner and hold 85% of the partnership interests, also is a VIE. The total assets of this VIE at December 31, 2017 are $53 million and consist primarily of cash and property and equipment. Liabilities for the VIE total $4 million and consist of accounts payable and deferred revenue. The unconsolidated partnership that owns the Philadelphia Marriott Downtown, of which we hold 11% of the limited partner interests, also is a VIE. The carrying amount of this investment at December 31, 2017 is $(6) million and is included in advances to and investments in affiliates. The mortgage debt held by this VIE is non-recourse to us.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents.
Restricted Cash
Restricted cash may include reserves for debt service, real estate taxes, insurance, and furniture, fixtures and equipment replacement, as well as cash collateral and excess cash flow deposits due to mortgage debt agreement restrictions and provisions, or reserves required for potential legal damages.
Property and Equipment
Generally, property and equipment is recorded at cost. For properties we develop, cost includes interest and real estate taxes incurred during construction. For property and equipment acquired in a business combination, we record the assets based on their fair value as of the acquisition date. Replacements and improvements and capital leases are capitalized, while repairs and maintenance are expensed as incurred.
We capitalize certain inventory (such as china, glass, silver, and linen) at the time of a hotel opening or acquisition, or when significant inventory is purchased (in conjunction with a major rooms renovation or when the number of rooms or meeting space at a hotel is expanded). These amounts then are amortized over the estimated useful life of three years. Subsequent replacement purchases are expensed when placed in service.
We maintain a furniture, fixtures and equipment replacement fund for renewal and replacement capital expenditures at our hotels, which generally is funded with 5% of property revenues.
Impairment testing. We analyze our consolidated properties for impairment throughout the year when events or circumstances occur that indicate the carrying value may not be recoverable. We consider a property to be impaired when the sum of the future undiscounted cash flows over our remaining estimated holding period is less than the carrying value of the asset. We test for impairment in several situations, including when a property has a current or projected loss from operations, when it becomes more likely than not that a hotel will be sold before the end of its previously estimated useful life, or when other events, trends, contingencies or changes in circumstances indicate that a triggering event has occurred and the carrying value of an asset may not be recoverable. For impaired assets, we record an impairment expense equal to the excess of the carrying value of the asset over its fair value. To the extent that a property has a substantial remaining estimated useful life and management does not believe that it is more likely than not that the property will be sold prior to the end thereof, it would be unusual for undiscounted cash flows to be insufficient to recover the property’s carrying value. In the absence of other factors, we assume that the estimated useful life is equal to the remaining GAAP depreciable life because of the continuous property maintenance and improvement capital expenditures required under our management agreements. We adjust our assumptions with respect to the remaining useful life of the property if situations dictate otherwise, such as an expiring ground lease, or that it is more likely than not that the asset will be sold prior to its previously
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
expected useful life. We also consider the effect of regular renewal and replacement capital expenditures on the estimated useful life of our properties, including critical infrastructure, which regularly is maintained and then replaced at the end of its useful life.
In the evaluation of the potential impairment of our assets, we make many assumptions and estimates, including:
| • | projected cash flows, both from operations and from the eventual sale; |
|---|
| • | the expected useful life and holding period of the asset; |
|---|
| • | the future required capital expenditures; and |
|---|
| • | fair values, including consideration of capitalization rates, discount rates and comparable selling prices, as well as available third-party appraisals. |
|---|
While we consider all of the above indicators as preliminary indicators to determine if the carrying value may not be recovered by undiscounted cash flows, we reviewed the actual year-to-date and the projected cash flows from operations in order to identify properties with actual or projected annual operating losses or minimal operating profit as of December 31, 2017. The projected cash flows consider items such as booking pace, occupancy, room rate and property-level operating costs. As a result of our review, we identified one property that required further consideration of property and market specific conditions or factors to determine if it was impaired. During 2017, we recognized impairment expense of $43 million on the W New York, which is included in depreciation and amortization expense. During negotiations with potential buyers, we received notice that the building commission would broadly interpret a local ordinance that would significantly restrict any potential alternative uses of the property, thus lowering its market value. In other circumstances, we use an undiscounted cash flow analysis, considering a range of RevPAR and operating margins compared to the prior years’ operating results in evaluating the probability-weighted projected cash flows from operations. To appropriately evaluate the extent to which the carrying value of the asset is recoverable, we projected cash flows at a stabilized growth rate over its remaining estimated useful life using assumptions and estimates that we believe reflect current market conditions. No impairment was recorded in 2016 and 2015.
Classification of Assets as “Held for Sale”. We will classify a hotel as held for sale when the sale thereof is probable, will be completed within one year and actions to complete the sale are unlikely to change or that the sale will not occur. This policy is consistent with our experience with real estate transactions under which the timing and final terms of a sale frequently are not known until purchase agreements are executed, the buyer has a significant deposit at risk and no financing contingencies exist which could prevent the transaction from being completed in a timely manner. We typically classify assets as held for sale when all of the following conditions are met:
| • | Host Inc.’s Board of Directors has approved the sale (to the extent that the dollar amount of the sale requires Board approval); |
|---|
| • | a binding agreement to sell the property has been signed under which the buyer has committed a significant amount of nonrefundable cash; and |
|---|
| • | no significant financing contingencies exist which could prevent the transaction from being completed in a timely manner. |
|---|
If these criteria are met, we will cease recording depreciation expense and will record an impairment expense if the fair value less costs to sell is less than the carrying amount of the hotel. We will classify the assets and related liabilities as held for sale on the balance sheet. Gains on sales of properties are recognized at the time of sale or are deferred and recognized as income in subsequent periods as conditions requiring deferral are satisfied or expire without further cost to us.
Discontinued Operations. We generally include the operations of a hotel that was sold or a hotel that has been classified as held for sale in continuing operations, including the gain or loss on the sale, unless the sale represents a strategic shift that will have a major impact on our future operations and financial results.
Asset retirement obligations. We recognize the fair value of any liability for conditional asset retirement obligations, including environmental remediation liabilities, when incurred, which generally is upon acquisition, construction, or development and/or through the normal operation of the asset, if sufficient information exists with which to reasonably estimate the fair value of the obligation.
Depreciation and Amortization Expense. We depreciate our property and equipment using the straight-line method. Depreciation expense is based on the estimated useful life of our assets and amortization expense for leasehold improvements is based on the shorter of the lease term or the estimated useful life of the related assets. The useful lives of the assets are based on a number of
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assumptions, including cost and timing of capital expenditures to maintain and refurbish the assets, as well as specific market and economic conditions. While management believes its estimates are reasonable, a change in the estimated useful lives could affect depreciation expense and net income (loss) or the gain or loss on the sale of any of our hotels.
Intangible Assets and Acquired Liabilities
In conjunction with our acquisitions, we may identify intangible assets and other liabilities. These identifiable intangible assets and other liabilities typically include above and below market contracts, including ground and retail leases and management and franchise agreements, which are recorded at fair value. These contract values are based on the present value of the difference between contractual amounts to be paid pursuant to the contracts acquired and our estimate of the fair value of rates for similar contracts measured over the period equal to the remaining non-cancelable term of the contract. Intangible assets and other liabilities are amortized using the straight-line method over the remaining non-cancelable term of the related agreements.
Non-Controlling Interests
Other Consolidated Partnerships. As of December 31, 2017, we consolidate three majority-owned partnerships that have third-party, non-controlling ownership interests. The third-party partnership interests are included in non-controlling interest-other consolidated partnerships on the consolidated balance sheets and totaled $29 million and $39 million as of December 31, 2017 and 2016, respectively. One of the partnerships has a finite life that terminates in 2095, and the associated non-controlling interests are mandatorily redeemable at the end of, but not prior to, the finite life.
Net income attributable to non-controlling interests of consolidated partnerships is included in our determination of net income. Net income attributable to non-controlling interests of third parties was immaterial for each of the years ended December 31, 2017, 2016 and 2015.
Host Inc.’s treatment of the non-controlling interests of Host L.P. Host Inc. adjusts the non-controlling interests of Host L.P. each period so that the amount presented equals the greater of its carrying value based on its historical cost or its redemption value. The historical cost is based on the proportional relationship between the historical cost of equity held by our common stockholders relative to that of the unitholders of Host L.P. The redemption value is based on the amount of cash or Host Inc. common stock, at our option, that would be paid to the non-controlling interests of Host L.P. if it were terminated. We have estimated that the redemption value is equivalent to the number of shares issuable upon conversion of the OP units currently owned by unrelated third parties (one OP unit may be exchanged for 1.021494 shares of Host Inc. common stock) valued at the market price of Host Inc. common stock at the balance sheet date. Non-controlling interests of Host L.P. are classified in the mezzanine section of the balance sheet as they do not meet the requirements for equity classification because the redemption feature requires the delivery of registered shares.
The table below details the historical cost and redemption values for the non-controlling interests of Host L.P.:
| As of December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | |||||||
| OP units outstanding (millions) | 8.2 | 8.6 | ||||||
| Market price per Host Inc. common share | $ | 19.85 | $ | 18.84 | ||||
| Shares issuable upon conversion of one OP unit | 1.021494 | 1.021494 | ||||||
| Redemption value (millions) | $ | 167 | $ | 165 | ||||
| Historical cost (millions) | 80 | 84 | ||||||
| Book value (millions) (1) | 167 | 165 | ||||||
| ___________ |
(1)The book value recorded is equal to the greater of the redemption value or the historical cost.
