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

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

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

Overview

Host Inc. operates as a self-managed and self-administered REIT that owns properties and conducts operations through Host L.P., of which Host Inc. is the sole general partner and of which it holds approximately 99% of its common OP units as of December 31, 2018. The remainder of Host L.P.’s common OP units are owned by various unaffiliated limited partners. Host Inc. has the exclusive and complete responsibility for Host L.P.’s day-to-day management and control.

Host Inc. is the largest lodging REIT in NAREIT’s composite index and one of the largest owners of luxury and upper upscale hotel properties. As of February 21, 2019, we own 93 hotels in the United States and internationally and have minority ownership interests in an additional 10 hotels through joint ventures in the United States and the Asia/Pacific region. These hotels are operated primarily under brand names that are among the most respected and widely recognized in the lodging industry. Most of our hotels are located in central business districts of major cities, near airports and in resort/conference destinations.

Our customers fall into three broad groups: transient business, group business and contract business, which accounted for approximately 58%, 36%, and 6%, respectively, of our 2018 room sales. Transient business broadly represents individual business or leisure travelers. Business travelers make up the majority of transient demand at our hotels. Therefore, we will be significantly more affected by trends in business travel than trends in leisure demand. For a discussion of our customer categories, see “ – Our Customers”.

Understanding Our Performance

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

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


•	Rooms revenue. Occupancy and average daily room rate are the major drivers of rooms revenue. The business mix of the hotel (group versus transient and retail versus discount business) is a significant driver of room rates.	64%

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

•	Other revenue. Occupancy, the nature of the property (e.g., resort, etc.) and its price point are the main drivers of other ancillary revenue, such as attrition and cancellation fees, parking, golf course, spa, entertainment and other guest services. This category also includes other rental revenue.	7%

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


•	Rooms expense. These costs include housekeeping, reservation systems, room supplies, laundry services and front desk costs. Occupancy is the major driver of rooms expense. These costs can increase based on increases in salaries and wages, as well as on the level of service and amenities that are provided.	18%

•	Food and beverage expense. These expenses primarily include food, beverage and the associated labor costs and will correlate closely with food and beverage revenue. Group functions with banquet sales and audio and visual components generally will have lower overall costs as a percentage of revenues than outlet sales.	22%

•	Other departmental and support expenses. These expenses include labor and other costs associated with other ancillary revenue, such as parking, golf courses, spas, entertainment and other guest services, as well as labor and other costs associated with administrative departments, sales and marketing, repairs and minor maintenance and utility costs.	26%

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

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

•	Depreciation and amortization expense. This is a non-cash expense that changes primarily based on the acquisition and disposition of hotels and the amounts of historical capital expenditures.	19%

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

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

	•	hotel occupancy is a volume indicator based on the percentage of available room nights that are sold;

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

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

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

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

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

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

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

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

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

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

Summary of 2018 Operating Results

The following table reflects certain line items from our audited consolidated statements of operations and the significant operating statistics for the three years ended December 31, 2018 (in millions, except per share and hotel statistics):

Historical Income Statement Data:

							Change						Change
	2018			2017			2017 to 2018			2016			2016 to 2017
Total revenues	$	5,524		$	5,387			2.5	%	$	5,430			(0.8	)%
Net income		1,151			571			101.6	%		771			(25.9	)%
Operating profit		530			676			(21.6	)%		684			(1.2	)%
Operating profit margin under GAAP		9.6	%		12.5	%		(290	bps)		12.6	%		(10	bps)
EBITDAre	$	1,562		$	1,510			3.4	%	$	1,483			1.8	%
Adjusted EBITDAre	$	1,562		$	1,510			3.4	%	$	1,482			1.9	%

Diluted earnings per share	$	1.47		$	.76			93.4	%	$	1.02			(25.5	)%
NAREIT FFO per diluted share		1.77			1.68			5.4	%		1.69			(0.6	)%
Adjusted FFO per diluted share		1.77			1.69			4.7	%		1.69		—

Comparable Hotel Data:

	2018 Comparable Hotels (1)									2017 Comparable Hotels (1)
							Change									Change
	2018			2017			2017 to 2018			2017			2016			2016 to 2017
Comparable hotel revenues	$	4,714		$	4,603			2.4	%	$	4,840		$	4,808			0.7	%
Comparable hotel EBITDA		1,356			1,296			4.6	%		1,348			1,334			1.0	%
Comparable hotel EBITDA margin		28.8	%		28.2	%		60	bps		27.85	%		27.75	%		10	bps
Change in comparable hotel RevPAR - Constant US$ (2)		2.0	%								1.3	%
Change in comparable hotel RevPAR - Nominal US$ (2)		1.9	%								1.4	%
Change in comparable domestic RevPAR		1.8	%								1.7	%
Change in comparable international RevPAR - Constant US$ (2)		11.2	%								(12.2	)%
___________

(1)	Comparable hotel operating statistics for 2018 and 2017 are based on 85 comparable hotels as of December 31, 2018, while the comparable hotel operating statistics for 2017 and 2016 are based on 87 comparable hotels as of December 31, 2017.

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

Revenues

Total revenue improved $137 million, or 2.5%, compared to 2017, driven by the growth in comparable revenues of $111 million, or 2.4%. The growth was reflected in all our revenue categories, as rooms, food and beverage (“F&B”) and other revenues increased 1.6%, 3.5% and 7.4%, respectively. In 2018, on a constant US$ basis, RevPAR at our comparable hotels increased 2.0% compared to 2017, representing the ninth consecutive year of positive RevPAR growth. Room rates improved 1.2% on a constant US$ basis and occupancy improved 60 basis points to 79.6%. Food and beverage revenues increased 3.5% for 2018 as comparable hotel food and beverage revenues increased 2.5%, driven by strong banquet and audio/visual sales. The comparable hotel other revenues growth of 8% was driven by an increase in resort and destination fees. For 2018, acquisition and disposition activity did not significantly affect year-over-year comparisons. The acquisition of three hotels in March 2018 largely was offset by the sale of eight hotels in 2017 and 2018 and resulted in an increase in total revenues on a net basis of $18 million, or 0.3%, in 2018 (see “Statement of Operations Results and Trends”).

Our San Francisco and Maui/Oahu markets were catalysts for the RevPAR improvement in 2018, with Comparable RevPAR increases of 8.7% and 5.7%, respectively. Increased demand in both markets from strong city-wide group business allowed the managers to strengthen transient rate. Our Miami properties led the portfolio in 2018 with a 9.1% increase in RevPAR as 2017 results were impacted by Hurricane Irma. RevPAR at our Chicago properties increased 2.7%, as an increase in average rate was partially offset by a decline in occupancy. Our San Diego market was in line with the portfolio average, with a RevPAR increase of 2.2%, as a strong increase in the fourth quarter of 11.7% offset a slight RevPAR decline through the first three quarters of the year. An increase in group business at our Boston properties, partially offset by a slight decline in transient room nights, led to a 1.1% increase in RevPAR in 2018. Our Washington, D.C. (Central Business District “CBD”) and Atlanta properties experienced declines of 6.5% and 3.9%, respectively, reflecting decreases in group business in both markets. Our New York properties also lagged the portfolio with a 0.9% increase, as improvements due to the growth in city-wide demand were constrained due to increases in supply.

On a constant US$ basis, RevPAR for our comparable consolidated international hotels increased 11.2% in 2018, led by a 14.1% increase in RevPAR at our properties in Canada. RevPAR at our properties in Brazil increased 3.8%, reflecting an increase in transient room nights and group rate.

Operating Profit

Operating profit margins (calculated based on GAAP operating profit as a percentage of GAAP revenues) decreased 290 basis points for 2018. This decline was due to $260 million of impairment expense recorded on four hotels during the year compared to $43 million recorded in 2017. Operating profit margins under GAAP also are affected significantly by several items, including dispositions, depreciation, and corporate expenses. Our comparable hotel EBITDA margins, which exclude these items, increased 60 basis points to 28.8%. The improvement in comparable hotel EBITDA margins was driven by strong food and beverage profitability,

continued improvements in operating efficiencies and higher ancillary revenues, partially offset by rooms department wage and benefit growth.

Net Income, Adjusted EBITDAre and Adjusted FFO per Diluted Share

Net income for Host Inc. increased $580 million in 2018 to $1,151 million due primarily to a $794 million increase in gains on dispositions, partially offset by an increase of $217 of impairment expense in 2018. Adjusted EBITDAre, which excludes, among other items, gain on sale of assets and impairment expense, increased $52 million to $1,562 million, reflecting improvements in operations. These results led to an increase in diluted earnings per common share for Host Inc. of 93.4% to $1.47. Adjusted FFO per Diluted Share, which excludes gain on dispositions and other real estate transactions, including depreciation and impairment, increased $0.08, or 4.7%, in 2018.

The trends and transactions described above for Host Inc. affected Host L.P., as the only significant difference between the Host Inc. and Host L.P. statements of operations relates to the treatment of income attributable to the unaffiliated limited partners of Host L.P.