Net income is allocated to the non-controlling interests of Host L.P. based on their weighted average ownership percentage during the period. Net income attributable to Host Inc. has been reduced by the amount attributable to non-controlling interests in Host L.P., which totaled $7 million, $9 million, and $7 million for 2017, 2016, and 2015, respectively.
Investments in Affiliates
Other-than-Temporary Impairment of an Investment. We perform an analysis on each of our equity method investments for impairment based on the occurrence of triggering events that would indicate that the carrying amount of an investment exceeds its fair value on an other-than-temporary basis. Triggering events can include a decline in distributable cash flows from the investment, a
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
change in the expected useful life or other significant events which would decrease the value of the investment. Our investments primarily consist of joint ventures which own hotels; therefore, generally we will have few observable inputs and will determine fair value based on a discounted cash flow analysis of the investment, as well as consideration of the impact of other elements (i.e. control premiums, etc.). We use certain inputs, such as available third-party appraisals and forecast net operating income for the hotels, to estimate the expected cash flows. If an equity method investment is impaired and that impairment is determined to be other than temporary, an expense is recorded for the difference between the fair value and the carrying amount of the investment. No other-than-temporary impairment expense was recorded in 2017, 2016 and 2015.
Distributions from Investments in Affiliates. We classify the distributions from our equity investments in the statements of cash flows based upon an evaluation of the specific facts and circumstances of each distribution. For example, distributions from cash generated by property operations are classified as cash flows from operating activities. However, distributions received as a result of property sales are classified as cash flows from investing activities.
Income Taxes
Host Inc. has elected to be treated as a REIT effective January 1, 1999, pursuant to the U.S. Internal Revenue Code of 1986, as amended. It is our intention to continue to comply with the REIT qualification requirements and to maintain our qualification for taxation as a REIT. A corporation that elects REIT status and meets certain tax law requirements regarding the distribution of its taxable income to its stockholders as prescribed by applicable tax laws and complies with certain other requirements (relating primarily to the composition of its assets and the sources of its gross income) generally is not subject to federal and state income taxation on its operating income that is distributed to its stockholders. As a partnership for federal income tax purposes, Host L.P. is not subject to federal income tax. Host L.P. is, however, subject to state, local and foreign income and franchise tax in certain jurisdictions. Additionally, each of the Host L.P. taxable REIT subsidiaries is taxable as a regular C corporation, subject to federal, state and foreign income tax. Our consolidated income tax provision or benefit includes the income tax provision or benefit related to the operations of our taxable REIT subsidiaries, and state, local, and foreign income and franchise taxes incurred by Host L.P. and its subsidiaries.
Deferred Tax Assets and Liabilities. Under the partnership agreement, Host L.P. generally is required to reimburse Host Inc. for any tax payments it is required to make. Accordingly, the tax information included herein represents disclosures regarding Host Inc. and its subsidiaries. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for net operating loss, capital loss, interest expense, and tax credit carryovers. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which such amounts are expected to be realized or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available evidence, including future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies. As a result of the enactment of the Tax Cuts and Jobs Act on December 22, 2017, the net deferred tax asset as at December 31, 2017 has been revalued at the new corporate income tax rate of 21% that is effective on January 1, 2018.
GAAP prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. We must determine whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement in order to determine the amount of benefit to recognize in the financial statements. This accounting standard applies to all tax positions related to income taxes. We recognize accrued interest related to unrecognized tax benefits in interest expense and penalties in operating expenses.
Deferred Charges
Financing costs related to long-term debt are deferred and amortized over the remaining life of the debt using the effective interest method. These costs are presented as a direct deduction from the related long-term debt on the balance sheets.
Foreign Currency Translation
As of December 31, 2017, our international operations consist of hotels located in Brazil, Canada and Mexico, as well as investments in the Euro JV and the Asia/Pacific JV. The financial statements of these hotels and our investments therein are maintained in their functional currency, which generally is the local currency, and their operations are translated to U.S. dollars using the average exchange rates for the period. The assets and liabilities of the hotels and the investments therein are translated to U.S.
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
dollars using the exchange rate in effect at the balance sheet date. The resulting translation adjustments are reflected in other comprehensive income (loss).
Foreign currency transactions are recorded in the functional currency for each applicable foreign entity using the exchange rates prevailing at the dates of the transactions. Assets and liabilities denominated in foreign currencies are remeasured at period end exchange rates. The resulting exchange differences are recorded in gain (loss) on foreign currency transactions and derivatives on the accompanying consolidated statements of operations, except when recorded in other comprehensive income (loss) as qualifying net investment hedges.
Accumulated Other Comprehensive Income (Loss)
The components of total accumulated other comprehensive income (loss) in the balance sheets are as follows (in millions):
| As of December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | |||||||
| Gain on foreign currency forward contracts | $ | 26 | $ | 40 | ||||
| Loss on interest rate swap cash flow hedges | (5 | ) | (5 | ) | ||||
| Foreign currency translation | (83 | ) | (121 | ) | ||||
| Other comprehensive loss attributable to non-controlling interests | 2 | 3 | ||||||
| Total accumulated other comprehensive loss | $ | (60 | ) | $ | (83 | ) |
During 2017, we reclassified a net loss due to foreign currency translation of $14 million that had been recognized previously in other comprehensive income (loss) due to the sale of the Hilton Melbourne South Wharf on July 28, 2017. During 2016, we reclassified a net loss due to foreign currency translation of $17 million that had been recognized previously in other comprehensive income (loss) upon the sale of two hotels in Chile and four hotels in New Zealand in 2016. The reclassified losses were recorded as a reduction to the gain on sale of these hotels.
Revenues
Our results of operations include revenues and expenses of our hotels. Revenues are recognized when the services are provided. Additionally, we collect sales, use, occupancy and similar taxes at our hotels, which we present on a net basis (excluded from revenues) in our statements of operations.
Fair Value Measurement
In evaluating the fair value of both financial and non-financial assets and liabilities, GAAP outlines a valuation framework and creates a fair value hierarchy that distinguishes between market assumptions based on market data (“observable inputs”) and a reporting entity’s own assumptions about market data (“unobservable inputs”). Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability at the measurement date in an orderly transaction (an “exit price”). Assets and liabilities are measured using inputs from three levels of the fair value hierarchy. The three levels are as follows:
Level 1 — Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date. An active market is defined as a market in which transactions occur with sufficient frequency and volume to provide pricing on an ongoing basis.
Level 2 — Inputs include quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data correlation or other means.
Level 3 — Unobservable inputs reflect our assumptions about the pricing of an asset or liability when observable inputs are not available.
Earnings Per Common Share (Unit)
Basic earnings per common share (unit) is computed by dividing net income attributable to common stockholders (unitholders) by the weighted average number of shares of Host Inc. common stock or Host L.P. common units outstanding. Diluted earnings per
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
common share (unit) is computed by dividing net income attributable to common stockholders (unitholders), as adjusted for potentially dilutive securities, by the weighted average number of shares of Host Inc. common stock or Host L.P. common units outstanding plus other potentially dilutive securities. Dilutive securities may include shares granted under comprehensive stock plans or the common OP units distributed to Host Inc. to support such shares granted, and other non-controlling interests that have the option to convert their limited partner interests to common OP units and convertible debt securities. No effect is shown for any securities that are anti-dilutive.
The calculation of Host Inc. basic and diluted earnings per common share is shown below (in millions, except per share amounts):
| Year ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | ||||||||||
| Net income | $ | 571 | $ | 771 | $ | 565 | ||||||
| Less: Net income attributable to non-controlling interests | (7 | ) | (9 | ) | (7 | ) | ||||||
| Net income attributable to Host Inc. | $ | 564 | $ | 762 | $ | 558 | ||||||
| Basic weighted average shares outstanding | 738.6 | 743.0 | 752.4 | |||||||||
| Assuming distribution of common shares granted under the comprehensive stock plans, less shares assumed purchased at market | 0.5 | 0.7 | 0.5 | |||||||||
| Diluted weighted average shares outstanding (1) | 739.1 | 743.7 | 752.9 | |||||||||
| Basic earnings per common share | $ | .76 | $ | 1.03 | $ | .74 | ||||||
| Diluted earnings per common share | $ | .76 | $ | 1.02 | $ | .74 |
| (1) | There were approximately 25 million potentially dilutive shares (on a weighted average basis) for the year ended December 31, 2015 related to our exchangeable senior debentures, which were anti-dilutive for the period. The exchangeable senior debentures were redeemed in 2015 in exchange for 32 million common shares of Host Inc. |
|---|
The calculation of Host L.P. basic and diluted earnings per common unit is shown below (in millions, except per unit amounts):
| Year ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | ||||||||||
| Net income | $ | 571 | $ | 771 | $ | 565 | ||||||
| Less: Net loss attributable to non-controlling interests | — | — | — | |||||||||
| Net income attributable to Host L.P. | $ | 571 | $ | 771 | $ | 565 | ||||||
| Basic weighted average units outstanding | 731.5 | 736.3 | 745.7 | |||||||||
| Assuming distribution of common units to support shares granted under the comprehensive stock plans, less shares assumed purchased at market | 0.5 | 0.6 | 0.5 | |||||||||
| Diluted weighted average units outstanding (1) | 732.0 | 736.9 | 746.2 | |||||||||
| Basic earnings per common unit | $ | .78 | $ | 1.05 | $ | .76 | ||||||
| Diluted earnings per common unit | $ | .78 | $ | 1.05 | $ | .76 |
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| (1) | There were approximately 25 million potentially dilutive units (on a weighted average basis) for the year ended December 31, 2015 related to our exchangeable senior debentures, which were anti-dilutive for the period. The exchangeable senior debentures were redeemed in 2015 and Host L.P. issued 31.3 million units to Host Inc. in connection with such redemption. |
|---|
Share-Based Payments
At December 31, 2017, Host Inc. maintained two stock-based employee compensation plans. Upon the issuance of Host’s common stock under the compensation plans, Host L.P. will issue to Host Inc. common OP units of an equivalent value. These liabilities are included in the consolidated financial statements for Host Inc. and Host L.P.
We recognize costs resulting from Host Inc.’s share-based payment transactions over their vesting periods. We classify share-based payment awards granted in exchange for employee services either as equity-classified awards or liability-classified awards Equity-classified awards are measured based on the fair value on the date of grant. Liability-classified awards are remeasured to fair value each reporting period. Effective January 1, 2017, we implemented a new stock-based employee compensation plan. In conjunction with the adoption of ASU No. 2016-09, the awards under the new plan are classified as equity. The plan includes awards that vest over a one-year, two-year and three-year period. For performance-based awards, compensation cost will be recognized when the achievement of the performance condition is considered probable. If a performance condition has more than one outcome that is probable, recognition of compensation cost will be based on the condition that is the most likely outcome. No compensation cost is recognized for awards for which employees do not render the requisite services.
Concentrations of Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents. We are exposed to credit risk with respect to cash held at various financial institutions, access to our credit facility, and amounts due or payable under our derivative contracts. As of December 31, 2017, we do not have any credit risk exposure related to our derivative instruments. At December 31, 2016, our exposure to risk related to our derivative instruments totaled $12 million. The counterparties to such instruments are investment grade financial institutions. Our credit risk exposure with regard to our cash and the available capacity under the revolver portion of our credit facility is spread among a diversified group of investment grade financial institutions.
Business Combinations
We recognize identifiable assets acquired, liabilities assumed, and non-controlling interests in a business combination at their fair values at the acquisition date based on the exit price (i.e. the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date). We evaluate several factors, including market data for similar assets, expected cash flows discounted at risk adjusted rates and replacement cost for the assets to determine an appropriate exit cost when evaluating the fair value of our assets and liabilities acquired. Property and equipment are recorded at fair value and such fair value is allocated to buildings, improvements, furniture, fixtures and equipment using appraisals and valuations performed by management and independent third parties. Acquisition-related costs, such as due diligence, legal and accounting fees, are not capitalized or applied in determining the fair value of the acquired assets.
Other items that we evaluate in a business combination include identifiable intangible assets, capital lease assets and obligations and goodwill. Identifiable intangible assets typically consist of assumed contracts, including ground and retail leases and management and franchise agreements, which are recorded at fair value. Capital lease obligations that are assumed as part of the acquisition of a leasehold interest are measured at fair value and are included as debt on the accompanying balance sheet and we record the corresponding right-to-use assets. Classification of a lease does not change if it is part of a business combination. In making estimates of fair values for purposes of allocating purchase price, we may utilize a number of sources that arise in connection with the acquisition or financing of a property and other market data, including third-party appraisals and valuations. In certain situations, and usually only in connection with the acquisition of a foreign hotel, a deferred tax liability is recognized due to the difference between the fair value and the tax basis of the acquired assets at the acquisition date. Any consideration paid in excess of the net fair value of the identifiable assets and liabilities acquired would be recorded to goodwill. In very limited circumstances, we may record a bargain purchase gain if the consideration paid is less than the net fair value of the assets and liabilities acquired.
Reclassifications
Certain prior year financial statement amounts have been reclassified to conform with the current year presentation.
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
New Accounting Standards
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 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.
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 2. | Property and Equipment |
|---|
Property and equipment consists of the following (in millions):
| As of December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | |||||||
| Land and land improvements | $ | 1,934 | $ | 2,047 | ||||
| Buildings and leasehold improvements | 13,529 | 13,483 | ||||||
| Furniture and equipment | 2,357 | 2,377 | ||||||
| Construction in progress | 106 | 86 | ||||||
| 17,926 | 17,993 | |||||||
| Less accumulated depreciation and amortization | (8,234 | ) | (7,848 | ) | ||||
| $ | 9,692 | $ | 10,145 |
The aggregate cost of real estate for federal income tax purposes is approximately $10.7 billion at December 31, 2017.
3.Investments in Affiliates
We own investments in joint ventures for which the equity method of accounting is used. The debt of our joint ventures is non-recourse to, and not guaranteed by, us, and a default of such debt does not trigger a default under any of our debt instruments. Investments in affiliates consist of the following (in millions):
| As of December 31, 2017 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Ownership Interests | Our Investment | Our Portion of Debt | Total Debt | Distributions received in 2017 (1) | Assets | |||||||||||||||||
| Euro JV (2) | 32.1 - 33.4% | $ | 271 | $ | 316 | $ | 1,029 | $ | 31 | Eleven hotels in Europe | ||||||||||||
| Asia/Pacific JV | 25 | % | 15 | — | — | — | A 36% interest in seven hotels in India | |||||||||||||||
| Maui JV | 67 | % | 83 | 27 | 41 | 7 | 131-unit vacation ownership project in Maui, HI | |||||||||||||||
| Hyatt Place JV | 50 | % | (13 | ) | 30 | 60 | 3 | One hotel in Nashville, TN | ||||||||||||||
| Harbor Beach JV | 49.9 | % | (28 | ) | 75 | 149 | 7 | One hotel in Fort Lauderdale, FL | ||||||||||||||
| Philadelphia Marriott Downtown JV | 11 | % | (6 | ) | 24 | 217 | 1 | One hotel in Philadelphia, PA | ||||||||||||||
| Fifth Wall Ventures | 5 | — | — | — | Real estate industry technology investment | |||||||||||||||||
| Total | $ | 327 | $ | 472 | $ | 1,496 | $ | 49 |
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| As of December 31, 2016 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Ownership Interests | Our Investment | Our Portion of Debt | Total Debt | Distributions received in 2016 (1) | Assets | |||||||||||||||||
| Euro JV | 32.1 - 33.4% | $ | 227 | $ | 236 | $ | 744 | $ | 18 | Ten hotels in Europe | ||||||||||||
| Asia/Pacific JV (3) | 25 | % | 17 | — | — | 9 | A 36% interest in five operating hotels and two hotels in final stages of completion in India | |||||||||||||||
| Maui JV | 67 | % | 81 | 27 | 41 | — | 131-unit vacation ownership project in Maui, HI | |||||||||||||||
| Hyatt Place JV (4) | 50 | % | (12 | ) | 30 | 60 | 17 | One hotel in Nashville, TN | ||||||||||||||
| Harbor Beach JV | 49.9 | % | (24 | ) | 75 | 149 | 6 | One hotel in Fort Lauderdale, FL | ||||||||||||||
| Philadelphia Marriott Downtown JV | 11 | % | (6 | ) | 24 | 221 | 2 | One hotel in Philadelphia, PA | ||||||||||||||
| Fifth Wall Ventures | 3 | — | — | — | Real estate industry technology investment | |||||||||||||||||
| Total | $ | 286 | $ | 392 | $ | 1,215 | $ | 52 | ||||||||||||||
| ___________ |
| (1) | Distributions received were funded by cash from operations unless otherwise noted. |
|---|
| (2) | Distributions received from Euro JV in 2017 include $9 million of loan refinancing proceeds. |
|---|
| (3) | Distributions received from the Asia/Pacific JV in 2016 were primarily related to the sale of the Four Points by Sheraton Perth in 2015. |
|---|
| (4) | Distributions received from the Hyatt Place JV in 2016 include $14 million of loan refinancing proceeds. |
|---|
European Joint Venture
We own general and limited partner interests in the Euro JV that consists of two separate funds, with the other partners being APG Strategic Real Estate Pool NV, an affiliate of a Dutch Pension Fund, and Jasmine Hotels Pte Ltd, an affiliate of the real estate investment company of the Government of Singapore Investment Corporation Pte Ltd (“GIC RE”). We own a combined 32.1% interest of Euro JV Fund I and a combined 33.4% interest of Euro JV Fund II. We do not consolidate the Euro JV due to the structure and substantive participating rights of the non-Host limited partners, including approval over financing, acquisitions and dispositions, and annual operating and capital expenditures budgets. The joint venture agreement expires in June 2021, subject to two one-year extensions. As of December 31, 2017, the total assets of the Euro JV are approximately €1.7 billion. As asset manager of the Euro JV funds, we earn asset management fees based on the amount of equity invested, which in 2017, 2016 and 2015 aggregated approximately $8 million, $8 million and $11 million, respectively.
The commitment period of both funds has expired with the remaining equity commitment limited in its use to capital expenditures and financing needs.
During 2017, the Euro JV acquired the 433-room Hilton Amsterdam Airport Schiphol in Amsterdam for €148 million. In connection with the acquisition, the partnership entered into an €81.4 million mortgage loan which matures on December 13, 2022, and funded the remaining portion with partner contributions, of which Host’s share was €23 million ($27 million).