2019 Outlook

While economic activity remains strong heading into 2019, downside risks have increased in recent months. Consensus estimates anticipate real GDP growth of 2.5%, implying growth above the long-term trend, albeit at a slight deceleration from 2018 growth of 2.9%. Similarly, business investment is anticipated to continue increasing above the long-term trend rate, with some deceleration from last year. These economic indicators, coupled with strong consumer confidence and a robust labor market, have the potential to buoy the corporate and leisure transient travel segments. However, recent stock market volatility, an anticipated deceleration in corporate profit growth in the U.S., and fears of an international economic slowdown could cause a downward shift in consumer and business confidence. Specifically, political and trade uncertainty, such as U.S./China trade disputes and Great Britain’s exit from the European Union could impact lodging demand.

At the same time, industry supply growth is expected to accelerate slightly in 2019. Current supply growth is above the long-term average, but below historical peak levels. Some of our markets, such as New York and Houston, have experienced above-average supply growth which has made it more challenging for our operators to grow average rates. Therefore, while we have noted positive economic indicators for overall lodging demand, supply growth and economic uncertainty are expected to constrain overall RevPAR growth for our portfolio.

The net result of these trends means that we anticipate that we will continue to experience high levels of occupancy in 2019; however, rate growth is expected to continue to be restricted. Additionally, disruption due to the Marriott International transformational capital projects discussed below is anticipated to reduce comparable hotel RevPAR by approximately 45 basis points in 2019 (in addition to disruptions at our non-comparable hotels). However, the estimated effect to earnings caused by these expenditures is offset by Marriott’s operating profit guarantees. As a result of these trends, we expect RevPAR growth for our comparable hotels on a constant dollar basis of between 0.0% and 2.0% for the full year 2019. Additionally, comparisons between our 2018 and 2019 results will be affected by changes in our portfolio due to acquisitions and dispositions.

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

Strategic Initiatives

Acquisitions. On March 29, 2018, we acquired the 301-room Andaz Maui at Wailea Resort, 668-room Grand Hyatt San Francisco, and 454-room Hyatt Regency Coconut Point Resort and Spa for $1 billion. The hotels are owned on a fee simple basis and will continue to be Hyatt-branded and managed by Hyatt pursuant to long-term management agreements.

On February 14, 2019, we acquired the 429-room 1 Hotel South Beach for $610 million. The resort is the centerpiece of a mixed-use complex that features an additional 155 luxury condominium units whose owners may participate in a rental program through the resort. The resort features over 600 linear feet of direct beach access, 160,000 square feet of meeting space, eight food and beverage outlets, spa, gym, four elevated pools with ocean views and 23,000 square feet of luxury retail space.

Dispositions. We completed the sale of five assets for proceeds of approximately $977 million, including the sale of the Westin New York Grand Central, subsequent to year end, for $302 million, including approximately $20 million of FF&E replacement funds that will be retained by us. We also completed the sale of the New York Marriott Marquis retail and theater commercial units and related signage areas of the hotel (the “Retail”) to Vornado Realty for a sale price of $442 million.

On December 21, 2018 we sold our 33% interest in the European joint venture (“Euro JV”) to our partners. The gross asset value of our interest was approximately €700 million ($800 million). After accounting for joint venture level debt, net proceeds were approximately €435 million ($496 million). We used a portion of the proceeds to repay our Euro denominated draw on the credit facility of approximately €207 million ($237 million). Following the sale of our interest in the Euro JV and the September 2018 sale of the JW Marriott Hotel Mexico City, we largely have exited international markets, as our remaining international hotels now represent approximately 1.5% of our revenues.

For 2019, we intend to continue our disciplined approach to capital allocation to strengthen our portfolio and deliver stockholder value through multiple levers. These levers may include, over time, acquiring assets, investing in our portfolio, buying back stock (depending on market conditions) or returning capital through a meaningful quarterly dividend. We intend to take advantage of our strong capital position and overall scale to acquire upper-upscale and luxury properties, through single asset or portfolio acquisitions, that we believe have sustainable competitive advantages to drive long-term value. At the same time, we will opportunistically sell hotels when market conditions permit, including the pursuit of exiting our remaining international markets to focus on our domestic portfolio. We also continue to critically analyze our portfolio to seek to take advantage of the inherent value of our real estate for its highest and best use.

Financing transactions. During the year, we had net repayments of $102 million under the revolver portion of our credit facility. We believe that our ability to maintain an investment grade balance sheet and well-laddered maturity schedule is an important factor in our investment strategy. At December 31, 2018, our weighted average interest rate is 4.4% and our weighted average debt maturity is 4.2 years. We have a debt balance of $3.8 billion and a balanced maturity schedule wherein not more than 22% of our outstanding debt, representing 4% of our U.S. GAAP gross asset value, is due in any given year. We have no debt maturities until 2020.

For a detailed discussion, see “—Liquidity and Capital Resources.” For a detailed discussion of our significant debt activities, see “Note 5. Debt” in the Notes to Consolidated Financial Statements.

Capital Projects. We continue to pursue opportunities to enhance asset value through select capital improvements, including projects that are designed to increase the eco-efficiency of our hotels, incorporate elements of sustainable design and replace aging equipment and systems with more efficient technology. During 2018, we spent approximately $474 million on capital expenditures, of which $200 million represented return on investment (“ROI”) capital expenditures and $274 million represented renewal and replacement projects.

For 2019, we expect capital expenditures of $550 million to $625 million, which includes $225 million of brand reinvestment projects associated with the agreement with Marriott International discussed below. This total spend consists of $315 million to $350 million of ROI projects and $235 million to $275 million of renewal and replacement projects.

In collaboration with Marriott International, we initiated a transformational brand reinvestment plan in 2018 on 17 properties that is expected to occur over a four-year period. We believe these investments will make these assets more competitive in their respective markets and will enhance long-term performance through increases in RevPAR and market yield index. To accelerate this process, we agreed to invest amounts in excess of the FF&E reserves required under our management agreements, or approximately an average of $175 million per year, which amounts are included in the forecast range of 2019 expenditures reflected above. In exchange, Marriott has provided additional priority returns on the agreed upon investments and operating profit guarantees of $84 million over the four years to offset expected business disruption.

Dividends. During 2018, Host Inc.’s Board of Directors declared dividends of $0.85 per share with respect to Host Inc.’s common stock. Accordingly, Host L.P. made distributions of $0.8682699 per unit with respect to its common OP units for 2018. On February 19, 2019, the Board of Directors authorized a regular quarterly cash dividend of $0.20 per share on its common stock. The dividend will be paid on April 15, 2019, to stockholders of record on March 29, 2019. The amount of any future dividend will be determined by Host Inc.’s Board of Directors.

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

Results of Operations

The following table reflects certain line items from our audited consolidated statements of operations for the three years ended December 31, 2018 (in millions, except percentages):

					Change					Change
	2018		2017		2017 to 2018			2016		2016 to 2017
Total revenues	$	5,524	$	5,387		2.5	%	$	5,430		(0.8	)%
Operating costs and expenses:
Property-level costs (1)		4,897		4,627		5.8			4,655		(0.6	)
Corporate and other expenses		104		98		6.1			106		(7.5	)
Gain on insurance and business interruption settlements		7		14		(50.0	)		15		(6.7	)
Operating profit		530		676		(21.6	)		684		(1.2	)
Interest expense		176		167		5.4			154		8.4
Gain on sale of assets		902		108		735.2			253		(57.3	)
Provision for income taxes		150		80		87.5			40		100.0

Host Inc.:
Net income attributable to non- controlling interests		64		7		814.3			9		(22.2	)
Net income attributable to Host Inc.		1,087		564		92.7			762		(26.0	)

Host L.P.:
Net income attributable to non- controlling interests		52		—	N/M				—	—
Net income attributable to Host L.P.		1,099		571		92.5			771		(25.9	)

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

N/M = Not Meaningful

Statement of Operations Results and Trends

For 2018 and 2017, the results of hotels acquired or sold during the comparable periods impacted year-over-year comparisons. Our operations were affected by the disposition of four hotels in 2018, four hotels in 2017 and ten hotels in 2016, as well as the sale of the New York Marriott Marquis Retail in 2018. These dispositions were offset by the acquisition of five hotels during this timeframe: Andaz Maui At Wailea Resort, Grand Hyatt San Francisco, and Hyatt Regency Coconut Point Resort and Spa acquired in March 2018, the W Hollywood acquired in March 2017, and The Don CeSar acquired in February 2017. The table below presents the net (reduction)/increase of revenues and earnings due to the results of hotels acquired or sold during the comparable periods, collectively the “Property Transactions” (in millions):

	2018			2017			Net (reduction)/increase 2017 to 2018			2016		Net (reduction)/increase 2016 to 2017
Total Revenues:
Acquisitions	$	272		$	90		$	182		$	—	$	90
Dispositions		84			248			(164	)		453		(205	)
Total Revenues	$	356		$	338		$	18		$	453	$	(115	)
Net income (excluding gain on sale):
Acquisitions	$	34		$	15		$	19		$	—	$	15
Dispositions		(19	)		(24	)		5			45	$	(69	)
Net income (excluding gain on sale)	$	15		$	(9	)	$	24		$	45	$	(54	)

The following table presents revenues in accordance with GAAP and includes both comparable and non-comparable hotels for the three years ended December 31, 2018 (in millions, except percentages):

					Change					Change
	2018		2017		2017 to 2018			2016		2016 to 2017
Revenues:
Rooms	$	3,547	$	3,490		1.6	%	$	3,492		(0.1	)%
Food and beverage		1,616		1,561		3.5			1,599		(2.4	)
Other		361		336		7.4			339		(0.9	)
Total revenues	$	5,524	$	5,387		2.5		$	5,430		(0.8	)

Rooms. Total rooms revenues increased $57 million, or 1.6%, in 2018 and decreased $2 million, or 0.1%, in 2017. This activity reflects an increase at our comparable hotels of $58 million, or 1.9%, in 2018, and $36 million, or 1.1%, in 2017, driven by increases in both occupancy and rate. This was offset by a decrease of $3 million, or 0.1%, in 2018 and $66 million, or 1.9%, in 2017 because of Property Transactions.