Asia/Pacific Joint Venture
We own a 25% general and limited partner interest in the Asia/Pacific JV, the other partner of which is RECO Hotels JV Private Limited, an affiliate of GIC RE. The Asia/Pacific JV may be terminated by the partners at any time. Due to the ownership structure and the substantive participating rights of the non-Host limited partner, including approval over financing, acquisitions and dispositions, and annual operating and capital expenditures budgets, the Asia/Pacific JV is not consolidated in our financial statements. The commitment period for the equity contributions to the joint venture has expired. Certain funding commitments remain, however, related to its existing investment in India.
As of December 31, 2017, the Asia/Pacific JV partners have invested approximately $104 million (of which our share was $26 million) in a joint venture in India with Accor S.A. and InterGlobe Enterprises Limited, in which the Asia/Pacific JV holds a 36% interest. On November 12, 2017, the joint venture opened the Novotel & ibis Chennai OMR. As a result, this joint venture owns two hotels in Bangalore, three in Chennai, and two hotels in New Delhi. The hotels are managed by AccorHotels under the Pullman, ibis and Novotel brands.
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maui Joint Venture
We have a 67% non-controlling interest in a joint venture that owns a 131-unit vacation ownership development in Maui, Hawaii adjacent to our Hyatt Regency Maui Resort & Spa (the “Maui JV”). The project opened in December 2014. During 2017, the Maui JV repaid its outstanding construction loan, releasing us of our guarantees. Additionally, the joint venture has $41 million of outstanding debt used to facilitate the sales of the vacation ownership units, which is not guaranteed by us.
Hyatt Place Joint Venture
We own a 50% interest in a joint venture with White Lodging Services that owns the 255-room Hyatt Place Nashville Downtown in Tennessee. The Hyatt Place joint venture has an outstanding $60 million mortgage loan due August 2019, with two 12-month extension options. The loan bears interest at 1-month USD LIBOR plus 300 basis points, or 4.6%, at December 31, 2017.
Harbor Beach Joint Venture
We have a non-controlling 49.9% interest in a joint venture with R/V-C Association that owns the 650-room Fort Lauderdale Marriott Harbor Beach Resort & Spa in Florida. The joint venture has a $149 million mortgage loan with a maturity date of January 1, 2024. The loan bears interest at 4.75%. Only monthly interest payments are being made on the loan. No principal payments are due until the loan maturity date of January 1, 2024.
Combined Financial Information of Unconsolidated Investees
Combined summarized balance sheet information for our affiliates is as follows (in millions):
| As of December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | |||||||
| Property and equipment, net | $ | 1,945 | $ | 1,634 | ||||
| Timeshare inventory | 117 | 137 | ||||||
| Other assets | 566 | 514 | ||||||
| Total assets | $ | 2,628 | $ | 2,285 | ||||
| Debt | $ | 1,496 | $ | 1,215 | ||||
| Other liabilities | 330 | 319 | ||||||
| Equity | 802 | 751 | ||||||
| Total liabilities and equity | $ | 2,628 | $ | 2,285 |
Combined summarized operating results for our affiliates is as follows (in millions):
| Year ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | ||||||||||
| Total revenues | $ | 621 | $ | 599 | $ | 769 | ||||||
| Operating expenses | ||||||||||||
| Expenses | (436 | ) | (437 | ) | (558 | ) | ||||||
| Depreciation and amortization | (78 | ) | (73 | ) | (84 | ) | ||||||
| Operating profit | 107 | 89 | 127 | |||||||||
| Interest income | 6 | 5 | 3 | |||||||||
| Interest expense | (56 | ) | (57 | ) | (80 | ) | ||||||
| Other gain (loss) | 4 | (2 | ) | 141 | ||||||||
| Net income | $ | 61 | $ | 35 | $ | 191 |
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 4. | Debt |
|---|
Debt consists of the following (in millions):
| As of December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 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 |
Senior Notes
General. Under the terms of our senior notes indenture, our senior notes are equal in right of payment with all of our unsubordinated indebtedness and senior to all our subordinated obligations. The face amount of our senior notes as of December 31, 2017 and 2016 was $2.8 billion and $2.4 billion, respectively. The senior notes balances as of December 31, 2017 and 2016 are net of unamortized discounts and deferred financing costs of approximately $22 million and $20 million, respectively. We pay interest on each series of our senior notes semi-annually in arrears at the respective annual rates indicated in the table above.
Under the terms of the senior notes indenture, our ability to incur indebtedness and pay dividends is subject to restrictions and the satisfaction of various conditions. As of December 31, 2017, we are in compliance with all of these covenants.
On March 20, 2017, we issued $400 million of 3.875% Series G senior notes due April 2024 for proceeds of approximately $395 million, net of discounts, underwriting fees and expenses. Interest is payable semi-annually in arrears on May 15 and November 15, commencing November 15, 2017. The net proceeds were used to repay $250 million that had been drawn under the revolver portion of our credit facility and for general corporate purposes.
Authorization for Repurchase of Senior Notes. 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 their terms).
Credit Facility. On May 31, 2017 we entered into the fourth amended and restated senior revolving credit facility with Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., as syndication agent, and certain other agents and lenders. The credit facility allows for revolving borrowings in an aggregate principal amount of up to $1 billion, including a foreign currency subfacility for Canadian dollars, Australian dollars, 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 peso 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 and British pound sterling and a subfacility of up to $100 million for issuances of letters of credit. Host L.P. also has the option to increase the aggregate principal amount of the credit facility by up to $500 million, subject to obtaining additional loan commitments and satisfaction of certain conditions. The 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 (“2017 Term Loan”) 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.
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We pay interest on revolver borrowings under the credit facility at floating rates equal to LIBOR plus a margin ranging 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.
On September 10, 2015, we closed on a $500 million term loan (“2015 Term Loan”) by exercising the accordion feature of our existing credit facility. On that same day, we drew $300 million on the 2015 Term Loan and drew the remaining $200 million on December 29, 2015. The proceeds were used to repay outstanding amounts on the revolver. The loan has a five-year maturity and its interest rate spread depends on our unsecured debt rating. Based on our unsecured debt rating at December 31, 2017, both the 2017 Term Loan and 2015 Term Loan have a floating interest rate of LIBOR plus 110 bps (or approximately a 2.7% all-in interest rate).
Net repayments under the credit facility were $55 million in 2017, while in 2016 we made net repayments of $82 million. As of December 31, 2017, we have $822 million of available capacity under the revolver portion of our credit facility.
Financial Covenants. The credit facility contains covenants concerning allowable leverage, fixed charge coverage and unsecured interest coverage (as defined in our credit facility). Currently, we are permitted to borrow and maintain amounts outstanding under the credit facility so long as our leverage ratio is not in excess of 7.25x, our unsecured coverage ratio is not less than 1.75x and our fixed charge coverage ratio is not less than 1.25x. The financial covenants for the credit facility do not apply when there are no borrowings thereunder. Therefore, so long as there are no amounts outstanding, we would not be in default if we do not satisfy the financial covenants and we do not lose the potential to draw under the credit facility in the future if we were to regain compliance with the financial covenants. These calculations are performed based on pro forma results for the prior four fiscal quarters, giving effect to transactions such as acquisitions, dispositions and financings as if they had occurred at the beginning of the period. Under the terms of the credit facility, interest expense excludes items such as gains and losses on the extinguishment of debt, deferred financing costs related to the senior notes or the credit facility, amortization of debt premiums or discounts that were recorded at issuance of a loan in order to establish the debt at fair value and non-cash interest expense due to the implementation in 2009 of accounting standards related to our exchangeable debentures, all of which are or have been included in interest expense on our consolidated statements of operations. Additionally, total debt used in the calculation of our leverage ratio is based on a “net debt” concept, under which cash and cash equivalents in excess of $100 million are deducted from our total debt balance. As of December 31, 2017, we are in compliance with the financial covenants under our credit facility.
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.
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. In particular, at any time that our leverage ratio is below 6.0x, we will not be subject to limitations on capital expenditures, and the limitations on acquisitions, investments and dividends contained in the credit facility will be superseded by the generally less restrictive corresponding covenants in our senior notes indenture. Additionally, the credit facility’s restrictions on the incurrence of debt and the payment of dividends generally are consistent with our senior notes indenture for our Series D senior notes. These provisions, under certain circumstances, limit debt incurrence to debt incurred under the credit facility or in connection with a refinancing, and limit dividend payments to those necessary to maintain Host Inc.’s tax status as a REIT. Our senior notes and credit facility have cross default provisions that would trigger a default under those agreements if we were to have a payment default or an acceleration prior to maturity of other debt of Host L.P. or its subsidiaries. The amount of other debt in default needs to exceed certain thresholds in order to trigger a cross default and the thresholds are greater for secured debt than for unsecured debt. The credit facility also includes usual and customary events of default for facilities of this nature, and provides that, upon the occurrence and continuance of an event of default, payment of all amounts owed under the credit facility may be accelerated, and the lenders’ commitments may be terminated. In addition, upon the occurrence of certain insolvency or bankruptcy related events of default, all amounts owed under the credit facility will become due and payable and the lenders’ commitments will terminate.
Mortgage Debt
All of our mortgage debt is recourse solely to specific assets, except for environmental liabilities, fraud, misapplication of funds and other customary recourse provisions. As of December 31, 2017, we have no assets that are encumbered by mortgage debt.
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We have made the following mortgage debt repayments since January 2016:
| Maturity | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Transaction Date | Property | Rate | Date | Amount | ||||||||
| Repayments | ||||||||||||
| July 2017 | Hilton Melbourne South Wharf | 3.3 | % | 11/22/2017 | $ | (69 | ) | |||||
| September 2016 | Novotel and ibis Christchurch | 3.6 | % | 2/18/2018 | (17 | ) | ||||||
| April 2016 | Hyatt Regency Reston | 3.5 | % | 7/1/2016 | (100 | ) | ||||||
| March 2016 | ibis Wellington | 3.7 | % | 2/18/2018 | (11 | ) | ||||||
| February 2016 | Novotel Wellington | 5.7 | % | 2/18/2018 | (9 | ) | ||||||
Aggregate Debt Maturities
Aggregate debt maturities are as follows (in millions):
| As of December 31, 2017 | ||||
|---|---|---|---|---|
| 2018 | $ | — | ||
| 2019 | — | |||
| 2020 | 500 | |||
| 2021 | 978 | |||
| 2022 | 350 | |||
| Thereafter | 2,155 | |||
| 3,983 | ||||
| Deferred financing costs | (27 | ) | ||
| Unamortized (discounts) premiums, net | (3 | ) | ||
| Capital lease obligations | 1 | |||
| $ | 3,954 |
Interest
The following items are included in interest expense (in millions):
| Year ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015(1) | ||||||||||
| Interest expense | $ | 167 | $ | 154 | $ | 227 | ||||||
| Amortization of debt premiums/discounts, net (2) | (1 | ) | (1 | ) | (13 | ) | ||||||
| Amortization of deferred financing costs | (6 | ) | (6 | ) | (8 | ) | ||||||
| Non-cash losses on debt extinguishments | — | — | (11 | ) | ||||||||
| Change in accrued interest | (2 | ) | (3 | ) | 12 | |||||||
| Interest paid (3) | $ | 158 | $ | 144 | $ | 207 | ||||||
| ___________ |
| (1) | Interest expense and interest paid for 2015 includes cash prepayment premiums of approximately $30 million. |
|---|
| (2) | For 2015, this primarily represents the amortization of the debt discount on exchangeable senior debentures, which is considered non-cash interest expense. |
|---|
| (3) | Does not include capitalized interest of $1 million, $3 million and $5 million for 2017, 2016 and 2015, respectively. |
|---|
Our debt repayments resulted in debt extinguishment costs included in interest expense for 2017 and 2015 of $1 million and $41 million, respectively. No debt extinguishment costs were incurred in 2016.
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 5. | Equity of Host Inc. and Capital of Host L.P. |
|---|
Equity of Host Inc.
Host Inc. has authorized 1,050 million shares of common stock, with a par value of $0.01 per share, of which 739.1 million and 737.8 million were outstanding as of December 31, 2017 and 2016, respectively. Fifty million shares of no par value preferred stock are authorized; none of such preferred shares was outstanding as of December 31, 2017 and 2016.
Capital of 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 1% of Host L.P.’s common OP units are held by various unaffiliated limited partners. Each common OP unit may be redeemed for cash or, at the election of Host Inc., Host Inc. common stock, based on the conversion ratio of 1.021494 shares of Host Inc. common stock for each OP unit. In connection with the issuance of shares by Host Inc., Host L.P. will issue OP units based on the same conversion ratio. As of December 31, 2017 and 2016, Host L.P. had 731.7 million and 730.8 million OP units outstanding, respectively, of which Host Inc. held 723.5 million and 722.2 million, respectively.
Repurchases and Issuances of Common Stock and Common OP Units
During 2016, we repurchased 13.8 million shares at an average price of $15.79 for a total purchase price of approximately $218 million. The shares repurchased constitute authorized but unissued shares. On December 31, 2016, the purchasing authority under the program had expired. On February 21, 2017, the Board of Directors authorized a new program to repurchase up to $500 million of common stock. No stock was repurchased during 2017.
Dividends/Distributions
Host Inc. is required to distribute at least 90% of its annual taxable income, excluding net capital gains, to its stockholders in order to maintain its qualification as a REIT, including taxable income recognized for federal income tax purposes but with regard to which we do not receive cash. Funds used by Host Inc. to pay dividends on its common stock are provided by distributions from Host L.P. The amount of any future dividends will be determined by Host Inc.’s Board of Directors.
The dividends that were taxable to our stockholders in 2017 were considered 88% ordinary income (non-qualified dividend income), 1% qualified dividend income, 8% capital gain distribution and 3% unrecaptured Section 1250 gain. The dividends that were taxable to our stockholders in 2016 were considered 66% ordinary income (non-qualified dividend income), 4% qualified dividend income, 24% capital gain distribution and 6% unrecaptured Section 1250 gain.
The table below presents the amount of common dividends declared per share and common distributions per unit as follows:
| Year ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | ||||||||||
| Common stock | $ | .85 | $ | .85 | $ | .80 | ||||||
| Common OP units | .868 | .868 | .817 |
On February 21, 2018, Host Inc.’s Board of Directors authorized a regular quarterly cash dividend of $0.20 per share on Host Inc.’s common stock. The dividend is payable on April 16, 2018, to stockholders of record on March 29, 2018.
| 6. | Income Taxes |
|---|
We elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with our taxable year beginning January 1, 1999. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our taxable income to our stockholders, excluding net capital gain. As a REIT, generally we will not be subject to federal and state corporate income tax on that portion of our taxable income that currently is distributed to our stockholders. If we fail to qualify for taxation as a REIT in any taxable year, we will be subject to federal and state corporate income taxes at regular corporate rates (including any applicable corporate alternative minimum tax, which was repealed effective January 1, 2018) and may not be able to qualify as a REIT for four subsequent taxable years. Even if we qualify for taxation as a REIT, we may be subject to certain state, local and foreign taxes on our income and property, and to federal and state income and excise taxes on our undistributed taxable income.
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H. R. 1 (Tax Cuts and Jobs Act) was enacted on December 22, 2017. Accordingly, the domestic deferred tax assets have been remeasured using a U.S. federal income tax rate of 21% that is effective beginning with calendar year 2018. The impact of this remeasurement is a decrease to the domestic deferred tax assets and an increase to the deferred income tax provision in 2017 of approximately $11 million.
We have recorded a 100% valuation allowance of approximately $27 million against the deferred tax asset related to the net operating loss carryovers as of December 31, 2017 with respect to our hotel in Mexico. During 2016, we reversed the $3 million valuation allowance previously recorded against the deferred tax asset related to the net operating loss carryovers of our hotels in Canada. The net increase in valuation allowance for the year ending December 31, 2017 is approximately $5 million. The net decrease in valuation allowance for the year ending December 31, 2016 is approximately $1 million. The primary components of our net deferred tax assets are as follows (in millions):
| As of December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | |||||||
| Deferred tax assets | ||||||||
| Net operating loss and capital loss carryovers | $ | 34 | $ | 43 | ||||
| Alternative minimum tax and investment tax credits | — | 8 | ||||||
| Property and equipment | 3 | 4 | ||||||
| Investments in domestic affiliates | — | 2 | ||||||
| Deferred revenue and expenses | 27 | 42 | ||||||
| Foreign exchange net losses (AOCI) | 12 | 12 | ||||||
| Other | — | 2 | ||||||
| Total gross deferred tax assets | 76 | 113 | ||||||
| Less: Valuation allowance | (27 | ) | (22 | ) | ||||
| Total deferred tax assets, net of valuation allowance | $ | 49 | $ | 91 | ||||
| Deferred tax liabilities | ||||||||
| Property and equipment | — | (11 | ) | |||||
| Investments in domestic and foreign affiliates | (8 | ) | (7 | ) | ||||
| Other | — | (2 | ) | |||||
| Total gross deferred tax liabilities | (8 | ) | (20 | ) | ||||
| Net deferred tax assets | $ | 41 | $ | 71 |
At December 31, 2017, we have aggregate gross foreign net operating loss and capital loss carryovers of approximately $116 million. We have deferred tax assets related to these foreign loss carryovers of approximately $34 million, with a valuation allowance of approximately $27 million. Our foreign net operating loss carryovers expire through 2037, and our foreign capital loss carryovers have no expiration period. We believe that it is more likely than not that the results of future operations will generate sufficient taxable income in order to realize our total deferred tax assets, net of a valuation allowance of $27 million, of $49 million.