Food and beverage. Total F&B revenues increased $55 million, or 3.5%, in 2018, and decreased $38 million, or 2.4%, in 2017. For our comparable hotels, F&B revenues increased $33 million, or 2.5%, and decreased $13 million, or 0.9%, respectively, for 2018 and 2017, as banquet and audio/visual revenues increased 3.2% in 2018 and decreased 1.4% in 2017. Results in 2017 also were impacted negatively by Hurricanes Harvey and Irma. Year-over-year comparisons also reflect a net increase of $18 million, or 1.1%, for 2018 and a net decrease of $41 million, or 2.6%, for 2017 because of Property Transactions.

Other revenues. Total other revenues increased $25 million, or 7.4%, in 2018 and decreased $3 million, or 0.9%, in 2017. For our comparable hotels, other revenues increased $20 million, or 8.0%, in 2018, and $9 million, or 3.2%, in 2017, primarily driven by an increase in amenity fees and, for 2017, additional rental income from the New York Marriott Marquis retail space. The net effect of our Property Transactions increased other revenues $4 million, or 1.2%, in 2018 and decreased other revenues $9 million, or 2.6%, in 2017.

Property-level Operating Expenses

The following table presents consolidated property-level operating expenses in accordance with GAAP and includes both comparable and non-comparable hotels for the three years ended December 31, 2018 (in millions, except percentages):

					Change					Change
	2018		2017		2017 to 2018			2016		2016 to 2017
Expenses:
Rooms	$	918	$	899		2.1	%	$	893		0.7	%
Food and beverage		1,103		1,071		3.0			1,114		(3.9	)
Other departmental and support expenses		1,302		1,273		2.3			1,306		(2.5	)
Management fees		243		239		1.7			236		1.3
Other property-level expenses		387		394		(1.8	)		382		3.1
Depreciation and amortization		944		751		25.7			724		3.7
Total property-level operating expenses	$	4,897	$	4,627		5.8		$	4,655		(0.6	)

Our operating costs and expenses, which consist of both fixed and variable components, are affected by several factors. Rooms expense is affected mainly by occupancy, which drives costs related to items such as housekeeping, reservation systems, room supplies, laundry services and front desk costs. Food and beverage expense correlates closely with food and beverage revenue and is affected by occupancy and the mix of business between banquet and audio-visual and outlet sales. However, the most significant expense for room, food and beverage, and other departmental and support expenses is wages and employee benefits, which comprise approximately 57% of these expenses in any year. During 2018 and 2017, these expenses increased approximately 2% and 1%, respectively, in part due to ongoing impacts of general wage and labor costs increases. Other property-level expenses consist of property taxes, which are highly dependent on local taxing authorities, and property and general liability insurance, and do not necessarily change based on changes in revenues at our hotels.

Rooms. Rooms expense increased $19 million, or 2.1%, during 2018, reflecting the increase at our comparable properties of $18 million, or 2.4%, which was due to higher wages and benefits expenses. In 2017, rooms expense increased $6 million, or 0.7%, reflecting the increase at our comparable properties of $17 million, or 2.1%, because of overall growth in wage rates, partially offset by a net decrease of $17 million, or 1.9%, due to Property Transactions. The net effect of Property Transactions in 2018 was negligible.

Food and beverage. The increase in F&B expenses of $32 million, or 3.0%, in 2018 and the decrease of $43 million, or 3.9%, in 2017 reflect the year-over-year increase of $16 million, or 1.8%, and year-over-year decrease of $18 million, or 1.8%, in comparable F&B expenses in 2018 and 2017, respectively. The changes are consistent with the changes in F&B revenues in 2018 and 2017. Overall, F&B hourly productivity improved in both 2018 and 2017, resulting in declines in F&B costs as a percentage of revenues. The net effect of our Property Transactions increased F&B expenses by $14 million, or 1.3%, in 2018 and decreased F&B expenses by $28 million, or 2.5%, in 2017.

Other departmental and support expenses. Other departmental and support expenses increased $29 million, or 2.3%, and decreased $33 million, or 2.5%, in 2018 and 2017, respectively. On a comparable hotel basis, other departmental and support expenses increased $11 million, or 1%, and $3 million, or 0.3%, for 2018 and 2017, respectively. For 2018, the increase primarily reflects increases in general and administrative and sales and marketing costs, offset by decreases in information and technology expenses. The decrease in 2017 primarily reflects the impact of Property Transactions, as other departmental and support expenses for our comparable properties increased 0.3%. The net effect of our Property Transactions increased other departmental expenses by $10 million, or 0.8%, in 2018 and decreased them by $39 million or 3.0%, in 2017.

Management fees. Total management fees increased $4 million, or 1.7%, and $3 million, or 1.3%, for 2018 and 2017, respectively. At our comparable hotels, base management fees, which are calculated as a percentage of total revenues, increased $2 million, or 1.7%, in 2018 and decreased $1 million, or 0.5%, in 2017. Incentive management fees, generally which are based on the amount of operating profit at each property after we receive a priority return on our investment, increased $8 million, or 11.2%, in 2018 and $5 million, or 7.0%, in 2017 at our comparable hotels. The increase in incentive management fees at our comparable hotels reflects the improvements in hotel operations.

Other property-level expenses. These expenses generally do not vary significantly based on occupancy and include expenses such as property taxes and insurance. Other property-level expenses decreased $7 million, or 1.8%, in 2018, and increased $12 million, or 3.1%, in 2017. Other property-level expenses at our comparable hotels decreased $4 million, or 1.3%, and increased $11 million, or 3.2%, for 2018 and 2017, respectively. Other property-level expenses were reduced in 2018 by a one-time distribution related to the sale of Marriott’s centralized buying services, property tax rebates and guarantee payments under our reinvestment plan with Marriott. The increase in 2017 reflects an increase in property taxes and ground rent, partially offset by a decline in insurance expense.

Depreciation and amortization. Depreciation and amortization expense increased $193 million, or 25.7%, to $944 million in 2018 and increased $27 million, or 3.7%, to $751 million in 2017. The increase in 2018 is due to impairment expense of $260 million on four properties during the year, while the increase in 2017 is due to impairment expense of $43 million at one property.

Other Income and Expense

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

	Year ended December 31,
	2018		2017		2016
General and administrative costs		90		87		94
Non-cash stock-based compensation expense		14		11		12
Total	$	104	$	98	$	106

General and administrative costs primarily consist of wages and benefits, travel, corporate insurance, legal fees, audit fees, building rent and systems costs. In 2018, corporate and other expenses include costs associated with a significant transformation of our corporate information systems platform. These costs are expected to extend into 2019. The 2016 corporate and other expenses include approximately $10 million of severance costs paid to our prior chief executive officer.

Gain on insurance and business interruption settlements. In 2018, we received $7 million of business interruption insurance proceeds related to Hurricane Irma that occurred in the third quarter of 2017. For 2017, we received $13 million of business interruption insurance proceeds, which includes proceeds related to Hurricane Irma and proceeds related to the 2010 Deepwater Horizon oil spill for disruption at several of our Florida gulf coast properties. In 2016, we received $12 million of business

interruption insurance proceeds for the disruption of operations at the New Orleans Marriott caused by the 2010 Deepwater Horizon oil spill.

Interest expense. Interest expense increased $9 million, or 5.4%, in 2018 as compared to 2017, due to an increase in interest rates on our floating rate debt, and a full year of interest expense on the Series G Senior Notes issued in March 2017. Interest expense increased $13 million, or 8.4%, in 2017, due to the issuance of the Series G Senior Notes. The following table presents certain components of interest expense (in millions):

	Year ended December 31,
	2018		2017		2016
Cash interest expense(1)	$	169	$	159	$	147
Non-cash interest expense		7		7		7
Cash debt extinguishment costs(1)		—		1		—
Total interest expense	$	176	$	167	$	154

(1)	Total cash interest expense paid was $171 million, $158 million, and $144 million in 2018, 2017, and 2016, respectively, which includes an increase (decrease) due to the change in accrued interest of $2 million, $(2) million, and $(3) million for 2018, 2017, and 2016, respectively.