Our U.S. and foreign income from continuing operations before income taxes was as follows (in millions):
| Year ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | |||||||||
| U.S. income | $ | 593 | $ | 763 | $ | 530 | |||||
| Foreign income | 58 | 48 | 44 | ||||||||
| Total | $ | 651 | $ | 811 | $ | 574 |
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income taxes from continuing operations consists of (in millions):
| Year ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | |||||||||||
| Current | —Federal | $ | 17 | $ | — | $ | 2 | ||||||
| —State | 6 | 1 | (1 | ) | |||||||||
| —Foreign | 19 | 12 | 3 | ||||||||||
| 42 | 13 | 4 | |||||||||||
| Deferred | —Federal | 32 | 24 | 2 | |||||||||
| —State | 4 | 6 | — | ||||||||||
| —Foreign | 2 | (3 | ) | 3 | |||||||||
| 38 | 27 | 5 | |||||||||||
| Income tax provision – continuing operations | $ | 80 | $ | 40 | $ | 9 |
The differences between the income tax provision calculated at the statutory U.S. federal income tax rate of 35% (21% beginning with calendar year 2018) and the actual income tax provision recorded for continuing operations are as follows (in millions):
| Year ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | ||||||||||
| Statutory federal income tax provision | $ | 228 | $ | 284 | $ | 204 | ||||||
| Adjustment for nontaxable income of Host Inc. | (190 | ) | (260 | ) | (203 | ) | ||||||
| State income tax provision, net | 10 | 7 | 1 | |||||||||
| Provision for uncertain tax positions | — | — | 1 | |||||||||
| Remeasurement of domestic net deferred tax assets | 11 | — | — | |||||||||
| Foreign income tax provision | 21 | 9 | 6 | |||||||||
| Income tax provision | $ | 80 | $ | 40 | $ | 9 |
Cash paid for income taxes, net of refunds received, was $40 million, $15 million, and $9 million in 2017, 2016, and 2015, respectively.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):
| 2017 | 2016 | |||||||
|---|---|---|---|---|---|---|---|---|
| Balance at January 1 | $ | 11 | $ | 11 | ||||
| Balance at December 31 | $ | 11 | $ | 11 |
All of such uncertain tax position amounts, if recognized, would impact our reconciliation between the income tax provision calculated at the statutory U.S. federal income tax rate of 35% (21% beginning with calendar year 2018) and the actual income tax provision recorded each year.
As of December 31, 2017, the tax years that remain subject to examination by major tax jurisdictions generally include 2014-2017. There were no material interest or penalties recorded for the years ended December 31, 2017, 2016, and 2015.
| 7. | Leases |
|---|
Taxable REIT Subsidiaries Leases
We lease substantially all of our hotels to a wholly owned subsidiary that qualifies as a taxable REIT subsidiary due to federal income tax restrictions on a REIT’s ability to derive revenue directly from the operation and management of a hotel.
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ground Leases
As of December 31, 2017, all or a portion of 26 of our hotels are subject to ground leases, generally with multiple renewal options, all of which are accounted for as operating leases. For lease agreements with scheduled rent increases, we recognize the lease expense ratably over the term of the lease. Certain of these leases contain provisions for the payment of contingent rentals based on a percentage of sales in excess of stipulated amounts.
Other Lease Information
We also have leases on facilities used in our former restaurant business, all of which we subsequently subleased. These leases and subleases contain one or more renewal options, generally for five- or ten-year periods. The restaurant leases are accounted for as operating leases. Our contingent liability related to these leases is $9 million as of December 31, 2017. We, however, consider the likelihood of any material funding related to these leases to be remote. Our leasing activity also includes those entered into by our hotels for various types of equipment, such as computer equipment, vehicles and telephone systems. Equipment leases are accounted for either as operating or capital leases, depending upon the characteristics of the particular lease arrangement. Equipment leases that are characterized as capital leases are classified as furniture and equipment and are depreciated over the life of the lease. The amortization expense applicable to capitalized leases is included in depreciation expense.
The following table presents the future minimum annual rental commitments required under non-cancelable operating leases for which we are the lessee (in millions):
| As of December 31, 2017 | ||||
|---|---|---|---|---|
| 2018 | $ | 42 | ||
| 2019 | 41 | |||
| 2020 | 39 | |||
| 2021 | 39 | |||
| 2022 | 37 | |||
| Thereafter | 1,289 | |||
| Total minimum lease payments | $ | 1,487 |
Minimum payments for the operating leases have not been reduced by aggregate minimum sublease rentals from restaurants of approximately $6 million that are payable to us under non-cancelable subleases.
Rent expense is included in other property-level expenses and consists of (in millions):
| Year ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | ||||||||||
| Minimum rentals on operating leases | $ | 46 | $ | 45 | $ | 46 | ||||||
| Additional rentals based on sales | 38 | 38 | 33 | |||||||||
| Less: sublease rentals | (1 | ) | (2 | ) | (2 | ) | ||||||
| $ | 83 | $ | 81 | $ | 77 |
| 8. | Employee Stock Plans |
|---|
Upon the issuance of Host Inc.’s common stock under either of the two stock-based compensation plans described below, Host L.P. will issue to Host Inc. common OP units of an equivalent value. Accordingly, these awards and related disclosures are included in both Host Inc.’s and Host L.P.’s consolidated financial statements.
Host Inc. maintains two stock-based compensation plans, the Comprehensive Stock and Cash Incentive Plan (the “2009 Comprehensive Plan”), under which Host Inc. may award to participating employees restricted stock units (“RSUs”), and the Employee Stock Purchase Plan (“ESPP”). At December 31, 2017, there were approximately 14 million shares of Host Inc.’s common stock reserved and available for issuance under the 2009 Comprehensive Plan.
We recognize costs resulting from share-based payments in our financial statements over their vesting periods. No compensation cost is recognized for awards for which employees do not render the requisite services. We classify share-based
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
payment awards granted in exchange for employee services as either equity-classified or liability-classified awards. Equity-classified awards are measured based on their fair value as of the date of grant. In contrast, liability-classified awards are re-measured to fair value each reporting period.
During 2017, 2016 and 2015, we recorded stock-based compensation expense of approximately $11 million, $12 million and $11 million, respectively. Shares granted in 2017, 2016 and 2015 totaled 1.5 million, 2.3 million and 1.8 million, respectively, while 0.6 million, 1.2 million and 0.8 million shares, respectively, vested during those years.
Senior Executive Plan
During 2017, Host Inc. granted 1.4 million RSU awards under the 2009 Comprehensive Plan, which amount represents the maximum number of RSUs that can be earned during the period of 2017 through 2019 if performance is at the “high” level of achievement and, for time based awards, the executive remains employed. The RSUs vest over a one, two or three-year period and 0.7 million RSUs were unvested at December 31, 2017. Total unrecognized compensation cost related to unvested RSU awards that vest through 2019 is approximately $8 million. Prior to 2017, all restricted stock awards were fully vested.
RSU awards
Vesting of RSUs is based on (1) continued employment on the vesting date (“Time-Based Award”); (2) the achievement of relative total shareholder return (“TSR”); and (3) the Company’s performance against certain strategic objectives. Approximately 33% of the RSUs are Time-Based Awards and vest on an annual basis over three years; approximately 33% of the RSUs are based on the satisfaction of the TSR compared to (i) the NAREIT index, (ii) the Standard & Poor’s index, and (iii) a Selected Lodging Company index that serves as a relevant industry/asset specific measurement to our competitors and vest over a three year period with performance periods of one, two and three years; and the remaining 34% based on the Company’s performance against certain strategic objectives and vest on an annual basis. The RSUs granted are considered equity-classified awards. As a result, the fair value of these awards is based on the fair value on the grant date, and such grant date fair value is not adjusted for subsequent movements thereof.
We value the time based awards using the closing stock price on the grant date multiplied by the percentage of shares expected to be released, which is 100% of the time based awards. We also value the strategic objective awards using the closing stock price on the grant date multiplied by the percentage of shares expected to be released; however, as a result of the strategic objective awards’ performance conditions, we reevaluate the percentage based on the probability of meeting the performance conditions each period. We value the TSR awards using the economic theory that is the basis for all valuation models, including Binominal, Black-Scholes, exotic options formulas, and Monte Carlo valuations, with the following assumptions, to determine the fair value of the awards granted in 2017.
| 2017 Award Grants | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| NAREIT index | Standard & Poor's index | Selected Lodging Company index | |||||||||
| Grant date stock price | $ | 18.56 | $ | 18.56 | $ | 18.56 | |||||
| Volatility | 25.2 | % | 25.2 | % | 25.2 | % | |||||
| Beta | 1.178 | 1.182 | 1.006 | ||||||||
| Risk-free rate - one year award | 0.82 | % | 0.82 | % | 0.82 | % | |||||
| Risk-free rate - two year award | 1.20 | % | 1.20 | % | 1.20 | % | |||||
| Risk-free rate - three year award | 1.48 | % | 1.48 | % | 1.48 | % |
In making these assumptions, we base the expected volatility on the historical volatility over three years using daily stock price observations. The beta is calculated by comparing the risk of the Company’s stock to the risk of the applicable peer group index, using three years of daily price data. We base the risk-free rate on the Treasury bond yields corresponding to the length of each performance period as reported by the Federal Reserve.
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The payout schedule for the TSR awards is as follows, with linear interpolation for points between the 30th and 75th percentiles.
| TSR Percentile Ranking | Payout (% of Maximum) | |||
|---|---|---|---|---|
| At or above 75th percentile | 100 | % | ||
| 50th percentile | 50 | |||
| 30th percentile | 25 | |||
| Below 30th percentile | 0 |
During 2017, 2016 and 2015, we recorded compensation expense of approximately $9 million, $10 million and $8 million, respectively, related to the RSU awards to senior executives. The following table is a summary of the status of our senior executive plans for the three years ended December 31, 2017:
| Year ended December 31, | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | ||||||||||||||||||||||
| Shares | Fair Value | Shares | Fair Value | Shares | Fair Value | |||||||||||||||||||
| (in millions) | (per share) | (in millions) | (per share) | (in millions) | (per share) | |||||||||||||||||||
| Balance, at beginning of year | — | $ | — | — | $ | — | — | $ | — | |||||||||||||||
| Granted | 1.4 | 15 | 1.6 | 18 | 1.3 | 16 | ||||||||||||||||||
| Vested (1) | (0.5 | ) | 20 | (0.6 | ) | 19 | (0.4 | ) | 15 | |||||||||||||||
| Forfeited/expired | (0.2 | ) | 20 | (1.0 | ) | 19 | (0.9 | ) | 15 | |||||||||||||||
| Balance, at end of year | 0.7 | 14 | — | — | — | — | ||||||||||||||||||
| Issued in calendar year (1) | 0.3 | 19 | 0.2 | 15 | 0.5 | 24 | ||||||||||||||||||
| ___________ |
| (1) | Shares that vest at December 31 of each year are issued to the employees in the first quarter of the following year, although the requisite service period is complete. Accordingly, the 0.3 million shares issued in 2017 include shares vested at December 31, 2016, after adjusting for shares withheld to meet employee tax requirements. The shares withheld for employee tax requirements were valued at $4.9 million, $2.4 million and $9.8 million for 2017, 2016 and 2015, respectively. |
|---|
Stock Option Awards
Beginning in 2017, we no longer grant stock options awards as part of the 2009 Comprehensive Plan. As of December 31, 2017, 0.6 million shares of stock option awards were outstanding and exercisable, with a weighted average remaining life of 7 years and a weighted average exercise price of $18.98 per share. During 2017, 2016 and 2015, we received proceeds of $7 million, $4 million and $2 million, respectively, from the exercise of stock options. During 2016 and 2015, stock option compensation expense was $1.5 million and $1.8 million, respectively, and all stock option awards outstanding are fully vested.
Other Stock Plans
In addition to the share-based plans described above, we maintain an upper-middle management plan and an employee stock purchase plan. The upper-middle management awards are time-based, equity-classified awards that vest within three years of the grant date and compensation expense is recognized over the life of the award based on the grant date fair value. Through the employee stock purchase plan, employees can purchase stock at a discount of 10% of the lower of the beginning and ending stock price each quarter. During 2017, 2016 and 2015, we granted 69,000 shares, 118,000 shares and 116,000 shares, respectively, under both of these programs and recorded expense of $1.7 million, $1.6 million and $1.9 million, respectively.
| 9. | Profit Sharing and Postemployment Benefit Plans |
|---|
We contribute to defined contribution plans for the benefit of employees who meet certain eligibility requirements and who elect participation in the plans. The discretionary amount to be matched by us is determined annually by Host Inc.’s Board of Directors. Our liability recorded for this obligation is not material. Payments for these items were not material for the three years ended December 31, 2017.
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 10. | Dispositions |
|---|
We disposed of four hotels in 2017, ten hotels in 2016 and eight hotels in 2015 and recorded gains on sales of approximately $99 million, $243 million and $89 million, respectively. In connection with the sale of the Hilton Melbourne South Wharf in 2017, we recorded Australian capital gain taxes of $17 million associated with the gain on sale.
At December 31, 2017, the Key Bridge Marriott and W New York were classified as held for sale. Subsequent to year end, we sold the Key Bridge Marriott for $190 million, including $8 million for the FF&E replacement funds.
| 11. | Acquisitions |
|---|
Business Combinations
On February 16, 2017, we acquired the 347-room Don CeSar, including the adjacent Beach House Suites, for $214 million. On March 7, 2017, we acquired the 305-room W Hollywood for $219 million.
Asset Acquisitions
For 2017 and 2016, our other asset acquisitions were as follows:
| • | In March 2017, we purchased the ground lease at the Miami Marriott Biscayne Bay for $38 million. |
|---|
| • | In October 2016, we purchased eight apartments at the Hilton Melbourne South Wharf for $4 million (A$5 million). |
|---|
| • | In July 2016, we purchased the ground lease at the Key Bridge Marriott for $54 million. |
|---|
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. We expect the acquisition to close during the first quarter of 2018.
12.Fair Value Measurements
Derivatives and Hedging
Foreign Investment Hedging Instruments. We have three foreign currency forward sale contracts in the aggregate notional amount of $70 million that hedge a portion of the foreign currency exposure resulting from the eventual repatriation of our Canadian dollar and euro net investments in foreign operations. These derivatives are considered hedges of the foreign currency exposure of a net investment in a foreign operation. The contracts are required to be measured at fair value on a recurring basis using significant other observable inputs (Level 2) in the GAAP fair value hierarchy. As a result, we recorded a liability of $5 million and an asset of $12 million as of December 31, 2017 and December 31, 2016, respectively, related to these foreign currency forward sale contracts. These contracts are marked-to-market with changes in fair value recorded to other comprehensive income (loss). We recorded a loss of $14 million and a gain of $6 million for the years ended December 31, 2017 and 2016, respectively. The foreign currency forward sale contracts are valued based on the forward yield curve of the foreign currency to U.S. dollar forward exchange rate on the date of measurement. We also evaluate counterparty credit risk when we calculate the fair value of the derivatives.
During 2017, in connection with the maturity of a foreign currency forward purchase contract with a total notional amount of €15 million, for which we received total proceeds of approximately $4 million, we entered into a new foreign currency forward purchase contract with the same notional amount. We also made payments totaling approximately $2 million to settle forward currency hedges with a total notional amount of NZ$45 million and €55 million. The gain or loss related to the matured contracts is initially included in accumulated other comprehensive income and is recognized in earnings when the hedged investment has been repatriated.
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition to the foreign currency forward sale contracts, we have designated $129 million of the foreign currency draws on our credit facility as hedges of net investments in foreign operations. Changes in fair value of the designated credit facility draws are recorded to foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates. We recorded a loss of $14 million and a gain of $2 million for the years ended December 31, 2017 and 2016, respectively.
Impairment
During 2017, we recorded an impairment loss of $43 million related to the W New York. The fair value was based on the expected sale proceeds of the property, which is considered an unobservable input (Level 3) in the GAAP fair value hierarchy. The fair value of the property on December 31, 2017, following the impairment loss, was $191 million. The property was classified as held-for-sale as of December 31, 2017.
Other Liabilities
Fair Value of Other Financial Liabilities. We did not elect the fair value measurement option for any of our other financial liabilities. The fair values of secured debt and our credit facility are determined based on the expected future payments discounted at risk-adjusted rates. Senior notes are valued based on quoted market prices. The fair values of financial instruments not included in this table are estimated to be equal to their carrying amounts. The fair value of certain financial liabilities is shown below (in millions):
| December 31, 2017 | December 31, 2016 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
| Financial liabilities | ||||||||||||||||
| Senior notes (Level 1) | $ | 2,778 | $ | 2,932 | $ | 2,380 | $ | 2,477 | ||||||||
| Credit facility (Level 2) | 1,170 | 1,178 | 1,206 | 1,211 | ||||||||||||
| Mortgage debt and other, excluding capital leases (Level 2) | 5 | 5 | 62 | 62 |
| 13. | Relationship with Marriott International |
|---|
We have entered into various agreements with Marriott, including those for the management or franchise of approximately 79% of our hotels (as measured by revenues), the partnership agreement for the JW Marriott Hotel Mexico City, Mexico and certain limited administrative services.
In 2017, 2016 and 2015, we paid Marriott $199 million, $159 million and $138 million, respectively, of hotel management fees and approximately $9.7 million, $4.6 million and $2.6 million, respectively, of franchise fees.
| 14. | Hotel Management Agreements and Operating and License Agreements |
|---|
All of our hotels are managed by third parties pursuant to management or operating agreements, with some of our hotels also being subject to separate license agreements addressing matters pertaining to operations under the designated brand. Hotels managed or franchised by Marriott and Hyatt represent 79% and 14% of our total revenues, respectively. Under these agreements, the managers generally have sole responsibility for all activities necessary for the day-to-day operation of the hotels, including establishing room rates, processing reservations and promoting and publicizing the hotels. The managers also provide all employees for the hotels, prepare reports, budgets and projections, and provide other administrative and accounting support services to the hotels. We have approval rights over budgets, capital expenditures, significant leases and contractual commitments, and various other matters.
The initial term of our agreements generally is 10 to 25 years, with one or more renewal terms at the option of the manager. The majority of our agreements condition the manager’s right to exercise options for renewal upon the satisfaction of specified economic performance criteria. The manager typically receives a base management fee, which is calculated as a percentage (generally 2-3%) of annual gross revenues, and an incentive management fee, which typically is calculated as a percentage (generally 10-20%) of operating profit after the owner has received a priority return on its investment. In the case of our hotels operating under the W®, Westin®, Sheraton®, Luxury Collection® and St. Regis® brands and managed by Marriott following its acquisition of Starwood Hotels & Resorts Worldwide, Inc. on September 23, 2016, the base management fee is 1% of annual gross revenues, but that amount is
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
supplemented by license fees payable to Marriott under a separate license agreement pertaining to the designated brand, including rights to use trademarks, service marks and logos, matters relating to compliance with certain brand standards and policies, and the provision of certain system programs and centralized services. Under the license agreement, Marriott generally receives 5% of gross revenues attributable to room sales and 2% of gross revenues attributable to food and beverage sales in addition to the base management fee.