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

	Year ended December 31,
	2018			2017		2016
Euro JV	$	238		$	—	$	—
New York Marriott Marquis Retail		386			—		—
JW Marriott Hotel Mexico City		163			—		—
Key Bridge Marriott		119			—		—
JW Marriott Desert Springs Resort & Spa		—			14		—
Sheraton Memphis Downtown		—			27		—
Hilton Melbourne South Wharf		—			49		—
Sheraton Indianapolis Hotel at Keystone Crossing		—			9		—
San Diego Marriott Mission Valley		—			—		47
Manhattan Beach Marriott		—			—		48
Sheraton Santiago Hotel & Convention Center and San Cristobal Tower, Chile		—			—		19
Atlanta Marriott Perimeter Center		—			—		39
Seattle Airport Marriott		—			—		69
Four hotels in New Zealand		—			—		21
The Ritz-Carlton San Francisco (1)		—			—		4
Maui Timeshare land (2)		1			2		2
Chicago Marriott O'Hare commercial land		—			4		—
Other		(5	)		3		4
	$	902		$	108	$	253

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

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

Benefit (provision) for income taxes. We lease substantially all our properties to consolidated subsidiaries designated as TRS for federal income tax purposes. The difference between hotel-level operating cash flow and the aggregate rent paid to Host L.P. by the TRS represents taxable income or loss, on which we record an income tax provision or benefit. The tax provision in 2018 primarily reflects approximately $32 million of Mexico corporate income tax on the sale of the JW Marriott Hotel Mexico City and approximately $77 million of U.S. and state capital gain tax on the sale of our interest in the Euro JV and the sale of the New York Marriott Marquis Retail. Approximately 48% of the Mexican corporate income tax reflects amounts related to our minority partner and is offset in net income attributable to non-controlling interests. The 2018 tax provision on the profit from hotel operations was significantly less than in 2017 due to the U.S. corporate income tax rate reduction from 35% to 21% that was effective for 2018. The tax provision in 2017 primarily reflects $17 million of capital gain tax on the sale of our hotel in Australia, the reduction of certain deferred tax assets because of the Tax Cuts and Jobs Act passed in December 2017 in the amount of $11 million and an increase in domestic corporate income taxes resulting from increased profitability of hotel operations retained by the TRS.

Comparable Hotel Sales Overview

While management evaluates the performance of each individual hotel against its competitive set in a given market, we also evaluate our overall portfolio operating results by geographic location and by mix of business (i.e. transient, group or contract). As of December 31, 2018, 85 of our 93 owned hotels have been classified as comparable hotels. See “Comparable Hotel Operating Statistics” for a complete description of our comparable hotels.

2018 Compared to 2017

Comparable Hotel Sales by Location.

The following table sets forth performance information for our comparable hotels by location as of December 31, 2018 and 2017:

Comparable Hotels by Location in Constant US$(1)

	As of December 31, 2018				Year ended December 31, 2018							Year ended December 31, 2017
Location	No. of Properties		No. of Rooms		Average Room Rate		Average Occupancy Percentage			RevPAR		Average Room Rate		Average Occupancy Percentage			RevPAR		Percent Change in RevPAR
Maui/Oahu		3		1,682	$	361.68		90.3	%	$	326.71	$	340.98		90.7	%	$	309.15		5.7	%
Jacksonville		1		446		364.02		74.0			269.32		349.70		71.0			248.28		8.5
New York		4		5,033		295.09		87.7			258.87		288.79		88.8			256.52		0.9
Seattle		2		1,315		240.44		83.5			200.65		232.84		83.7			194.80		3.0
Washington, D.C. (CBD)		5		3,238		245.96		80.4			197.70		257.16		82.2			211.42		(6.5	)
Boston		4		3,185		236.41		81.6			192.99		234.25		81.5			190.88		1.1
San Diego		4		4,341		231.68		82.5			191.10		227.31		82.3			187.01		2.2
San Francisco/San Jose		5		2,353		229.16		82.6			189.38		221.03		78.8			174.22		8.7
Los Angeles		3		1,421		212.89		88.8			189.01		218.15		89.0			194.24		(2.7	)
Philadelphia		2		810		209.57		85.0			178.20		199.69		82.4			164.54		8.3
Florida Gulf Coast		2		593		245.73		71.9			176.76		233.20		74.5			173.67		1.8
Chicago		6		2,392		204.10		78.9			161.11		197.52		79.4			156.83		2.7
Phoenix		4		1,518		211.72		74.4			157.60		206.51		73.9			152.54		3.3
Orange County		4		1,429		188.11		79.6			149.79		188.85		79.2			149.51		0.2
New Orleans		1		1,333		181.73		80.1			145.64		175.51		77.0			135.13		7.8
Atlanta		5		1,936		185.91		77.9			144.75		195.60		77.0			150.69		(3.9	)
Northern Virginia		5		1,919		185.99		75.8			140.90		184.14		75.0			138.11		2.0
San Antonio		2		1,513		187.32		74.4			139.40		181.55		72.2			131.01		6.4
Orlando		1		2,004		184.98		70.4			130.17		179.30		70.1			125.62		3.6
Miami		2		843		160.37		80.4			128.90		157.48		75.0			118.14		9.1
Houston		4		1,716		176.25		72.3			127.50		178.11		72.1			128.50		(0.8	)
Denver		3		1,340		166.34		75.1			124.93		164.30		75.0			123.19		1.4
Other		8		3,596		168.08		73.9			124.26		166.34		72.8			121.10		2.6
Domestic		80		45,956		225.20		80.0			180.19		222.39		79.6			176.95		1.8

International		5		1,499		158.60		66.2			105.06		154.85		61.0			94.45		11.2
All Locations - Constant US$		85		47,455		223.45		79.6			177.82		220.74		79.0			174.35		2.0

Comparable Hotels in Nominal US$
	As of December 31, 2018				Year ended December 31, 2018							Year ended December 31, 2017
	No. of Properties		No. of Rooms		Average Room Rate		Average Occupancy Percentage			RevPAR		Average Room Rate		Average Occupancy Percentage			RevPAR		Percent Change in RevPAR
International		5		1,499	$	158.60		66.2	%	$	105.06	$	161.46		61.0	%	$	98.48		6.7	%
Domestic		80		45,956		225.20		80.0			180.19		222.39		79.6			176.95		1.8
All Locations		85		47,455		223.45		79.6			177.82		220.90		79.0			174.47		1.9

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

Hotel Sales by Business Mix.

The majority of our customers fall into three broad categories: transient, group and contract business. The information below is derived from business mix results from 85 comparable hotels for which 2018 and 2017 business mix information is available. In 2018, overall revenue growth for our comparable hotels was driven by increases in transient, group and contract revenue of 1.2%, 1.7% and 11.8%, respectively. The increase in group revenue was driven by a 0.6% increase in room nights sold and a 1.1% increase in group average rate. Contract business average rate increased 4.0% and room nights sold increased 7.5%, reflecting additional airline contracts. While contract revenues only represent 6% of our revenues, we continue to work with operators to secure airline contracts at hotels or in markets where new supply or demand concerns warrant negotiating multi-year airline contracts. Transient revenues increased 1.2% compared to the prior year, primarily due to a 1.1% increase in transient average rate, benefiting from a positive mix shift to higher-rated business.

2017 Compared to 2016

Comparable Hotel Sales by Location.

As of December 31, 2017, 87 of our 94 owned hotels were classified as comparable hotels. See “Comparable Hotel Operating Statistics” for a complete description of 87 comparable hotels. The following table sets forth performance information for our comparable hotels by geographic location as of December 31, 2017 and 2016:

Comparable Hotels by Location in Constant US$(1)

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

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

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

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

Hotel Sales by Business Mix.

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

Liquidity and Capital Resources

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

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

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

We have structured our debt profile to maintain a balanced maturity schedule and to minimize the number of assets that are encumbered by mortgage debt. Currently, none of our consolidated hotels are encumbered by mortgage debt. We have access to multiple types of financing as substantially all our debt consists of senior notes and borrowings under our credit facility, none of which are collateralized by specific hotels. We believe that we have sufficient liquidity and access to capital markets in order to take advantage of opportunistic acquisitions and investments to enhance our portfolio, withstand declines in operating cash flow, pay near-term debt maturities and fund our capital expenditures programs. We may continue to access capital markets if favorable conditions exist to enhance our liquidity and to fund cash needs.

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

Capital Resources. As of December 31, 2018, we had $1,542 million of cash and cash equivalents, $213 million in our FF&E escrow reserve and $945 million of available capacity remaining under the revolver portion of the credit facility. We depend primarily on external sources of capital to finance future growth, including acquisitions. As a result, the liquidity and debt capacity provided by our credit facility and the ability to issue senior unsecured debt are key components of our capital structure. Our financial flexibility (including our ability to incur debt, make distributions and make investments) is contingent on our ability to maintain compliance with the financial covenants of such indebtedness, which include, among other things, the allowable amounts of leverage, interest coverage and fixed charges.

If, at any time, we determine that market conditions are favorable, after considering our liquidity requirements, we may cause Host L.P. to issue senior notes or debentures exchangeable for shares of Host Inc. common stock. Given the total amount of our debt and our maturity schedule, we will continue to redeem or refinance senior notes from time to time, taking advantage of favorable market conditions. In February 2019, Host Inc.’s Board of Directors authorized repurchases of up to $250 million of senior notes other than in accordance with their respective terms, of which the entire amount remains available under this authority. We may purchase senior notes for cash through open market purchases, privately negotiated transactions, a tender offer or, in some cases, through the early redemption of such securities pursuant to their terms. Repurchases of debt will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. Any refinancing or retirement before the maturity date will affect earnings and NAREIT FFO per diluted share because of the payment of any applicable call premiums and the accelerated expensing of previously deferred financing costs. In addition, while we intend to use any available cash predominantly for acquisitions or other investments in our hotel portfolio, to the extent that we do not identify appropriate investments, we may elect in the future to use available cash for other purposes, including share repurchases, subject to market conditions. Accordingly, considering our priorities in managing our capital structure and liquidity profile and given prevailing conditions and relative pricing in the capital markets, we may, at any time, subject to applicable securities laws, be considering, or be in discussions with respect to, the repurchase or issuance of exchangeable debentures and/or senior notes or the repurchase or sale of common stock. Any such transactions may, subject to applicable securities laws, occur simultaneously.

To have the flexibility to engage in repurchases and/or sales of common stock, depending upon prevailing market conditions, the following programs currently are in place. On May 25, 2018, we entered into a distribution agreement with J.P. Morgan Securities LLC, BNY Mellon Capital Markets, LLC, Deutsche Bank Securities Inc., Goldman Sachs & Co. LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Morgan Stanley & Co. LLC, as sales agents, through which we may issue and sell, from time to time, shares of common stock having a combined aggregate offering price of up to $500 million. The sales will be made in “at the market” offerings under SEC rules, including sales made directly on the NYSE. We may sell shares of common stock under this program from time to time based on market conditions, although we are not under an obligation to sell any shares. No shares were sold during 2018. Additionally, in February 2017, Host Inc.’s Board of Directors authorized a program to repurchase up to $500 million of Host Inc. common stock. The common stock may be purchased from time to time depending upon market conditions and may be purchased in the open market or through private transactions or by other means, including principal transactions with various financial institutions, like accelerated share repurchases, forwards, options, and similar transactions and through one or more trading plans designed to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. The plan does not obligate us to repurchase any specific number or any specific dollar amount of shares and may be suspended at any time at our discretion. We have not repurchased any shares under this program.

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

Sources and Uses of Cash. In 2018, our primary sources of cash included cash from operations and proceeds from asset sales. Our primary uses of cash during the year consisted of acquisitions, capital expenditures, operating costs, and distributions to equity holders. We anticipate that our sources and uses of cash will be similar during 2019.

Cash Provided by Operations. Our cash provided by operations for 2018 increased $70 million to $1,300 million compared to 2017 due primarily to the improvement in operations, partially offset by an increase in taxes paid.

Cash Provided by/Used in Investing Activities. Approximately $100 million of cash was provided by investing activities during 2018 compared to $267 million used in 2017. In addition to the acquisition and disposition activity detailed in the charts below, we spent approximately $474 million on capital expenditures, compared to $277 million in 2017. This includes certain internal costs and

interest expense associated with our capital expenditures projects that have been capitalized in accordance with GAAP. These capitalized costs were $11 million, $8 million and $10 million for 2018, 2017, and 2016, respectively.

The following tables summarize significant acquisitions, dispositions and return of investments in affiliates from January 1, 2017 through February 21, 2019 (in millions):

Transaction Date		Description of Transaction	Investment(1)
Acquisitions
February	2019	Acquisition of 1 Hotel South Beach	$	(610	)
March	2018	Acquisition of Portfolio of 3 Hyatt Hotels(1)		(1,000	)
December	2017	Investment in Euro JV - Acquisition of Hilton Amsterdam Airport Schiphol		(27	)
March	2017	Acquisition of the Miami Marriott Biscayne Bay ground lease		(38	)
March	2017	Acquisition of the W Hollywood		(219	)
February	2017	Acquisition of The Don CeSar and Beach House Suites complex		(214	)
		Total acquisitions	$	(2,108	)
___________

(1)	Effective January 1, 2018, we adopted Accounting Standards Update No. 2018-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. As a result, the Hyatt portfolio acquisition was considered an asset acquisition and we capitalized $17 million of acquisition costs, which are not included in the above chart. Acquisition costs for transactions in prior years were expensed.

Transaction Date		Description of Transaction	Net Proceeds (1)		Sales Price
Dispositions/Return of Investments in Affiliates
January	2019	Disposition of The Westin New York Grand Central	$	276	$	302
December	2018	Disposition of our approximate 33% interest in the Euro JV (2)		496		496
September	2018	Disposition of JW Marriott Hotel Mexico City (3)		180		183
September	2018	Disposition of New York Marriott Marquis Retail		429		442
September	2018	Disposition of W New York Union Square		159		171
May	2018	Disposition of W New York on Lexington Avenue		181		190
January	2018	Disposition of Key Bridge Marriott		181		190
December	2017	Distribution from Euro JV		9	N/A
September	2017	Disposition of Sheraton Indianapolis at Keystone Crossing		64		66
July	2017	Disposition of Hilton Melbourne South Wharf (4)		182		184
April	2017	Disposition of Sheraton Memphis Downtown		66		67
January	2017	Disposition of JW Marriott Desert Springs Resort & Spa		160		172
		Total	$	2,383

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

(2)	Represents our portion of the gross asset value of the Euro JV of approximately €700 million ($800 million), net of debt, before payment of taxes.

(3)	In January 2019, we paid $66 million to the non-controlling partner of the JW Marriott Hotel Mexico City, representing its share of proceeds from the partnership, net of taxes.

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

Cash Used in Financing Activities. Net cash used in financing activities was $748 million for 2018, as compared to $402 million in 2017. Cash used in financing activities in 2018 primarily consisted of repayments on our credit facility and dividend payments, while 2017 also included the repayment of mortgage debt. In 2017, cash provided by financing activities included issuance of the Series G senior notes.

The following table summarizes significant issuances, net of deferred financing costs and issuance discounts, that have been completed from January 1, 2017 through February 21, 2019 (in millions):

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

The following table presents significant debt repayments, including prepayment premiums, that have been completed from January 1, 2017 through February 21, 2019 (in millions):

			Transaction
Transaction Date		Description of Transaction	Amount
Debt Repayments
January - December	2018	Net repayment on the revolver portion of credit facility	$	(102	)
January - December	2017	Net repayment on the revolver portion of credit facility		(55	)
July	2017	Repayment of A$86 million mortgage loan on Hilton Melbourne South Wharf		(69	)
		Total cash repayments	$	(226	)

Equity/Capital Transactions. The following table summarizes significant equity transactions that have been completed from January 1, 2017 through February 21, 2019 (in millions):

			Transaction
Transaction Date		Description of Transaction	Amount
Equity of Host Inc.
January	2019	Dividend payment (1)(2)	$	(185	)
January - December	2018	Dividend payment (2)		(629	)
January - December	2017	Dividend payments (2)		(628	)
		Cash payments on equity transactions	$	(1,442	)

(1)	Our dividend payment for the fourth quarter of 2018 was made in January 2019, but was accrued at December 31, 2018.

(2)	In connection with the dividends, Host L.P. made distributions of $187 million in 2019, $636 million in 2018 and $635 million in 2017 to its common unit holders.

Financial Condition

As of December 31, 2018, our total debt was approximately $3.8 billion, of which 73% carried a fixed rate of interest. Total debt was comprised of the following (in millions):

	As of December 31,
	2018		2017
Series Z senior notes, with a rate of 6% due October 2021	$	299	$	298
Series B senior notes, with a rate of 5¼% due March 2022		348		348
Series C senior notes, with a rate of 4¾% due March 2023		447		447
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		497		496
Series F senior notes, with a rate of 4½% due February 2026		397		396
Series G senior notes, with a rate of 3⅞% due April 2024		396		395
Total senior notes		2,782		2,778
Credit facility revolver		51		174
2017 Credit facility term loan due May 2021		499		498
2015 Credit facility term loan due September 2020		499		498
Other debt, with an average interest rate of 8.8% at both December 31, 2018 and 2017, maturing through February 2024		6		6
Total debt	$	3,837	$	3,954

Aggregate debt maturities at December 31, 2018 are as follows (in millions):

	Senior notes
	and			Mortgage debt
	credit facility			and other		Total
2019	$	—		$	—	$	—
2020		500			—		500
2021		855			—		855
2022		350			—		350
2023		850			—		850
Thereafter		1,300			5		1,305
		3,855			5		3,860
Deferred financing costs		(21	)		—		(21	)
Unamortized (discounts) premiums, net		(3	)		—		(3	)
Capital lease obligations		—			1		1
	$	3,831		$	6	$	3,837

Senior Notes. The following summary is a description of the material provisions of the indentures governing the various senior notes issued by Host L.P., to which we refer collectively as the senior notes indenture. We pay interest on each series of our outstanding senior notes semi-annually in arrears at the respective annual rates indicated on the table above. Under the terms of our senior notes indenture, our senior notes are equal in right of payment with all of Host L.P.’s unsubordinated indebtedness and senior to all subordinated obligations of Host L.P.

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

Senior Notes Indenture Covenants

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

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

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

We are in compliance with all of the financial covenants applicable to our Series D, E, F and G senior notes. The following table summarizes the financial tests contained in the senior notes indenture for our Series D, E, F and G senior notes and our actual credit ratios as of December 31, 2018:

			Covenant Requirement
Unencumbered assets tests	542	%	Minimum ratio of 150%
Total indebtedness to total assets	18	%	Maximum ratio of 65%
Secured indebtedness to total assets	0	%	Maximum ratio of 40%
EBITDA-to-interest coverage ratio	9.4	x	Minimum ratio of 1.5x

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

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

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

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

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

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

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

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

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

The following summarizes the actual credit ratios for our senior notes (other than the Series D, E, F and G senior notes) as of December 31, 2018 and the covenant requirements contained in the senior notes indenture that would be applicable at such times as our senior notes no longer are rated investment grade by either of Moody’s or Standard & Poor’s. Even if we were to lose the investment grade rating, we would be in compliance with all of our financial covenants under the senior notes indenture:

			Covenant Requirement
Unencumbered assets tests	541	%	Minimum ratio of 125%
Total indebtedness to total assets	19	%	Maximum ratio of 65%
Secured indebtedness to total assets	0	%	Maximum ratio of 45%
EBITDA-to-interest coverage ratio	9.4	x	Minimum ratio of 2.0x

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

Credit Facility. On May 31, 2017 we entered into the fourth amended and restated senior revolving credit and term loan facility with Bank of America, N.A. as administrative agent, JPMorgan Chase Bank, N.A. as syndication agent, and certain other agents and lenders. The credit facility allows for revolving borrowings in an aggregate principal amount of up to $1 billion. The revolver also includes a foreign currency subfacility for Canadian dollars, Australian dollars, Euros, British pound sterling and, if available to the lenders, Mexican pesos of up to the foreign currency equivalent of $500 million, subject to a lower amount in the case of Mexican pesos borrowings. The credit facility also provides for the existing term loan facility of $1 billion (which is fully utilized), a subfacility of up to $100 million for swingline borrowings in U.S. dollars, Canadian dollars, Euros or British pounds sterling and a subfacility of up to $100 million for issuances of letters of credit. Host L.P. also has the option to increase the aggregate principal amount of the revolving credit facility and/or term loan facility of the credit facility by up to $500 million, subject to obtaining additional loan commitments and the satisfaction of certain conditions.

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

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

Guarantees. The credit facility requires all Host L.P. subsidiaries which guaranty Host L.P. debt to similarly guarantee obligations under the credit facility but otherwise removed the requirement under the prior agreement that guarantees and pledges are required in the event that Host L.P.’s leverage ratio exceeds 6.0x for two consecutive fiscal quarters at a time when Host L.P. does not have an investment grade long-term unsecured debt rating.

Prepayments. Voluntary prepayments of revolver borrowings and term loans under the credit facility are permitted in whole or in part without premium or penalty. The loans under the credit facility are required to be prepaid in the event that asset sales reduce adjusted total assets (using undepreciated real estate book values) to below $10 billion if we do not reinvest the proceeds of those asset sales in new properties. At December 31, 2018, we have adjusted total assets, as defined in our credit facility, of $21 billion.

Financial Covenants. The credit facility contains covenants concerning allowable leverage, fixed charge coverage and unsecured interest coverage. We are permitted to make borrowings and maintain amounts outstanding under the credit facility so long as our leverage ratio is not in excess of 7.25x, our unsecured coverage ratio is not less than 1.75x and our fixed charge coverage ratio is not less than 1.25x. The financial covenants for the credit facility do not apply when there are no borrowings under the credit facility. Thus, so long as there are no amounts outstanding thereunder and the term loans are repaid, we would not be in default if we do not satisfy the financial covenants and we do not lose the potential to draw under the revolver portion of the credit facility in the future if we were ever to regain compliance with the financial covenants. These calculations are performed based on pro forma results for the prior four fiscal quarters, giving effect to transactions such as acquisitions, dispositions and financings as if they had occurred at the beginning of the period. Under the terms of the credit facility, interest expense excludes items such as the gains and losses on the extinguishment of debt, deferred financing charges related to the senior notes or the credit facility, amortization of debt premiums or discounts that were recorded at issuance of a loan in order to establish its fair value and non-cash interest expense, all of which are included in interest expense on our consolidated statements of operations. Additionally, total debt used in the calculation of our leverage ratio is based on a “net debt” concept, pursuant to which cash and cash equivalents in excess of $100 million are deducted from our total debt balance.

We are in compliance with all of our financial covenants under the credit facility. The following table summarizes the financial tests contained in the credit facility as of December 31, 2018:

			Covenant Requirement for all years
Leverage ratio	1.6	x	Maximum ratio of 7.25x
Fixed charge coverage ratio	6.3	x	Minimum ratio of 1.25x
Unsecured interest coverage ratio (1)	9.9	x	Minimum ratio of 1.75x
___________

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

Interest and Fees. We pay interest on revolver borrowings under the credit facility at floating rates equal to LIBOR plus a margin. The margin ranges from 82.5 to 155 basis points (depending on Host L.P.’s unsecured long-term debt rating). We also pay a facility fee ranging from 12.5 to 30 basis points, depending on our rating and regardless of usage. Based on Host L.P.’s unsecured long-term debt rating as of December 31, 2018, we are able to borrow at a rate of LIBOR plus 100 basis points and pay a facility fee of 20 basis points. Interest on the term loans consists of floating rates equal to LIBOR plus a margin ranging from 90 to 175 basis points (depending on Host L.P.’s unsecured long-term debt rating). Based on Host L.P.’s long-term debt rating as of December 31, 2018, our applicable margin on LIBOR loans under both term loans is 110 basis points. Borrowings under our revolver and the $1 billion outstanding in term loans constitute our primary obligations denominated in LIBOR. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear whether LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. There currently is no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As such, the potential effect of any such event on our cost of capital cannot yet be determined. Our credit facility provides that in the event LIBOR no longer is published a comparable successor rate will be determined by Bank of America, N.A., as administrative agent.

Other Covenants and Events of Default. The credit facility contains restrictive covenants on customary matters. Certain covenants are less restrictive at any time that our leverage ratio is below 6.0x, as currently is the case. At any time that our leverage ratio is below 6.0x, we will not be subject to limitations on capital expenditures, and the limitations on acquisitions, investments, dividends and distributions contained in the credit facility will be superseded by the generally less restrictive corresponding covenants in our senior notes indenture to the extent applicable, while our senior notes maintain an investment grade rating. Additionally, the credit facility’s restrictions on incurrence of debt and the payment of dividends and distributions generally are consistent with our senior notes indenture. These provisions, under certain circumstances, limit debt incurrence to debt incurred under the credit facility or in connection with a refinancing, and limit dividend payments to those necessary to maintain Host Inc.’s tax status as a REIT.

The credit facility also includes usual and customary events of default for facilities of this nature, and provides that, upon the occurrence and continuance of an event of default, payment of all amounts due under the credit facility may be accelerated and the lenders’ commitments may be terminated. In addition, upon the occurrence of certain insolvency or bankruptcy related events of default, all amounts due under the credit facility automatically will become due and payable and the lenders’ commitments automatically will terminate.

Mortgage Debt of Unconsolidated Partner Interests. We own non-controlling interests in partnerships and joint ventures that are not consolidated and that are accounted for under the equity method. The portion of the mortgage and other debt of these partnerships and joint ventures attributable to us, based on our ownership percentage thereof, was $150 million at December 31, 2018. The debt of our unconsolidated joint ventures is non-recourse to us. See “—Off-Balance Sheet Arrangements and Contractual Obligations.”

Distribution/Dividend. Host Inc.’s policy on common dividends generally is to distribute, over time, at least 100% of its taxable income, which primarily is dependent on our results of operations, as well as gains and losses on property sales. However, for 2018, we elected to pay U.S. and applicable state capital gain tax of approximately $77 million on certain sale proceeds rather than distribute the capital gain to our stockholders. Host Inc. paid a regular quarterly cash dividend of $0.20 per share and a special cash dividend of $0.05 per share on its common stock on January 15, 2019 to stockholders of record as of December 31, 2018. The $0.20 per share dividend represents Host Inc.’s intended regular quarterly cash dividend for the next several quarters, subject to Board approval. While Host Inc. intends to use available cash predominantly for acquisitions or other investments in its portfolio, to the extent that we do not identify appropriate investments, we may elect in the future, subject to market conditions, to use available cash for other purposes, such as common stock repurchases or increased dividends, which dividends could be in excess of taxable income. Any special dividend will be subject to approval by Host Inc.’s Board of Directors.

Funds used by Host Inc. to pay dividends are provided through distributions from Host L.P. As of December 31, 2018, Host Inc. is the owner of approximately 99% of Host L.P.’s common OP units. The remaining common OP units are owned by various unaffiliated limited partners. Each OP unit may be offered for redemption by the holders for cash or, at the election of Host Inc., Host Inc. common stock based on the then current conversion ratio. The current conversion ratio is 1.021494 shares of Host Inc. common stock for each OP unit.

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

Counterparty Credit Risk. We are subject to counterparty credit risk, which relates to the ability of counterparties to meet their contractual payment obligations or the potential non-performance of counterparties to deliver contracted commodities or services at the contracted price. We assess the ability of our counterparties to fulfill their obligations to determine the impact, if any, of

counterparty bankruptcy or insolvency on our financial condition. We are exposed to credit risk with respect to cash held at various financial institutions and access to our credit facility. Our credit exposure in each of these cases is limited, as the credit risk is spread among a diversified group of investment grade financial institutions.

Off-Balance Sheet Arrangements and Contractual Obligations

Off-Balance Sheet Arrangements. We are party to various transactions, agreements or other contractual arrangements with unconsolidated entities (which we refer to as “off-balance sheet arrangements”), pursuant to which we have certain contingent liabilities and/or guarantees. Contingencies included on our balance sheet are discussed in Part II Item 8. “Financial Statements and Supplementary Data – Note 17. “Legal Proceedings, Guarantees and Contingencies.” As of December 31, 2018, we are party to the following material off-balance sheet arrangements:

Asia/Pacific Joint Venture. We have a 25% interest in the Asia/Pacific JV with RECO Hotels JV Private Limited, an affiliate of the Government of Singapore Investment Corporation Pte Ltd. The agreement may be terminated by either partner at any time, which would trigger the liquidation of the JV. Due to the ownership structure and the substantive participating rights of the non-Host limited partner, including approval over financing, acquisitions and dispositions, and annual operating and capital expenditures budgets, the Asia/Pacific JV is not consolidated in our financial statements. The commitment period for equity contributions to the Asia/Pacific JV has expired. Certain funding commitments remain, however, related to its existing investments in India.

As of December 31, 2018, the Asia/Pacific JV has invested approximately $106 million (of which our share is $27 million) in a separate joint venture in India with Accor S.A. and InterGlobe Enterprises Limited, in which it holds a 36% interest. This joint venture owns seven hotels in Delhi, Bangalore and Chennai, totaling approximately 1,720 rooms. The hotels are managed by AccorHotels under the Pullman, ibis and Novotel brands.

Maui Joint Venture. We own a 67% interest in a joint venture with an affiliate of HV Global Group, a subsidiary of Marriott Vacations Worldwide Corporation, that owns a 131-unit vacation ownership development in Maui, Hawaii adjacent to our Hyatt Regency Maui Resort & Spa (the “Maui JV”). Our ownership is a non-controlling interest because of the significant economic rights held by the unaffiliated member, which also is the managing member. Since 2012, we have contributed approximately $87 million to the Maui JV, which includes the contribution of land valued at $36 million. During 2017, the Maui JV repaid its outstanding construction loan, releasing us of our guarantees, and it began making distributions to its partners. During 2018, we received a distribution of $17 million from the Maui JV. During 2018, 2017 and 2016, the Maui JV recognized $42 million, $54 million and $55 million, respectively, of sales of timeshare units.

Hyatt Place Joint Venture. We own a 50% interest in a joint venture with White Lodging Services that owns the 255-room Hyatt Place Nashville Downtown in Tennessee. The joint venture has a $60 million mortgage loan that is non-recourse to us. Due to the significant participating rights of our partner, we do not consolidate the joint venture in our financial statements. During 2018, we received approximately $3 million of distributions from the joint venture as the hotel generated excess cash from operations.

Harbor Beach Joint Venture. We own a 49.9% interest in a joint venture with R/V-C Association that owns the 650-room Fort Lauderdale Marriott Harbor Beach Resort & Spa in Florida. The joint venture has approximately $150 million of mortgage debt that is non-recourse to us. Due to significant participating rights of our partner, we do not consolidate the joint venture in our financial statements. During 2018, we received approximately $8 million of distributions from the joint venture as the hotel generated excess cash from operations.

For additional discussion of each of our joint venture investments, see Part II Item 8. Financial Statements and Supplementary Data – Note 4. “Investments in Affiliates.”

Contractual Obligations. The table below summarizes our obligations for principal and estimated interest payments on our debt, future minimum lease payments on our operating and capital leases, projected capital expenditures and other long-term liabilities, each as of December 31, 2018 (in millions):

	Payments due by period
			Less than						More than
	Total		1 year		1 to 3 years		3 to 5 years		5 years
Long-term debt obligations (1)	$	4,557	$	166	$	1,647	$	1,366	$	1,378
Capital lease obligations		1		1		—		—		—
Operating lease obligations		1,519		46		87		77		1,309
Purchase obligations (2)		797		327		408		62		—
Other long-term liabilities reflected on the balance sheet (3)		17		3		7		—		7
Total	$	6,891	$	543	$	2,149	$	1,505	$	2,694
___________

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

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

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

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

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

Guarantees. We have entered into certain guarantees, which consist of commitments we have made to third parties for leases or debt, that are not recorded on our books due to various dispositions, spin-offs and contractual arrangements, but that we have agreed to pay in the event of certain circumstances, including default by an unrelated party. We consider the likelihood of any material payments under these guarantees to be remote. For a discussion of the largest guarantees (by dollar amount) see “Item 8. Financial Statements and Supplementary Data - Note 17. Legal Proceedings, Guarantees and Contingencies.”

Critical Accounting Policies

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

	•	Asset Acquisitions and Business Combinations; and

	•	Property and Equipment – Impairment testing.

Application of New Accounting Standards

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. The current standard requires adoption using a modified retrospective approach, with the option of restatement of the comparative periods presented in the year of adoption or applying the new standard only in the year of adoption with a cumulative-effect adjustment in the period of adoption. The primary impact of the new standard on us will be to the treatment of our 25 ground leases, which represent approximately 85% of our annual operating lease payments. We believe that application of this standard will result in a right of use asset and the related lease liability of between $500 million and $600 million for the ground leases, although changes in discount rates, ground lease terms or other variables may have a significant effect on the calculation of this recorded amount. We expect that the adoption of this standard will have minimal impact on our income statement. We expect to adopt the new standard on January 1, 2019 and use the effective date as our date of initial application. We also expect to elect all the new standard’s available transition practical expedients. Consequently, financial information will not be updated and disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.

We adopted ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business on January 1, 2018. 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. We anticipate that most of our future hotel purchases will be considered asset purchases as opposed to business combinations, although this determination will be made on a transaction-by-transaction basis. This standard was adopted on a prospective basis and, therefore, it did not affect the accounting for any of our previous acquisitions.

We adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), on January 1, 2018. 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 an entity expects in exchange. We also adopted ASU No. 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20), which provides further guidance on accounting for the derecognition and partial sales of a non-financial asset. This standard may allow for earlier gain recognition for certain sale transactions pursuant to which we have continuing involvement with the asset that was sold. We adopted these standards using a modified retrospective approach with a cumulative effect recognized in our equity balance on the date of adoption and no restatements of prior period amounts. When applying the new standard for the cumulative effect, we elected to apply the new standard only to contracts that were not considered completed as of the date of adoption.

Transition adjustment. Because of the adoption of this standard, total liabilities were reduced by $4.5 million, and total equity of Host Inc. stockholders and total Host L.P. partner capital increased by $4.5 million. This adjustment is related to a previously deferred gain on the sale of the Atlanta Marriott Marquis in 2013 that would have qualified for recognition under the new standard. Adoption did not effect our income statement for 2018.

Policy Disclosure. There has been no significant change to our method of revenue recognition for our primary operations; however, we have updated our accounting policy and disclosures for the revenue recognition standard.

Our Customers

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

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

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

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

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

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

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

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

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

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

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

Comparable Hotel Operating Statistics

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

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

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

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

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

We do not include an acquired hotel in our comparable hotel set until the operating results for that hotel have been included in our consolidated results for one full calendar year. For example, we acquired the 1 Hotel South Beach in February 2019. The hotel will not be included in our comparable hotel set until January 1, 2021. Hotels that we sell are excluded from the comparable hotel set once the transaction has closed. Similarly, hotels are excluded from our comparable hotel set from the date that they sustain substantial property damage or business interruption or commence a large-scale capital project. In each case, these hotels are returned to the comparable hotel set when the operations of the hotel have been included in our consolidated results for one full calendar year after completion of the repair of the property damage or cessation of the business interruption, or the completion of large-scale capital projects, as applicable.

Of the 93 hotels that we owned on December 31, 2018, 85 have been classified as comparable hotels. The operating results of the following hotels that we owned as of December 31, 2018 are excluded from comparable hotel results for these periods:

	•	The Phoenician (acquired in June 2015 and, beginning in second quarter 2016 and into 2017, business disruption due to extensive renovations, including all guestrooms and suites, a redesign of the lobby and public areas, renovation of pools, recreation areas and a restaurant and a re-configured spa and fitness center);

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

	•	W Hollywood (acquired in March 2017).

	•	Andaz Maui at Wailea Resort (acquired in March 2018);

	•	Grand Hyatt San Francisco (acquired in March 2018);

	•	Hyatt Regency Coconut Point Resort & Spa (acquired in March 2018);

	•	The Ritz-Carlton, Naples, removed in second quarter of 2018 (business disruption due to extensive renovations, including restoration of the façade that required closure of the hotel for over two months, coordinated with renovation and expansion of restaurant areas and renovation to the spa and ballrooms); and

	•	San Francisco Marriott Marquis, removed in third quarter of 2018 (business disruption due to renovations of guestrooms, ballrooms, meeting space, and extensive renovations of the main lobby).

The operating results of 8 hotels disposed of in 2018 and 2017 are not included in comparable hotel results for the periods presented herein. None of our hotels have been excluded from our comparable hotel results in 2018 due to Hurricanes Harvey or Irma. In 2019, the following hotels will be excluded from our comparable hotel results because they will be undergoing large-scale capital projects during the comparable periods reported: the San Francisco Marriott Marquis, the Costa Mesa Marriott, the Minneapolis Marriott City Center, the San Antonio Marriott Rivercenter and The Ritz-Carlton, Naples. We also will exclude The Westin New York Grand Central, which we sold in January, along with any hotels acquired or sold during 2019.

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

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

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

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

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

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

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

	•	W Hollywood (acquired March 2017).

Constant US$ and Nominal US$

Operating results denominated in foreign currencies are translated using the prevailing exchange rates on the date of the transaction, or monthly based on the weighted average exchange rate for the period. For comparative purposes, we also present the RevPAR results for 2017 assuming the results of our foreign operations were translated using the same exchange rates that were effective for the comparable periods in 2018, thereby eliminating the effect of currency fluctuation for the year-over-year comparisons. We believe this presentation is useful to investors as it provides clarity with respect to the growth in RevPAR in the local currency of the hotel consistent with the way we would evaluate our domestic portfolio. However, the effect of changes in foreign currency has been reflected in the actual results of net income, EBITDA, Adjusted EBITDAre, earnings per diluted share and Adjusted FFO per diluted share. Nominal US$ results include the effect of currency fluctuations consistent with our financial statement presentation.

Non-GAAP Financial Measures

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

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

Similarly, EBITDAre, Adjusted EBITDAre, NAREIT FFO and Adjusted FFO per diluted share include adjustments for the pro rata share of our equity investments and NAREIT FFO and Adjusted FFO include adjustments for non-controlling partners in consolidated partnerships. Our equity investments consist of interests ranging from 11% to 67% in seven domestic and international partnerships that own a total of 10 properties and a vacation ownership development. Due to the voting rights of the outside owners, we do not control and, therefore, do not consolidate these entities. The non-controlling partners in consolidated partnerships primarily consist of the approximate 1% interest in Host LP held by unaffiliated limited partners, an interest of 15% held by an unaffiliated limited partner in one hotel for which we do control the entity and, therefore, consolidate its operations, and an interest of 48% held by an unaffiliated limited partner for one hotel that we sold during the year. These pro rata results for NAREIT FFO and Adjusted FFO per diluted share, EBITDAre and Adjusted EBITDAre are calculated as set forth below. Readers should be cautioned that the pro rata results presented in these measures for consolidated partnerships (for NAREIT FFO and Adjusted FFO per diluted share) and equity investments may not accurately depict the legal and economic consequences of our investments in these entities. The following discussion defines these terms and presents why we believe they are useful measures of our performance.

EBITDA, EBITDAre and Adjusted EBITDAre

EBITDA

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

EBITDAre and Adjusted EBITDAre

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

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

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

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

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

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

The following table provides a reconciliation of EBITDA, EBITDAre, and Adjusted EBITDAre to net income, the financial measure calculated and presented in accordance with GAAP that we consider the most directly comparable:

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

(in millions)

	Year ended December 31,
	2018			2017
Net income (1)	$	1,151		$	571
Interest expense		176			167
Depreciation and amortization		684			708
Income taxes		150			80
EBITDA (1)		2,161			1,526
Gain on dispositions (2)		(903	)		(100	)
Non-cash impairment expense		260			43
Equity investment adjustments:
Equity in earnings of Euro JV (4)		(14	)		(18	)
Equity in earnings of affiliates other than Euro JV		(16	)		(12	)
Pro rata EBITDAre of Euro JV (4)		45			40
Pro rata EBITDAre of equity investments other than Euro JV		29			31
EBITDAre (1)		1,562			1,510
Adjustments to EBITDAre:
Acquisition costs (3)		—			1
Gain on property insurance settlement		—			(1	)
Adjusted EBITDAre (1)	$	1,562		$	1,510

(1)	Net Income, EBITDA, EBITDAre, Adjusted EBITDAre, NAREIT FFO and Adjusted FFO include a gain of $1 million and $2 million for the years ended December 31, 2018 and 2017, respectively, for the sale of the portion of land attributable to individual units sold by the Maui timeshare joint venture and a gain of $4 million for the year ended December 31, 2017 for the sale of excess land in Chicago.

(2)	Reflects the sale of the New York Marriott Marquis Retail and the European Joint Venture in 2018, and four hotels in each of 2018 and 2017.

(3)	Effective January 1, 2018, we adopted Accounting Standards Update No. 2018-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. As a result, the Hyatt portfolio acquisition was considered an asset acquisition and the related $17 million of acquisition costs were capitalized.

(4)	Represents our share of earnings from our Euro JV. Our approximate one-third non-controlling interest was sold on December 21, 2018.

FFO Measures

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

We believe that NAREIT FFO per diluted share is a useful supplemental measure of our operating performance and that the presentation of NAREIT FFO per diluted share, when combined with the primary GAAP presentation of earnings per share, provides beneficial information to investors. By excluding the effect of real estate depreciation, amortization, impairment expense and gains and losses from sales of real estate, all of which are based on historical cost accounting and which may be of lesser significance in evaluating current performance, we believe such measures can facilitate comparisons of operating performance between periods and with other REITs, even though NAREIT FFO per diluted share does not represent an amount that accrues directly to holders of our common stock. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. As noted by NAREIT in its April 2002 “White Paper on Funds From Operations,” since real estate values historically have risen or fallen with market conditions, many industry investors have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. For these reasons, NAREIT adopted the FFO metric in order to promote an industry-wide measure of REIT operating performance.

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

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

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

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

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

The following table provides a reconciliation of the differences between our non-GAAP financial measures, NAREIT FFO and Adjusted FFO (separately and on a per diluted share basis), and net income, the financial measure calculated and presented in accordance with GAAP that we consider most directly comparable:

Host Inc. Reconciliation of Net Income to

NAREIT and Adjusted Funds From Operations per Diluted Share

(in millions, except per share amount)

	Year ended December 31,
	2018			2017
Net income (1)	$	1,151		$	571
Less: Net income attributable to non-controlling interests		(64	)		(7	)
Net income attributable to Host Inc.		1,087			564
Adjustments:
Gain on dispositions (2)		(903	)		(100	)
Tax on dispositions		113			18
Gain on property insurance settlement		—			(1	)
Depreciation and amortization		680			704
Non-cash impairment expense		260			43
Equity investment adjustments:
Equity in earnings of affiliates		(30	)		(30	)
Pro rata FFO of equity investments		53			56
Consolidated partnership adjustments:
FFO adjustment for non-controlling partnerships		50			(4	)
FFO adjustments for non-controlling interests of Host L.P.		(2	)		(8	)
NAREIT FFO (1)		1,308			1,242
Adjustments to NAREIT FFO:
Acquisition costs (3)		—			1
Adjustment for Tax Reform (4)		—			6
Loss on debt extinguishment		—			1
Adjusted FFO (1)	$	1,308		$	1,250

For calculation on a per share basis (5):

Diluted weighted average shares outstanding - EPS, NAREIT FFO and Adjusted FFO		740.6			739.1
NAREIT FFO per diluted share	$	1.77		$	1.68
Adjusted FFO per diluted share	$	1.77		$	1.69

(1-3)	Refer to the corresponding footnote on the Reconciliation of Net Income to EBITDA, EBITDAre and Adjusted EBITDAre for Host Inc. and Host L.P.

(4)

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

(5)

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

Comparable Hotel Property Level Operating Results.

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

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

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

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

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

(in millions, except hotel statistics)

	Year ended December 31,
	2018			2017
Number of hotels		85			85
Number of rooms		47,455			47,455
Change in comparable hotel RevPAR -
Constant US$		2.0	%		—
Nominal US$		1.9	%		—
Operating profit margin (1)		9.6	%		12.5	%
Comparable hotel EBITDA margin (1)		28.8	%		28.2	%
Food and beverage profit margin (1)		31.7	%		31.4	%
Comparable hotel food and beverage profit margin (1)		32.9	%		32.4	%

Net income	$	1,151		$	571
Depreciation and amortization		944			751
Interest expense		176			167
Provision for income taxes		150			80
Gain on sale of property and corporate level income/expense		(843	)		(44	)
Non-comparable hotel results, net (2)		(222	)		(229	)
Comparable hotel EBITDA	$	1,356		$	1,296

	Year ended December 31, 2018											Year ended December 31, 2017
				Adjustments											Adjustments
	GAAP Results			Non-comparable hotel results, net(2)			Depreciation and corporate level items			Comparable Hotel Results		GAAP Results			Non-comparable hotel results, net(2)			Depreciation and corporate level items			Comparable Hotel Results
Revenues
Room	$	3,547		$	(467	)	$	—		$	3,080	$	3,490		$	(468	)	$	—		$	3,022
Food and beverage		1,616			(248	)		—			1,368		1,561			(226	)		—			1,335
Other		361			(95	)		—			266		336			(90	)		—			246
Total revenues		5,524			(810	)		—			4,714		5,387			(784	)		—			4,603
Expenses
Room		918			(130	)		—			788		899			(129	)		—			770
Food and beverage		1,103			(185	)		—			918		1,071			(169	)		—			902
Other		1,932			(280	)		—			1,652		1,906			(271	)		—			1,635
Depreciation and amortization		944			—			(944	)		—		751			—			(751	)		—
Corporate and other expenses		104			—			(104	)		—		98			—			(98	)		—
Gain on insurance and business interruption settlements		(7	)		7			—			—		(14	)		14			—			—
Total expenses		4,994			(588	)		(1,048	)		3,358		4,711			(555	)		(849	)		3,307
Operating Profit - Comparable Hotel EBITDA	$	530		$	(222	)	$	1,048		$	1,356	$	676		$	(229	)	$	849		$	1,296

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

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

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