Pursuant to the agreements, the manager furnishes the hotels with certain chain services, which generally are provided on a central or regional basis to all hotels in the manager’s hotel system. Chain services include central training, advertising and promotion, national reservation systems, computerized payroll and accounting services, and such additional services as needed which may be more efficiently performed on a centralized basis. Costs and expenses incurred in providing such services are allocated among the hotels managed, owned or leased by the manager on a fair and equitable basis. In addition, our managers generally sponsor a guest rewards program, the costs of which are charged to all of the hotels that participate in such program.
We are obligated to provide the manager with sufficient funds, generally 5% of the revenue generated at the hotel, to cover the cost of (a) certain non-routine repairs and maintenance to the hotels which normally are capitalized, and (b) replacements and renewals to the hotels’ furniture, fixtures and equipment. Under certain circumstances, we will be required to establish escrow accounts for such purposes under terms outlined in the agreements.
We generally are limited in our ability to sell, lease or otherwise transfer the hotels unless the transferee assumes the related management agreement. However, most agreements include owner rights to terminate the agreements on the basis of the manager’s failure to meet certain performance-based metrics. Typically, these criteria are subject to the manager’s ability to ‘cure’ and avoid termination by payment to us of specified deficiency amounts (or, in some instances, waiver of the right to receive specified future management fees).
In addition to any performance-based or other termination rights, we have negotiated with Marriott and some of our other managers specific termination rights related to specific agreements. These termination rights can take a number of different forms, including termination of agreements upon sale that leave the property unencumbered by any agreement; termination upon sale provided that the property continues to be operated under a license or franchise agreement with continued brand affiliation; as well as termination without sale or other condition, which may require the payment of a fee. These termination rights also may restrict the number of agreements that may be terminated over any annual or other period; impose limitations on the number of agreements terminated as measured by EBITDA; require that a certain number of properties continue to maintain the brand affiliation; or be restricted to a specific pool of assets.
| 15. | Geographic and Business Segment Information |
|---|
We consider each one of our hotels to be an operating segment, none of which meets the threshold for a reportable segment. We also allocate resources and assess operating performance based on individual hotels. All of our other real estate investment activities (primarily our retail and office spaces) are immaterial and, with our operating segments, meet the aggregation criteria, and thus, we report one segment: hotel ownership. Our international operations consist of hotels in three countries as of December 31, 2017. There were no intersegment sales during the periods presented. The following table presents revenues and long-lived assets for each of the geographical areas in which we operate (in millions):
| 2017 | 2016 | 2015 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenues | Property and Equipment, net | Revenues | Property and Equipment, net | Revenues | Property and Equipment, net | |||||||||||||||||||
| United States | $ | 5,260 | $ | 9,548 | $ | 5,259 | $ | 9,913 | $ | 5,129 | $ | 10,294 | ||||||||||||
| Australia | 19 | — | 34 | 85 | 34 | 88 | ||||||||||||||||||
| Brazil | 22 | 59 | 34 | 63 | 30 | 53 | ||||||||||||||||||
| Canada | 59 | 71 | 54 | 71 | 58 | 66 | ||||||||||||||||||
| Chile | — | — | 9 | — | 25 | 44 | ||||||||||||||||||
| Mexico | 27 | 14 | 29 | 13 | 29 | 18 | ||||||||||||||||||
| New Zealand | — | — | 11 | — | 45 | 20 | ||||||||||||||||||
| Total | $ | 5,387 | $ | 9,692 | $ | 5,430 | $ | 10,145 | $ | 5,350 | $ | 10,583 |
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 16. | Guarantees and Contingencies |
|---|
All of our hotels in Houston and Florida were affected by Hurricanes Harvey and Irma in August and September 2017, respectively. All four of our hotels in Houston were able to remain operational during the hurricane. In Florida, due to evacuation mandates and loss of commercial power, seven of the nine properties were closed for a period of time. We are still evaluating the property and business interruption impact to our hotels. However, our current estimate of the book value of the property and equipment written off, and the related repairs and cleanup costs, is approximately $32 million and have recorded a corresponding insurance receivable of $32 million. We believe our insurance coverage should be sufficient to cover a substantial portion of the property damage to the hotels and the near-term loss of business. As of December 31, 2017, we have received $14 million of property insurance proceeds related to these claims, reducing the receivable to $18 million. Additionally, in 2017 we received $8 million of business interruption proceeds related to the disruption from the hurricanes, which is included in gain on insurance and business interruption settlements on our consolidated statements of operations.
We have entered into certain guarantees which consist of commitments made to third parties for leases or debt that are not recognized in our consolidated financial statements due to various dispositions, spin-offs and contractual arrangements, but that we have agreed to pay in the event of certain circumstances, including the default by an unrelated party. We also may have contingent environmental liabilities related to the presence of hazardous or toxic substances. We consider the likelihood of any material payments under these guarantees and contingencies to be remote. The guarantees and contingencies that are not recognized in our consolidated financial statements are listed below:
| • | We remain contingently liable for rental payments on certain divested non-lodging properties. These properties primarily represent certain restaurants that were sold subject to our guarantee of the future rental payments. The aggregate amount of these future rental payments is approximately $9 million as of December 31, 2017. |
|---|
| • | In connection with the sale of one hotel in January 2005, we remain contingently liable for the amounts due under the ground lease. The future minimum lease payments are approximately $7 million through the full term of the lease, including renewal options. We believe that the likelihood of any material payments related to this ground lease is remote, and we have been indemnified by the purchaser of the hotel. |
|---|
In connection with the sale of the Atlanta Marriott Marquis in January 2013, we retained a contingent liability for potential environmental liabilities, which is not to exceed $5 million. This amount is recorded on our consolidated balance sheet.
| 17. | Legal Proceedings |
|---|
We are involved in various legal proceedings in the ordinary course of business regarding the operation of our hotels and company matters. To the extent not covered by insurance, these lawsuits generally fall into the following broad categories: disputes involving hotel-level contracts, employment litigation, compliance with laws such as the Americans with Disabilities Act, tax disputes and other general matters. Under our management agreements, our operators have broad latitude to resolve individual hotel-level claims for amounts generally less than $150,000. However, for matters exceeding such threshold, our operators may not settle claims without our consent.
Based on our analysis of legal proceedings with which we currently are involved or of which we are aware and our experience in resolving similar claims in the past, we have accrued approximately $3 million as of December 31, 2017. We have estimated that, in the aggregate, our losses related to these proceedings could be as much as $15 million. We believe this range represents the maximum potential loss for all of our legal proceedings. We are not aware of any other matters with a reasonably possible unfavorable outcome for which disclosure of a loss contingency is required. No assurances can be given as to the outcome of any pending legal proceedings.
HOST HOTELS & RESORTS, INC., HOST HOTELS & RESORTS, L.P., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 18. | Quarterly Financial Data (unaudited) |
|---|
| 2017 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| First | Second | Third | Fourth | |||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
| (in millions, except per share/unit amounts) | ||||||||||||||||
| Host Hotels & Resorts, Inc.: | ||||||||||||||||
| Revenues | $ | 1,348 | $ | 1,441 | $ | 1,254 | $ | 1,344 | ||||||||
| Operating profit | 171 | 244 | 127 | 134 | ||||||||||||
| Net income | 161 | 212 | 105 | 93 | ||||||||||||
| Net income attributable to Host Hotels & Resorts, Inc. | 158 | 210 | 104 | 92 | ||||||||||||
| Basic earnings per common share | .21 | .28 | .14 | .12 | ||||||||||||
| Diluted earnings per common share | .21 | .28 | .14 | .12 | ||||||||||||
| Host Hotels & Resorts, L.P.(1): | ||||||||||||||||
| Net income attributable to Host Hotels & Resorts, L.P. | 160 | 212 | 106 | 93 | ||||||||||||
| Basic earnings per common unit | .22 | .29 | .14 | .13 | ||||||||||||
| Diluted earnings per common unit | .22 | .29 | .14 | .13 |
| 2016 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| First | Second | Third | Fourth | |||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
| (in millions, except per share/unit amounts) | ||||||||||||||||
| Host Hotels & Resorts, Inc.: | ||||||||||||||||
| Revenues | $ | 1,339 | $ | 1,459 | $ | 1,295 | $ | 1,337 | ||||||||
| Operating profit | 151 | 239 | 144 | 150 | ||||||||||||
| Net income | 184 | 351 | 108 | 128 | ||||||||||||
| Net income attributable to Host Hotels & Resorts, Inc. | 182 | 347 | 107 | 126 | ||||||||||||
| Basic earnings per common share | .24 | .47 | .14 | .17 | ||||||||||||
| Diluted earnings per common share | .24 | .47 | .14 | .17 | ||||||||||||
| Host Hotels & Resorts, L.P.(1): | ||||||||||||||||
| Net income attributable to Host Hotels & Resorts, L.P. | 184 | 352 | 108 | 127 | ||||||||||||
| Basic earnings per common unit | .25 | .48 | .15 | .17 | ||||||||||||
| Diluted earnings per common unit | .25 | .48 | .15 | .17 | ||||||||||||
| ___________ |
| (1) | Other income statement line items not presented for Host L.P. are equal to the amounts presented for Host Inc. |
|---|
The sum of the basic and diluted earnings per common share and OP units for the four quarters in all years presented differs from the annual earnings per common share and OP units due to the required method of computing the weighted average number of shares and OP units in the respective periods.
Previous: Item 7A. Quantitative and Qualitative Disclosures about Market Risk · Next: Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure