Item 8. Financial Statements and Supplementary Data

165K characters. Original on sec.gov · Markdown

Item 8. Financial Statements and Supplementary Data

The following financial information is included on the pages indicated:

Host Hotels & Resorts, Inc. & Host Hotels & Resorts, L.P.

Page
Reports of Independent Registered Public Accounting Firm (Host Hotels & Resorts, Inc.)69
Report of Independent Registered Public Accounting Firm (Host Hotels & Resorts, L.P.)72
Financial Statements of Host Hotels & Resorts, Inc.:74
Consolidated Balance Sheets as of December 31, 2019 and 201874
Consolidated Statements of Operations for the Years Ended December 31, 2019, 2018 and 201775
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2019, 2018 and 201776
Consolidated Statements of Equity for the Years Ended December 31, 2019, 2018 and 201777
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 201778
Financial Statements of Host Hotels & Resorts, L.P.:80
Consolidated Balance Sheets as of December 31, 2019 and 201880
Consolidated Statements of Operations for the Years Ended December 31, 2019, 2018 and 201781
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2019, 2018 and 201782
Consolidated Statements of Capital for the Years Ended December 31, 2019, 2018 and 201783
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 201784
Notes to Consolidated Financial Statements (Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P.)86

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors Host Hotels & Resorts, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Host Hotels & Resorts, Inc. and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes and financial statement schedule III (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 25, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019, due to the adoption of Financial Accounting Standards Board’s Accounting Standard Codification (ASC) Topic 842, Leases.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) related to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosure to which they relate.

Evaluation of the fair value of land acquired in a real estate asset acquisition

As discussed in Notes 1 and 12 to the consolidated financial statements, the Company acquired the 1 Hotel South Beach for approximately $610 million during the year ended December 31, 2019. The hotel is a part of a mixed-use complex in Miami, Florida. The Company determined the acquisition to be an asset acquisition, and allocated the transaction price to the individual assets acquired based on their relative fair values as of the acquisition date.

We identified the evaluation of the fair value of land acquired in the real estate asset acquisition as a critical audit matter. Key assumptions included the share of land used by the hotel in the mixed-use complex, as well as the weighting of comparable market sales transactions. Because of the subjective auditor judgment involved, specialized skills and knowledge were required to evaluate the Company’s determination of the fair value of land acquired in the real estate asset acquisition.

The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s acquisition process, including controls over the determination of the fair value of land acquired. These included controls related to the identification of the population of comparable market sales transactions and weighting of such transactions as well as the evaluation of the share of the land used by the hotel in the mixed-use complex. We involved valuation professionals with specialized skills and knowledge who assisted in (1) independently obtaining third-party evidence of comparable market sales transactions from industry sources, including information about the transaction prices and features of the comparable market sales transactions; (2) evaluating the weighting of comparable market sales transactions based on the characteristics of such transactions; and (3) evaluating the share of the land used by the hotel in the mixed-use complex by considering the features of the property as well as evaluating the method used by the Company in comparison with industry practices.

Evaluation of indicators of potential hotel property impairment

As discussed in Notes 1 and 3 to the consolidated financial statements, property and equipment, less accumulated depreciation as of December 31, 2019, was $9,660 million, or 79% of total assets. The Company analyzes its portfolio of property and equipment, primarily comprised of hotel properties, when events or changes in circumstances occur that indicate the carrying value may not be recoverable.

We identified the evaluation of indicators of potential hotel property impairment as a critical audit matter. Key assumptions used by the Company include future cash flows of its hotel properties and the Company’s intent and ability to hold its hotel properties for a period that recovers their carrying value. A significant change to these assumptions could impact the Company’s determination of the recoverability of the carrying value of its hotel properties. The evaluation of these assumptions required a high degree of auditor judgment.

The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the impairment process, including controls over the identification and evaluation of events or changes in circumstances that indicate the carrying value of a hotel property may not be recoverable. We also tested certain internal controls related to the Company’s assessment of its intent and ability to hold its hotel properties for a period that recovers their carrying value. We compared the future cash flows used by the Company in its evaluation of indicators of potential hotel property impairment to historical hotel property results to evaluate the potential of a decrease in such cash flows that indicates the carrying value of a hotel property may not be recoverable. We examined documents to assess the Company’s plans to dispose of hotel properties. We inquired of the Company and obtained written representations regarding status of potential plans to dispose of hotel properties. We corroborated that information with others in the organization who are responsible for, and have authority over, disposition activities. We inspected listings of hotel properties for sale in order to identify information regarding potential sales of the Company’s hotel properties.

/s/ KPMG LLP

We have served as the Company’s auditor since 2002.

McLean, Virginia

February 25, 2020

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors Host Hotels & Resorts, Inc.:

Opinion on Internal Control Over Financial Reporting

We have audited Host Hotels & Resorts, Inc. and subsidiaries' (the “Company”) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes and financial statement schedule III (collectively, the “consolidated financial statements”), and our report dated February 25, 2020 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

McLean, Virginia

February 25, 2020

Report of Independent Regist****ered Public Accounting Firm

To the Partners of Host Hotels & Resorts, L.P. and Board of Directors of Host Hotels & Resorts, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Host Hotels & Resorts, L.P. and subsidiaries (the “Partnership”) as of December 31, 2019 and 2018, the related consolidated statements of operations , comprehensive income (loss), capital, and cash flows for each of the years in the three‑year period ended December 31, 2019, and the related notes and financial statement schedule III (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Partnership as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Partnership has changed its method of accounting for leases as of January 1, 2019, due to the adoption of Financial Accounting Standards Board’s Accounting Standard Codification (ASC) Topic 842, Leases.

Basis for Opinion

These consolidated financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) related to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Evaluation of the fair value of land acquired in a real estate asset acquisition

As discussed in Notes 1 and 12 to the consolidated financial statements, the Partnership acquired the 1 Hotel South Beach for approximately $610 million during the year ended December 31, 2019. The hotel is a part of a mixed-use complex in Miami, Florida. The Partnership determined the acquisition to be an asset acquisition, and allocated the transaction price to the individual assets acquired based on their relative fair values as of the acquisition date.

We identified the evaluation of the fair value of land acquired in the real estate asset acquisition as a critical audit matter. Key assumptions included the share of land used by the hotel in the mixed-use complex, as well as the weighting of comparable market sales transactions. Because of the subjective auditor judgment involved, specialized skills and knowledge were required to evaluate the Partnership’s determination of the fair value of land acquired in the real estate asset acquisition.

The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Partnership’s acquisition process, including controls over the determination of the fair value of land acquired. These included controls related to the identification of the population of comparable market sales transactions and weighting of such transactions as well as the evaluation of the share of the land used by the hotel in the mixed-use complex. We involved valuation professionals with specialized skills and knowledge who assisted in (1) independently obtaining third-party evidence of comparable market sales transactions from industry sources, including information about the transaction prices and features of the comparable market sales transactions; (2) evaluating the weighting of comparable market sales transactions based on the characteristics of such transactions; and (3) evaluating the share of the land used by the hotel in the mixed-use complex by considering the features of the property as well as evaluating the method used by the Partnership in comparison with industry practices.

Evaluation of indicators of potential hotel property impairment

As discussed in Notes 1 and 3 to the consolidated financial statements, property and equipment, less accumulated depreciation as of December 31, 2019, was $9,660 million, or 79% of total assets. The Partnership analyzes its portfolio of property and equipment, primarily comprised of hotel properties, when events or changes in circumstances occur that indicate the carrying value may not be recoverable.

We identified the evaluation of indicators of potential hotel property impairment as a critical audit matter. Key assumptions used by the Partnership include future cash flows of its hotel properties and the Partnership’s intent and ability to hold its hotel properties for a period that recovers their carrying value. A significant change to these assumptions could impact the Partnership’s determination of the recoverability of the carrying value of its hotel properties. The evaluation of these assumptions required a high degree of auditor judgment.

The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the impairment process, including controls over the identification and evaluation of events or changes in circumstances that indicate the carrying value of a hotel property may not be recoverable. We also tested certain internal controls related to the Partnership’s assessment of its intent and ability to hold its hotel properties for a period that recovers their carrying value. We compared the future cash flows used by the Partnership in its evaluation of indicators of potential hotel property impairment to historical hotel property results to evaluate the potential of a decrease in such cash flows that indicates the carrying value of a hotel property may not be recoverable. We examined documents to assess the Partnership’s plans to dispose of hotel properties. We inquired of the Partnership and obtained written representations regarding status of potential plans to dispose of hotel properties. We corroborated that information with others in the organization who are responsible for, and have authority over, disposition activities. We inspected listings of hotel properties for sale in order to identify information regarding potential sales of the Partnership’s hotel properties.

/s/ KPMG LLP

We have served as the Partnership’s auditor since 2002.

McLean, Virginia

February 25, 2020

HOST HOTELS & RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2019 and 2018

(in millions, except per share amounts)

December 31, 2019December 31, 2018
ASSETS
Property and equipment, net$9,671$9,760
Right-of-use assets595—
Assets held for sale—281
Due from managers6371
Advances to and investments in affiliates5648
Furniture, fixtures and equipment replacement fund176213
Other171175
Cash and cash equivalents1,5731,542
Total assets$12,305$12,090
LIABILITIES, NON-CONTROLLING INTERESTS AND EQUITY
Debt
Senior notes$2,776$2,782
Credit facility, including term loans of $997 and $998, respectively9891,049
Other debt296
Total debt3,7943,837
Lease liabilities606—
Accounts payable and accrued expenses263293
Other175266
Total liabilities4,8384,396
Redeemable non-controlling interests - Host Hotels & Resorts, L.P.142128
Host Hotels & Resorts, Inc. stockholders’ equity:
Common stock, par value $.01, 1,050 million shares authorized, 713.4 million shares and 740.4 million shares issued and outstanding, respectively77
Additional paid-in capital7,6758,156
Accumulated other comprehensive loss(56)(59)
Deficit(307)(610)
Total equity of Host Hotels & Resorts, Inc. stockholders7,3197,494
Non-redeemable non-controlling interests—other consolidated partnerships672
Total equity7,3257,566
Total liabilities, non-controlling interests and equity$12,305$12,090

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2019, 2018 and 2017

(in millions, except per common share amounts)

201920182017
REVENUES
Rooms$3,431$3,547$3,490
Food and beverage1,6471,6161,561
Other391361336
Total revenues5,4695,5245,387
EXPENSES
Rooms873918899
Food and beverage1,1201,1031,071
Other departmental and support expenses1,2951,3021,273
Management fees239243239
Other property-level expenses365387394
Depreciation and amortization676944751
Corporate and other expenses10710498
Gain on insurance and business interruption settlements(5)(7)(14)
Total operating costs and expenses4,6704,9944,711
OPERATING PROFIT799530676
Interest income32156
Interest expense(222)(176)(167)
Other gains/(losses)340902108
Loss on foreign currency transactions and derivatives(1)—(2)
Equity in earnings of affiliates143030
INCOME BEFORE INCOME TAXES9621,301651
Provision for income taxes(30)(150)(80)
NET INCOME9321,151571
Less: Net income attributable to non-controlling interests(12)(64)(7)
NET INCOME ATTRIBUTABLE TO HOST HOTELS & RESORTS, INC.$920$1,087$564
Basic earnings per common share$1.26$1.47$.76
Diluted earnings per common share$1.26$1.47$.76

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Years Ended December 31, 2019, 2018 and 2017

(in millions)

201920182017
NET INCOME$932$1,151$571
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates—(13)23
Change in fair value of derivative instruments(1)1(14)
Amounts reclassified from other comprehensive income41314
OTHER COMPREHENSIVE INCOME, NET OF TAX3123
COMPREHENSIVE INCOME9351,152594
Less: Comprehensive income attributable to non-controlling interests(12)(65)(8)
COMPREHENSIVE INCOME ATTRIBUTABLE TO HOST HOTELS & RESORTS, INC.$923$1,087$586

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

Years Ended December 31, 2019, 2018 and 2017

(in millions)

Common Shares OutstandingCommon StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income (Loss)Retained Earnings / (Deficit)Non-redeemable non-controlling Interests of Other Consolidated PartnershipsTotal EquityRedeemable non-controlling Interests of Host Hotels & Resorts, L.P.
737.8Balance, December 31, 2016$7$8,077$(83)$(1,007)$39$7,033$165
—Net income———564—5647
—Other changes in ownership—(8)——4(4)8
—Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates——23—124—
—Change in fair value of derivative instruments——(14)——(14)—
—Amounts reclassified from Other Comprehensive Income——14——14—
0.5Common stock issuances—9———9—
0.5Comprehensive stock and employee stock purchase plans—13———13—
—Common stock dividends———(628)—(628)—
0.3Redemptions of limited partner interests for common stock—6———6(6)
—Distributions to non-controlling interests————(15)(15)(7)
739.1Balance, December 31, 2017$7$8,097$(60)$(1,071)$29$7,002$167
—Net income———1,087521,13912
—Other changes in ownership—30——(9)21(29)
—Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates——(13)—1(12)—
—Change in fair value of derivative instruments——1——1—
—Amounts reclassified from Other Comprehensive Income——13——13—
0.2Common stock issuances—3———3—
0.4Comprehensive stock and employee stock purchase plans—11———11—
—Common stock dividends———(630)—(630)—
0.7Redemptions of limited partner interests for common stock—15———15(15)
—Distributions to non-controlling interests————(1)(1)(7)
—Cumulative effect of accounting change———4—4—
740.4Balance, December 31, 2018$7$8,156$(59)$(610)$72$7,566$128
—Net income———920292210
—Other changes in ownership—(11)——1(10)13
—Change in fair value of derivative instruments——(1)——(1)—
—Amounts reclassified from Other Comprehensive Income——4——4—
0.6Comprehensive stock and employee stock purchase plans—10———10—
—Common stock dividends———(617)—(617)—
0.2Redemptions of limited partner interests for common stock—2———2(2)
—Distributions to non-controlling interests————(69)(69)(7)
(27.8)Repurchase of common stock—(482)———(482)—
713.4Balance, December 31, 2019$7$7,675$(56)$(307)$6$7,325$142

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2019, 2018 and 2017

(in millions)

201920182017
OPERATING ACTIVITIES
Net income$932$1,151$571
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization676944751
Amortization of finance costs, discounts and premiums, net677
Loss on extinguishment of debt56——
Stock compensation expense151411
Deferred income taxes7438
Other gains(340)(902)(108)
Loss on foreign currency transactions and derivatives1—2
Gain on property insurance settlement(4)—(1)
Equity in earnings of affiliates(14)(30)(30)
Change in due from managers313(27)
Distributions from investments in affiliates115840
Changes in other assets7(5)(18)
Changes in other liabilities(106)46(6)
Net cash provided by operating activities1,2501,3001,230
INVESTING ACTIVITIES
Proceeds from sales of assets, net1,1921,605481
Return of investments in affiliates1113
Advances to and investments in affiliates(6)(7)(30)
Acquisitions(602)(1,025)(468)
Capital expenditures:
Renewals and replacements(222)(274)(205)
Return on investment(336)(200)(72)
Property insurance proceeds31—14
Net cash provided by (used in) investing activities58100(267)
FINANCING ACTIVITIES
Financing costs(17)—(9)
Issuances of debt645—404
Draws on credit facility—360340
Repayment of credit facility(56)(462)(395)
Repurchase/redemption of senior notes(650)——
Mortgage debt and other prepayments and scheduled maturities—(1)(69)
Debt extinguishment costs(50)——
Common stock repurchase(482)——
Dividends on common stock(623)(629)(628)
Distributions and payments to non-controlling interests(75)(8)(49)
Other financing activities(7)(8)4
Net cash used in financing activities(1,315)(748)(402)
Effects of exchange rate changes on cash held1(5)4
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH(6)647565
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF YEAR1,7561,109544
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR$1,750$1,756$1,109

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Years Ended December 31, 2019, 2018 and 2017

(in millions)

Supplemental disclosure of cash flow information (in millions):

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the balance sheet to the amount shown on the statements of cash flows:

201920182017
Cash and cash equivalents$1,573$1,542$913
Restricted cash (included in other assets)111
Cash included in furniture, fixtures and equipment replacement fund176213195
Total cash and cash equivalents and restricted cash shown on the statements of cash flows$1,750$1,756$1,109

Supplemental schedule of noncash investing and financing activities:

During 2019, 2018 and 2017, Host Inc. issued approximately 0.2 million, 0.7 million and 0.3 million shares of common stock, respectively, upon the conversion of Host L.P. units, or OP units, held by non-controlling interests valued at $2 million, $15 million and $6 million, respectively.

Non-cash consideration for the acquisition of the 1 Hotel South Beach in 2019 included the issuance of $23 million of preferred Host L.P. OP units and $3 million of common Host L.P. OP units.

In connection with the sale of the Chicago Marriott Suites O’Hare in 2019, we extended a $28 million bridge loan to the purchaser. The proceeds received from the sale are net of this loan.

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2019 and 2018

(in millions)

December 31, 2019December 31, 2018
ASSETS
Property and equipment, net$9,671$9,760
Right-of-use assets595—
Assets held for sale—281
Due from managers6371
Advances to and investments in affiliates5648
Furniture, fixtures and equipment replacement fund176213
Other171175
Cash and cash equivalents1,5731,542
Total assets$12,305$12,090
LIABILITIES, LIMITED PARTNERSHIP INTERESTS OF THIRD PARTIES AND CAPITAL
Debt
Senior notes$2,776$2,782
Credit facility, including term loans of $997 and $998, respectively9891,049
Other296
Total debt3,7943,837
Lease liabilities606—
Accounts payable and accrued expenses263293
Other175266
Total liabilities4,8384,396
Limited partnership interests of third parties142128
Host Hotels & Resorts, L.P. capital:
General partner11
Limited partner7,3747,552
Accumulated other comprehensive loss(56)(59)
Total Host Hotels & Resorts, L.P. capital7,3197,494
Non-controlling interests—consolidated partnerships672
Total capital7,3257,566
Total liabilities, limited partnership interest of third parties and capital$12,305$12,090

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2019, 2018 and 2017

(in millions, except per common unit amounts)

201920182017
REVENUES
Rooms$3,431$3,547$3,490
Food and beverage1,6471,6161,561
Other391361336
Total revenues5,4695,5245,387
EXPENSES
Rooms873918899
Food and beverage1,1201,1031,071
Other departmental and support expenses1,2951,3021,273
Management fees239243239
Other property-level expenses365387394
Depreciation and amortization676944751
Corporate and other expenses10710498
Gain on insurance and business interruption settlements(5)(7)(14)
Total operating costs and expenses4,6704,9944,711
OPERATING PROFIT799530676
Interest income32156
Interest expense(222)(176)(167)
Other gains/(losses)340902108
Loss on foreign currency transactions and derivatives(1)—(2)
Equity in earnings of affiliates143030
INCOME BEFORE INCOME TAXES9621,301651
Provision for income taxes(30)(150)(80)
NET INCOME9321,151571
Less: Net income attributable to non-controlling interests(2)(52)—
NET INCOME ATTRIBUTABLE TO HOST HOTELS & RESORTS, L.P.$930$1,099$571
Basic earnings per common unit$1.29$1.50$.78
Diluted earnings per common unit$1.29$1.50$.78

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Years Ended December 31, 2019, 2018 and 2017

(in millions)

201920182017
NET INCOME$932$1,151$571
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates—(13)23
Change in fair value of derivative instruments(1)1(14)
Amounts reclassified from other comprehensive income41314
OTHER COMPREHENSIVE INCOME, NET OF TAX3123
COMPREHENSIVE INCOME9351,152594
Less: Comprehensive (income) loss attributable to non- controlling interests(2)(53)1
COMPREHENSIVE INCOME ATTRIBUTABLE TO HOST HOTELS & RESORTS, L.P.$933$1,099$595

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CAPITAL

Years Ended December 31, 2019, 2018 and 2017

(in millions)

Common OP Units OutstandingGeneral PartnerLimited PartnerAccumulated Other Comprehensive Income (Loss)Non-controlling Interests of Consolidated PartnershipsTotal CapitalLimited Partnership Interests of Third Parties
722.2Balance, December 31, 2016$1$7,076$(83)$39$7,033$165
—Net income—564——5647
—Other changes in ownership—(8)—4(4)8
—Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates——23124—
—Change in fair value of derivative instruments——(14)—(14)—
—Amounts reclassified from Other Comprehensive Income——14—14—
0.5Common OP unit issuances—9——9—
0.5Units issued to Host Inc. for the comprehensive stock and employee stock purchase plans—13——13—
—Distributions on common OP units—(628)——(628)(7)
0.3Redemptions of limited partner interests for common stock—6——6(6)
—Distributions to non-controlling interests———(15)(15)—
—Repurchase of common OP units——————
723.5Balance, December 31, 2017$1$7,032$(60)$29$7,002$167
—Net income—1,087—521,13912
—Other changes in ownership—30—(9)21(29)
—Foreign currency translation and other comprehensive income (loss) of unconsolidated affiliates——(13)1(12)—
—Change in fair value of derivative instruments——1—1—
—Amounts reclassified from Other Comprehensive Income——13—13—
0.2Common OP unit issuances—3——3—
0.4Units issued to Host Inc. for the comprehensive stock and employee stock purchase plans—11——11—
—Distributions on common OP units—(630)——(630)(7)
0.7Redemptions of limited partner interests for common stock—15——15(15)
—Distributions to non-controlling interests———(1)(1)—
—Cumulative effect of accounting change—4——4—
724.8Balance, December 31, 2018$1$7,552$(59)$72$7,566$128
—Net income—920—292210
—Other changes in ownership—(11)—1(10)13
—Change in fair value of derivative instruments——(1)—(1)—
—Amounts reclassified from Other Comprehensive Income——4—4—
0.5Units issued to Host Inc. for the comprehensive stock and employee stock purchase plans—10——10—
—Distributions on common OP units—(617)——(617)(7)
0.2Redemptions of limited partner interests for common stock—2——2(2)
—Distributions to non-controlling interests———(69)(69)—
—Cumulative effect of accounting change——————
(27.2)Repurchase of common OP units—(482)——(482)—
698.3Balance, December 31, 2019$1$7,374$(56)$6$7,325$142

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2019, 2018 and 2017

(in millions)

201920182017
OPERATING ACTIVITIES
Net income$932$1,151$571
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization676944751
Amortization of finance costs, discounts and premiums, net677
Loss on extinguishment of debt56——
Stock compensation expense151411
Deferred income taxes7438
Other gains(340)(902)(108)
Loss on foreign currency transactions and derivatives1—2
Gain on property insurance settlement(4)—(1)
Equity in earnings of affiliates(14)(30)(30)
Change in due from managers313(27)
Distributions from investments in affiliates115840
Changes in other assets7(5)(18)
Changes in other liabilities(106)46(6)
Net cash provided by operating activities1,2501,3001,230
INVESTING ACTIVITIES
Proceeds from sales of assets, net1,1921,605481
Return of investments in affiliates1113
Advances to and investments in affiliates(6)(7)(30)
Acquisitions(602)(1,025)(468)
Capital expenditures:
Renewals and replacements(222)(274)(205)
Return on investment(336)(200)(72)
Property insurance proceeds31—14
Net cash provided by (used in) investing activities58100(267)
FINANCING ACTIVITIES
Financing costs(17)—(9)
Issuances of debt645—404
Draws on credit facility—360340
Repayment of credit facility(56)(462)(395)
Repurchase/redemption of senior notes(650)——
Mortgage debt and other prepayments and scheduled maturities—(1)(69)
Debt extinguishment costs(50)——
Repurchase of common OP units(482)——
Distributions on common OP units(630)(636)(635)
Distributions and payments to non-controlling interests(68)(1)(42)
Other financing activities(7)(8)4
Net cash used in financing activities(1,315)(748)(402)
Effects of exchange rate changes on cash held1(5)4
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH(6)647565
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF YEAR1,7561,109544
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR$1,750$1,756$1,109

See Notes to Consolidated Financial Statements.

HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Years Ended December 31, 2019, 2018 and 2017

(in millions)

Supplemental disclosure of cash flow information (in millions):

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the balance sheet to the amount shown on the statements of cash flows:

201920182017
Cash and cash equivalents$1,573$1,542$913
Restricted cash (included in other assets)111
Cash included in furniture, fixtures and equipment replacement fund176213195
Total cash and cash equivalents and restricted cash shown on the statements of cash flows$1,750$1,756$1,109

Supplemental schedule of noncash investing and financing activities:

During 2019, 2018 and 2017, non-controlling partners converted common operating partnership units (“OP units”) valued at $2 million, $15 million and $6 million, respectively, in exchange for 0.2 million, 0.7 million and 0.3 million shares, respectively, of Host Inc. common stock.

Non-cash consideration for the acquisition of the 1 Hotel South Beach in 2019 included the issuance of $23 million of preferred Host L.P. OP units and $3 million of common Host L.P. OP units.

In connection with the sale of the Chicago Marriott Suites O’Hare in 2019, we extended a $28 million bridge loan to the purchaser. The proceeds received from the sale are net of this loan.

See Notes to Consolidated Financial Statements.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.Summary of Significant Accounting Policies

Description of Business

Host Hotels & Resorts, Inc. operates as a self-managed and self-administered real estate investment trust, or REIT, with its operations conducted solely through Host Hotels & Resorts, L.P. Host Hotels & Resorts, L.P., a Delaware limited partnership, operates through an umbrella partnership structure, with Host Hotels & Resorts, Inc., a Maryland corporation, as its sole general partner. In the notes to the consolidated financial statements, we use the terms “we” or “our” to refer to Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. together, unless the context indicates otherwise. We also use the term “Host Inc.” to refer specifically to Host Hotels & Resorts, Inc. and the term “Host L.P.” to refer specifically to Host Hotels & Resorts, L.P. in cases where it is important to distinguish between Host Inc. and Host L.P. Host Inc. holds approximately 99% of Host L.P.’s partnership interests, or OP units.

Consolidated Portfolio

As of December 31, 2019, the hotels in our consolidated portfolio are in the following countries:

Hotels
United States75
Brazil3
Canada2
Total80

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements include the consolidated accounts of Host Inc., Host L.P. and their subsidiaries and controlled affiliates, including joint ventures and partnerships. We consolidate subsidiaries when we have the ability to control them. For the majority of our hotel and real estate investments, we consider those control rights to be (i) approval or amendment of developments plans, (ii) financing decisions, (iii) approval or amendments of operating budgets, and (iv) investment strategy decisions.

We also evaluate our subsidiaries to determine if they are variable interest entities (“VIEs”). If a subsidiary is a VIE, it is subject to the consolidation framework specifically for VIEs. Typically, the entity that has the power to direct the activities that most significantly impact economic performance consolidates the VIE. We consider an entity to be a VIE if equity investors own an interest therein that does not have the characteristics of a controlling financial interest or if such investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. We review our subsidiaries and affiliates at least annually to determine (i) if they should be considered VIEs, and (ii) whether we should change our consolidation determination based on changes in the characteristics thereof.

Three partnerships are considered VIE’s, as the general partner maintains control over the decisions that most significantly impact the partnerships. The first VIE is the operating partnership, Host L.P., which is consolidated by Host Inc., of which Host Inc. is the general partner and holds 99% of the limited partner interests. Host Inc.’s sole significant asset is its investment in Host L.P. and substantially all of Host Inc.’s assets and liabilities represent assets and liabilities of Host L.P. All of Host Inc.’s debt is an obligation of Host L.P. and may be settled only with assets of Host L.P. The consolidated partnership that owns the Houston Airport Marriott at George Bush Intercontinental, of which we are the general partner and hold 85% of the partnership interests, also is a VIE. The total assets of this VIE at December 31, 2019 are $65 million and consist primarily of cash, a right-of-use (“ROU”) asset and property and equipment. Liabilities for the VIE total $26 million and consist of a lease liability, accounts payable and deferred revenue. The unconsolidated partnership that owns the Philadelphia Marriott Downtown, of which we hold 11% of the limited partner interests, also is a VIE. The carrying amount of this investment at December 31, 2019 is $(6) million and is included in advances to and investments in affiliates. The mortgage debt held by this VIE is non-recourse to us.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Cash and Cash Equivalents

We consider all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents.

Property and Equipment

Generally, property and equipment is recorded at cost. For hotels that we develop, cost includes interest and real estate taxes incurred during construction. For property and equipment acquired in a business combination, we record the assets acquired based on their fair value as of the acquisition date. Replacements and improvements and finance leases are capitalized, while repairs and maintenance are expensed as incurred.

Properties acquired in an asset acquisition are recorded at cost. The acquisition cost is allocated to land, buildings, improvements, furniture, fixtures and equipment, as well as identifiable intangible and lease assets and liabilities. Acquisition cost is allocated using their relative fair values. We evaluate several factors, including weighted market data for similar assets, expected future cash flows discounted at risk adjusted rates, and replacement costs for assets to determine an appropriate exit cost when evaluating the fair values.

We capitalize certain inventory (such as china, glass, silver, and linen) at the time of a hotel opening or acquisition, or when significant inventory is purchased (in conjunction with a major rooms renovation or when the number of rooms or meeting space at a hotel is expanded). These amounts then are amortized over the estimated useful life of three years. Subsequent replacement purchases are expensed when placed in service.

We maintain a furniture, fixtures and equipment replacement fund for renewal and replacement capital expenditures at our hotels, which generally is funded with 5% of property revenues.

Impairment testing. We analyze our consolidated hotels for impairment throughout the year when events or circumstances occur that indicate the carrying amount may not be recoverable. We test for impairment in several situations, including:

•when a hotel has a current or projected loss from operations;
•when management’s intent or ability to hold a property for a period that recovers its carrying value changes, making it more likely than not that a hotel will be sold before the end of its previously estimated useful life and the anticipated sales price is at or below the book value; or
•when other events, trends, contingencies or changes in circumstances indicate that a triggering event has occurred and the carrying amount of an asset may not be recoverable.

To the extent that a hotel has a substantial remaining estimated useful life and management does not believe that it is more likely than not that it will be sold prior to the end thereof, it would be unusual for undiscounted cash flows to be insufficient to recover the property’s carrying amount. In the absence of other factors, we assume that the estimated useful life is equal to the remaining GAAP depreciable life because of the continuous property maintenance and improvement capital expenditures required under our management agreements. We adjust our assumptions with respect to the remaining useful life of the property if situations dictate otherwise, such as an expiring ground lease, or that it is more likely than not that the asset will be sold prior to the end of its previously expected useful life. We also consider the effect of regular renewal and replacement capital expenditures on the estimated useful life of our properties, including critical infrastructure, which regularly is maintained and then replaced at the end of its useful life.

During 2019, due to a reduction in the estimated hold period of the assets, we recognized impairment expense of $14 million related to one hotel and a right of use asset associated with an operating lease. No other properties had triggering events warranting impairment testing. During 2018, we recognized impairment expense of $260 million on four hotels. During 2017, we recognized impairment expense of $43 million on one hotel. Impairment expense is included in depreciation and amortization expense. See Note 13 - Fair Value Measurements.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Classification of Assets as Held for Sale. We will classify a hotel as held for sale when its sale is probable, will be completed within one year and actions to complete the sale are unlikely to change or it is unlikely that the sale will not occur. This policy is consistent with our experience with real estate transactions under which the timing and final terms of a sale frequently are not known until purchase agreements are executed, the buyer has a significant deposit at risk and no financing contingencies exist that could prevent the transaction from being completed in a timely manner. We typically classify hotels as held for sale when all the following conditions are met:

•Host Inc.’s Board of Directors has approved the sale (to the extent that the dollar amount of the sale requires Board approval);
•a binding agreement to sell the property has been signed under which the buyer has committed a significant amount of nonrefundable cash; and
•no significant financing contingencies exist that could prevent the transaction from being completed in a timely manner.

If these criteria are met, we will cease recording depreciation expense and will record an impairment expense if the fair value less costs to sell is less than the carrying amount of the hotel. We will classify the assets and related liabilities as held for sale on the balance sheet. Gains on sales of properties are recognized at the time of sale or are deferred and recognized as income in subsequent periods as conditions requiring deferral are satisfied or expire without further cost to us.

Discontinued Operations. We generally include the operations of a hotel that was sold or a hotel that has been classified as held for sale in continuing operations, including the gain or loss on the sale, unless the sale represents a strategic shift that will have a major impact on our future operations and financial results.

Asset retirement obligations. We recognize the fair value of any liability for conditional asset retirement obligations, including environmental remediation liabilities, when incurred, which generally is upon acquisition, construction, or development and/or through the normal operation of the asset, if information exists with which to reasonably estimate the fair value of the obligation.

Depreciation and Amortization Expense. We depreciate our property and equipment using the straight-line method. Depreciation expense is based on the estimated useful life of our assets and amortization expense for leasehold improvements is based on the shorter of the lease term or the estimated useful life of the related assets. The useful lives of the assets are based on several assumptions, including cost and timing of capital expenditures to maintain and refurbish the assets, as well as specific market and economic conditions. While management believes its estimates are reasonable, a change in the estimated useful lives could affect depreciation expense and net income or the gain or loss on the sale of any of our hotels.

Intangible Assets and Acquired Liabilities

In conjunction with our acquisitions, we may identify intangible assets and other liabilities. These identifiable intangible assets and other liabilities typically include above and below-market contracts, including ground and retail leases and management and franchise agreements, which are recorded at fair value in a business combination and at its relative fair value in an asset acquisition. These contract values are based on the present value of the difference between contractual amounts to be paid pursuant to the contracts acquired and our estimate of the fair value of terms and conditions for similar contracts measured over the period equal to the remaining non-cancelable term of the contract. Intangible assets and other liabilities are amortized using the straight-line method over the remaining non-cancelable term of the related agreements.

Non-Controlling Interests

Other Consolidated Partnerships. As of December 31, 2019, we consolidate two majority-owned partnerships that have third-party, non-controlling ownership interests. The third-party partnership interests are included in non-redeemable non-controlling interests - other consolidated partnerships on the consolidated balance sheets and totaled $6 million and $72 million as of December 31, 2019 and 2018, respectively. Approximately $66 million of the balance at December 31, 2018 related to the partnership that owned the JW Marriott Hotel Mexico City that was sold in 2018, representing the portion of proceeds owed to the third-party ownership interest that was paid in January 2019.

Net income attributable to non-controlling interests of consolidated partnerships is included in our determination of net income. Net income attributable to non-controlling interests of third parties was $2 million and $52 million for the years ended December 31, 2019 and 2018, respectively, and immaterial for the year ended December 31, 2017.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Host Inc.’s treatment of the non-controlling interests of Host L.P. Host Inc. adjusts the non-controlling interests of Host L.P. each period so that the amount presented equals the greater of its carrying amount based on its historical cost or its redemption value. The historical cost is based on the proportional relationship between the historical cost of equity held by our common stockholders relative to that of the unitholders of Host L.P. The redemption value is based on the amount of cash or Host Inc. common stock, at our option, that would be paid to the non-controlling interests of Host L.P. if it were terminated. We have estimated that the redemption value is equivalent to the number of shares issuable upon conversion of the OP units currently owned by unaffiliated limited partners (one OP unit may be exchanged for 1.021494 shares of Host Inc. common stock) valued at the market price of Host Inc. common stock at the balance sheet date. Redeemable non-controlling interests of Host L.P. are classified in the mezzanine section of the balance sheet as they do not meet the requirements for equity classification because the redemption feature requires the delivery of registered shares.

The table below details the historical cost and redemption values for the non-controlling interests of Host L.P.:

As of December 31,
20192018
OP units outstanding (millions)7.57.5
Market price per Host Inc. common share$18.55$16.67
Shares issuable upon conversion of one OP unit1.0214941.021494
Redemption value (millions)$142$128
Historical cost (millions)7978
Book value (millions) (1)142128
___________

(1)The book value recorded is equal to the greater of the redemption value or the historical cost.

Net income is allocated to the non-controlling interests of Host L.P. based on their weighted average ownership percentage during the period. Net income attributable to Host Inc. has been reduced by the amount attributable to non-controlling interests in Host L.P., which totaled $10 million, $12 million, and $7 million for 2019, 2018, and 2017, respectively.

Investments in Affiliates

Distributions from Investments in Affiliates. We classify the distributions from our equity investments in the statements of cash flows based upon an evaluation of the specific facts and circumstances of each distribution. For example, distributions of cash that was generated by property operations are classified as cash flows from operating activities. However, distributions of cash that was generated by property sales are classified as cash flows from investing activities.

Income Taxes

Host Inc. elected to be treated as a REIT effective January 1, 1999, pursuant to the U.S. Internal Revenue Code of 1986, as amended. It is our intention to continue to comply with the REIT qualification requirements and to maintain our qualification for treatment as a REIT. A corporation that elects REIT status and meets certain tax law requirements regarding the distribution of its taxable income to its stockholders as prescribed by applicable tax laws and complies with certain other requirements (relating primarily to the composition of its assets and the sources of its gross income) generally is not subject to federal and state corporate income taxation on its operating income that is distributed to its stockholders. As a partnership for federal income tax purposes, Host L.P. is not subject to federal income tax. Host L.P. is, however, subject to state, local and foreign income and franchise tax in certain jurisdictions. Additionally, each of the Host L.P. taxable REIT subsidiaries is taxable as a regular C corporation, subject to federal, state and foreign corporate income tax. Our consolidated income tax provision includes the income tax provision related to the operations of our taxable REIT subsidiaries, and state, local, and foreign income and franchise taxes incurred by Host L.P. and its subsidiaries.

Deferred Tax Assets and Liabilities. Pursuant to its partnership agreement, Host L.P. generally is required to reimburse Host Inc. for any tax payments it is required to make. Accordingly, the tax information included herein represents disclosures regarding Host Inc. and its subsidiaries. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for net operating loss and capital loss carryovers. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which such amounts are expected to be realized or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available evidence, including future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

GAAP prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. We must determine whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement to determine the amount of benefit to recognize in the financial statements. This accounting standard applies to all tax positions related to income taxes. We recognize any accrued interest related to unrecognized tax benefits in interest expense and penalties in operating expenses.

Deferred Charges

Financing costs related to long-term debt are deferred and amortized over the remaining life of the debt using the effective interest method. These costs are presented as a direct deduction from the related long-term debt on the balance sheets.

Foreign Currency Translation

As of December 31, 2019, our international operations consist of hotels located in Brazil and Canada, as well as an investment in an Asia/Pacific joint venture. The financial statements of these hotels and our investments therein are maintained in their functional currency, which generally is the local currency, and their operations are translated to U.S. dollars using the average exchange rates for the period. The assets and liabilities of the hotels and the investments therein are translated to U.S. dollars using the exchange rate in effect at the balance sheet date. The resulting translation adjustments are reflected in other comprehensive income (loss).

Foreign currency transactions are recorded in the functional currency for each applicable foreign entity using the exchange rates prevailing at the dates of the transactions. Assets and liabilities denominated in foreign currencies are remeasured at period end exchange rates. The resulting exchange differences are recorded in gain (loss) on foreign currency transactions and derivatives on the accompanying consolidated statements of operations, except when recorded in other comprehensive income (loss) as qualifying net investment hedges.

Accumulated Other Comprehensive Income (Loss)

The components of total accumulated other comprehensive income (loss) in the balance sheets are as follows (in millions):

As of December 31,
20192018
Gain on foreign currency forward contracts$3$4
Loss on interest rate swap cash flow hedges(3)(4)
Foreign currency translation(57)(60)
Other comprehensive loss attributable to non-controlling interests11
Total accumulated other comprehensive loss$(56)$(59)

During 2019, we reclassified a net loss due to foreign currency translation of $4 million related to foreign subsidiaries that were substantially liquidated. During 2018, we reclassified a net loss due to foreign currency translation of $36 million and a net gain from foreign currency forward contracts of $23 million that had been recognized previously in other comprehensive income (loss) due to the sale of our interest in the European joint venture (“Euro JV”) and the sale of the JW Marriott Hotel Mexico City.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revenues

Substantially all of our operating results represent revenues and expenses generated by property-level operations. Payments are due from customers when services are provided to them. Due to the short-term nature of our contracts and the almost concurrent receipt of payment, we have no material unearned revenues at year end. We collect sales, use, occupancy and similar taxes at our hotels, which we present on a net basis (excluded from revenues) on our statements of operations. Revenues are recognized as follows:

Income statement line itemRecognition method
Rooms revenuesRooms revenues represent revenues from the occupancy of our hotel rooms and are driven by the occupancy and average daily rate charged. Rooms revenues do not include ancillary services or fees charged. The contracts for room stays with customers generally are very short term in duration and revenues are recognized over the course of the hotel stay.
Food and beverage revenuesFood and beverage revenues consist of revenues from group functions, which may include banquet revenues and audio-visual revenues, as well as outlet revenues from the restaurants and lounges at our properties. Revenues are recognized as the services or products are provided. Our hotels may employ third parties to provide certain services, for example, audio and visual services. These contracts are evaluated to determine if the hotel is the principal or the agent in the transaction and record the revenues as appropriate (i.e. gross vs. net).
Other revenuesOther revenues consist of ancillary revenues at the property, including attrition and cancelation fees, golf courses, resort and destination fees, spas, entertainment and other guest services, as well as rental revenues; primarily consisting of leased retail outlets. Other revenues generally are recognized as the services or products are provided. Attrition and cancelation fees are recognized for non-cancelable deposits when the customer provides notification of cancelation or is a no-show for the specified date, whichever comes first.

Fair Value Measurement

In evaluating the fair value of both financial and non-financial assets and liabilities, GAAP outlines a valuation framework and creates a fair value hierarchy that distinguishes between market assumptions based on market data (“observable inputs”) and a reporting entity’s own assumptions about market data (“unobservable inputs”). Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability at the measurement date in an orderly transaction (an “exit price”). Assets and liabilities are measured using inputs from three levels of the fair value hierarchy. The three levels are as follows:

Level 1 — Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date. An active market is defined as a market in which transactions occur with sufficient frequency and volume to provide pricing on an ongoing basis.

Level 2 — Inputs include quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data correlation or other means.

Level 3 — Unobservable inputs reflect our assumptions about the pricing of an asset or liability when observable inputs are not available.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Earnings Per Common Share (Unit)

Basic earnings per common share (unit) is computed by dividing net income attributable to common stockholders (unitholders) by the weighted average number of shares of Host Inc. common stock or Host L.P. common units outstanding. Diluted earnings per common share (unit) is computed by dividing net income attributable to common stockholders (unitholders), as adjusted for potentially dilutive securities, by the weighted average number of shares of Host Inc. common stock or Host L.P. common units outstanding plus other potentially dilutive securities. Dilutive securities may include shares granted under comprehensive stock plans or the common OP units distributed to Host Inc. to support such shares granted, and other non-controlling interests that have the option to convert their limited partner interests to common OP units and convertible debt securities. No effect is shown for any securities that are anti-dilutive.

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

Year ended December 31,
201920182017
Net income$932$1,151$571
Less: Net income attributable to non-controlling interests(12)(64)(7)
Net income attributable to Host Inc.$920$1,087$564
Basic weighted average shares outstanding730.3739.8738.6
Assuming distribution of common shares granted under the comprehensive stock plans, less shares assumed purchased at market0.80.80.5
Diluted weighted average shares outstanding731.1740.6739.1
Basic earnings per common share$1.26$1.47$.76
Diluted earnings per common share$1.26$1.47$.76

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

Year ended December 31,
201920182017
Net income$932$1,151$571
Less: Net income attributable to non-controlling interests(2)(52)—
Net income attributable to Host L.P.$930$1,099$571
Basic weighted average units outstanding722.5732.2731.5
Assuming distribution of common units to support shares granted under the comprehensive stock plans, less shares assumed purchased at market0.80.80.5
Diluted weighted average units outstanding723.3733.0732.0
Basic earnings per common unit$1.29$1.50$.78
Diluted earnings per common unit$1.29$1.50$.78

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Share-Based Payments

Upon the issuance of Host’s common stock under the compensation plans, Host L.P. will issue to Host Inc. common OP units of an equivalent value. These liabilities are included in the consolidated financial statements for Host Inc. and Host L.P.

We recognize costs resulting from Host Inc.’s share-based payment transactions over their vesting periods. We classify share-based payment awards granted in exchange for employee services either as equity-classified awards or liability-classified awards. Equity-classified awards are measured based on the fair value on the date of grant. Liability-classified awards are remeasured to fair value each reporting period. The plan includes awards that vest over a one-year, two-year and three-year period. For performance-based awards, compensation cost will be recognized when the achievement of the performance condition is considered probable. If a performance condition has more than one outcome that is probable, recognition of compensation cost will be based on the condition that is the most likely outcome. No compensation cost is recognized for awards for which employees do not render the requisite services.

Concentrations of Credit Risk

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents. We are exposed to credit risk with respect to cash held at various financial institutions and access to our credit facility, however, this cash balance is spread among a diversified group of investment grade financial institutions.

Acquisitions and Business Combinations

When acquiring an asset, we determine whether the acquisition is an asset acquisition or a business combination based on whether the fair value of the gross assets acquired is concentrated in a single (group of similar) identifiable assets, resulting in an asset acquisition or, if not, resulting in a business combination. If treated as an asset acquisition, the asset is recorded in accordance with our property and equipment policy and related acquisition costs are capitalized as part of the asset.

In a business combination, we recognize identifiable assets acquired, liabilities assumed, and non-controlling interests at their fair values at the acquisition date based on the exit price (i.e. the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date). We evaluate several factors, including market data for similar assets, expected cash flows discounted at risk adjusted rates and replacement cost for the assets to determine an appropriate exit cost when evaluating the fair value of our assets and liabilities acquired. Property and equipment are recorded at fair value and such fair value is allocated to land, buildings, improvements, furniture, fixtures and equipment using appraisals and valuations performed by management and independent third parties. Acquisition-related costs, such as due diligence, legal and accounting fees, are not capitalized or applied in determining the fair value of the acquired assets.

Other items that we evaluate include identifiable intangible assets, lease assets and liabilities and, in a business combination, goodwill. Identifiable intangible assets typically consist of assumed contracts, including ground and retail leases and management and franchise agreements, which are recorded at fair value. Finance lease obligations that are assumed as part of the acquisition of a leasehold interest are measured at fair value and are included as debt on the accompanying balance sheet and we record the corresponding right-of-use assets. Classification of a lease does not change if it is part of an asset acquisition or a business combination. In making estimates of fair values for purposes of allocating purchase price, we may utilize a number of sources that arise in connection with the acquisition or financing of a property and other market data, including third-party appraisals and valuations. In certain situations, and usually only in connection with the acquisition of a foreign hotel, a deferred tax liability is recognized due to the difference between the fair value and the tax basis of the acquired assets at the acquisition date. In a business combination, any consideration paid in excess of the net fair value of the identifiable assets and liabilities acquired would be recorded to goodwill. In very limited circumstances, we may record a bargain purchase gain if the consideration paid is less than the net fair value of the assets and liabilities acquired.

New Accounting Standards

Leases. On January 1, 2019, we adopted Financial Accounting Standards Board’s (“FASB”) Accounting Standard Codification (“ASC”) Topic 842, Leases, which affects aspects of accounting for lease agreements. Under the new standard, all leases pursuant to which we are the lessee, including operating leases, are recognized as lease assets and lease liabilities on the balance sheet. However, the adoption did not materially affect our statements of operations or statements of cash flows. For lease agreements pursuant to which we are the lessor, we have analyzed the impact of the standard and determined that there was no material impact to the recognition, measurement, or presentation of these rental revenues. Rooms revenues, which constitute the majority of our revenues, result from what are considered short term leases. Additionally, we earn rental revenues from retail and office space leases

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

at our properties, all of which are included in other revenues. We adopted the standard using the effective date transition method with a cumulative-effect adjustment in the period of adoption. The standard provided several optional practical expedients for use in transition. We elected to use what the Financial Accounting Standards Board (“FASB”) has deemed the “package of practical expedients,” which allowed us to not reassess our previous conclusions about lease identification, lease classification and the accounting treatment for initial direct costs, and we elected to not reassess previous conclusions about land easements. Consequently, financial information will not be updated and disclosures required under the new standard will not be provided for dates and periods prior to January 1, 2019. Upon adoption, we recognized an ROU asset and a related lease liability of $619 million and $628 million, respectively, with the prior year’s straight-line rent liability of $9 million reducing the ROU asset.

2.Revenues

Disaggregation of Revenues. While we do not consider the following division by location to consist of reportable segments, we have disaggregated hotel revenues by market location. Our revenues also are presented by country in Note 16 – Geographic and Business Segment Information.

By Location. The following table presents hotel revenues for each of the geographic locations in our consolidated hotel portfolio (in millions):

Year ended December 31,
Location201920182017
New York$560$744$796
San Francisco/San Jose519488414
San Diego516523503
Maui/Oahu400366287
Washington, D.C. (Central Business District)341330348
Florida Gulf Coast338285250
Phoenix311298264
Boston303304306
Orlando221217209
Los Angeles187188184
Miami1785552
Chicago165186185
Atlanta159158166
Northern Virginia135158193
Seattle120129125
Houston116118117
New Orleans10610396
San Antonio105116109
Orange County104119120
Jacksonville1009891
Denver938986
Philadelphia908882
Other214257277
Domestic5,3815,4175,260
International88107127
Total$5,469$5,524$5,387

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3Property and Equipment

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

As of December 31,
20192018
Land and land improvements$2,062$1,960
Buildings and leasehold improvements13,30813,586
Furniture and equipment2,3622,411
Construction in progress262220
17,99418,177
Less accumulated depreciation and amortization(8,323)(8,417)
$9,671$9,760

The aggregate cost of real estate for federal income tax purposes is approximately $9.7 billion at December 31, 2019.

4.Investments in Affiliates

We own investments in joint ventures for which the equity method of accounting is used. The debt of our joint ventures is non-recourse to, and not guaranteed by, us, and a default of such debt does not trigger a default under any of our debt instruments. We carry our investments at historical cost which, due to debt restructurings or distributions, may result in a negative balance. However, the negative balances do not represent funding obligations for us or our partners. Investments in affiliates consist of the following (in millions):

As of December 31, 2019
Ownership InterestsOur InvestmentOur Portion of DebtTotal DebtDistributions received in 2019 (1)Assets
Asia/Pacific JV25%$12$—$—$—A 36% interest in seven hotels and an office building in India
Maui JV67%721726—131-unit vacation ownership project in Maui, HI
Hyatt Place JV50%(13)30602One hotel in Nashville, TN
Harbor Beach JV49.9%(32)751509One hotel in Fort Lauderdale, FL
Philadelphia Marriott Downtown JV11%(6)232091One hotel in Philadelphia, PA
Other investments23———
Total$56$145$445$12

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2018
Ownership InterestsOur InvestmentOur Portion of DebtTotal DebtDistributions received in 2018 (1)Assets
Asia/Pacific JV25%$14$—$—$—A 36% interest in seven hotels and an office building in India
Maui JV67%70223217131-unit vacation ownership project in Maui, HI
Hyatt Place JV50%(13)30603One hotel in Nashville, TN
Harbor Beach JV49.9%(30)751508One hotel in Fort Lauderdale, FL
Philadelphia Marriott Downtown JV11%(6)232132One hotel in Philadelphia, PA
Other investments13———
Total$48$150$455$30
___________
(1)Distributions received were funded by cash from operations unless otherwise noted.

European Joint Venture

On December 21, 2018 we sold our approximate one-third interest in the Euro JV to the existing partners thereof, APG Strategic Real Estate Pool NV, an affiliate of a Dutch Pension Fund, and Jasmine Hotels Pte Ltd, an affiliate of the real estate investment company of the Government of Singapore Investment Corporation Pte Ltd (“GIC RE”). We received net proceeds of approximately €435 million ($496 million) and recorded a gain on sale of approximately $238 million. A portion of the proceeds was used to repay the €207 million ($237 million) draw on the credit facility.

5.Debt

Debt consists of the following (in millions):

As of December 31,
20192018
Series Z senior notes, with a rate of 6% due October 2021$—$299
Series B senior notes, with a rate of 5¼% due March 2022—348
Series C senior notes, with a rate of 4¾% due March 2023447447
Series D senior notes, with a rate of 3¾% due October 2023398398
Series E senior notes, with a rate of 4% due June 2025497497
Series F senior notes, with a rate of 4½% due February 2026397397
Series G senior notes, with a rate of 3⅞% due April 2024397396
Series H senior notes, with a rate of 3⅜% due December 2029640—
Total senior notes2,7762,782
Credit facility revolver(1)(8)51
Credit facility term loan due January 2024498499
Credit facility term loan due January 2025499499
Other debt, with an average interest rate of 5.6% and 8.8% at December 31, 2019 and 2018, respectively, maturing through February 2024296
Total debt$3,794$3,837
(1)There were no outstanding credit facility borrowings at December 31, 2019. Amount shown represents deferred financing costs related to the credit facility revolver.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Senior Notes

General. Under the terms of our senior notes indenture, our senior notes are equal in right of payment with all our unsubordinated indebtedness and senior to all our subordinated obligations. The face amount of our senior notes at both December 31, 2019 and 2018 was $2.8 billion. The senior notes balances as of December 31, 2019 and 2018 are net of unamortized discounts and deferred financing costs of approximately $24 million and $18 million, respectively. We pay interest on each series of our senior notes semi-annually in arrears at the respective annual rates indicated in the table above.

Under the terms of the senior notes indenture, our ability to incur indebtedness and pay dividends is subject to restrictions and the satisfaction of various conditions. As of December 31, 2019, we are in compliance with all of these covenants.

On September 26, 2019, we issued $650 million of 3.375% Series H senior notes due December 2029 for proceeds of approximately $640 million, net of discounts, underwriting fees and expenses. Interest is payable semi-annually in arrears on June 15 and December 15, commencing December 15, 2019. The net proceeds were used, together with cash on hand, to redeem our $300 million 6% Series Z senior notes due 2021 and our $350 million 5.25% Series B senior notes due 2022, including a prepayment premium of $50 million.

Authorization for Repurchase of Senior Notes. In July 2019, Host Inc.’s Board of Directors authorized repurchases of up to $1.0 billion of senior notes (other than in accordance with their terms). No repurchases occurred in 2019 under this program.

Credit Facility. On August 1, 2019, we entered into the fifth amended and restated senior revolving credit and term loan facility, with Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A and Wells Fargo Bank, N.A. as co-syndication agents, and certain other agents and lenders. The credit facility allows for revolving borrowings in an aggregate principal amount of up to $1.5 billion. The revolver also includes a foreign currency subfacility for Canadian dollars, Australian dollars, Euros, British pounds sterling and, if available to the lenders, Mexican pesos of up to the foreign currency equivalent of $500 million, subject to a lower amount in the case of Mexican peso borrowings. The credit facility also provides for the existing term loan facility of $1 billion (which is fully utilized), a subfacility of up to $100 million for swingline borrowings in currencies other than U.S. dollars and a subfacility of up to $100 million for issuances of letters of credit. Host L.P. also has the option to add in the future $500 million of commitments which may be used for additional revolving credit facility borrowings and/or term loans, subject to obtaining additional loan commitments (which we have not currently obtained) and the satisfaction of certain conditions. The revolving credit facility has an initial scheduled maturity date of January 11, 2024, which date may be extended by up to a year by the exercise of up to two six-month extension options, each of which is subject to certain conditions, including the payment of an extension fee and the accuracy of representations and warranties. One $500 million term loan tranche has an initial maturity date of January 11, 2024, which date may be extended up to a year by the exercise of one 1-year extension option, which is subject to certain conditions, including the payment of an extension fee; and the second $500 million term loan tranche has a maturity date of January 9, 2025, which date may not be extended.

We pay interest on revolver borrowings under the credit facility at floating rates equal to LIBOR plus a margin ranging from 77.5 to 145 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, 2019, we are able to borrow at a rate of LIBOR plus 90 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 85 to 165 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, 2019, our applicable margin on LIBOR loans under both term loans is 100 basis points, for an all-in rate of 2.8%.

Net repayments under the credit facility were $56 million and $102 million in 2019 and 2018, respectively. As of December 31, 2019, we have $1.5 billion of available capacity under the revolver portion of our credit facility.

Financial Covenants. The credit facility contains covenants concerning allowable leverage, fixed charge coverage and unsecured interest coverage (as defined in our credit facility). Currently, we are permitted to borrow and maintain amounts outstanding under the credit facility so long as our leverage ratio is not in excess of 7.25x, our unsecured coverage ratio is not less than 1.75x and our fixed charge coverage ratio is not less than 1.25x. The financial covenants for the credit facility do not apply when there are no borrowings thereunder. Therefore, so long as there are no amounts outstanding, we would not be in default if we do not satisfy the financial covenants and we do not lose the potential to draw under the credit facility in the future if we were to regain compliance with the financial covenants. These calculations are performed based on pro forma results for the prior four fiscal quarters, giving effect to transactions such as acquisitions, dispositions and financings as if they had occurred at the beginning of the period. Under the terms of the credit facility, interest expense excludes items such as gains and losses on the extinguishment of debt, deferred financing

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

costs related to the senior notes or the credit facility, amortization of debt premiums or discounts that were recorded at issuance of a loan in order to establish the debt at fair value and non-cash interest expense, all of which are or have been included in interest expense on our consolidated statements of operations. Additionally, total debt used in the calculation of our leverage ratio is based on a “net debt” concept, under which cash and cash equivalents in excess of $100 million are deducted from our total debt balance. As of December 31, 2019, we are in compliance with the financial covenants under our credit facility.

Guarantees. The credit facility requires all Host L.P. subsidiaries which guaranty Host L.P. debt to similarly guarantee obligations under the credit facility. Currently, there are no such guarantees.

Other Covenants and Events of Default. The credit facility contains restrictive covenants on customary matters. Certain covenants are less restrictive at any time that our leverage ratio is below 6.0x. In particular, at any time that our leverage ratio is below 6.0x, we will not be subject to limitations on capital expenditures, and the limitations on acquisitions, investments and dividends contained in the credit facility will be superseded by the generally less restrictive corresponding covenants in our senior notes indenture. Additionally, the credit facility’s restrictions on the incurrence of debt and the payment of dividends generally are consistent with our senior notes indenture. These provisions, under certain circumstances, limit debt incurrence to that incurred under the credit facility or in connection with a refinancing, and limit dividend payments to those necessary to maintain Host Inc.’s tax status as a REIT. Our senior notes and credit facility have cross default provisions that would trigger a default under those agreements if we were to have a payment default or an acceleration prior to maturity of other debt of Host L.P. or its subsidiaries. The amount of other debt in default needs to exceed certain thresholds in order to trigger a cross default and the thresholds are greater for secured debt than for unsecured debt. The credit facility also includes usual and customary events of default for facilities of this nature, and provides that, upon the occurrence and continuance of an event of default, payment of all amounts 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 owed under the credit facility will become due and payable and the lenders’ commitments will terminate.

Aggregate Debt Maturities

Aggregate debt maturities are as follows (in millions):

As of December 31, 2019
2020$23
2021—
2022—
2023850
2024905
Thereafter2,050
3,828
Deferred financing costs(28)
Unamortized (discounts) premiums, net(7)
Finance lease obligations1
$3,794

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Interest

The following is a reconciliation between interest expense and cash interest paid (in millions):

Year ended December 31,
2019 (2)20182017
Interest expense$222$176$167
Amortization of debt premiums/discounts, net(1)(1)(1)
Amortization of deferred financing costs(5)(6)(6)
Non-cash losses on debt extinguishment(6)——
Change in accrued interest92(2)
Interest paid (1)$219$171$158
___________
(1)Does not include capitalized interest of $4 million, $3 million and $1 million for 2019, 2018 and 2017, respectively.
(2)Interest expense and interest paid in 2019 includes cash prepayment premiums of approximately $50 million.
6.Equity of Host Inc. and Capital of Host L.P.

Equity of Host Inc.

Host Inc. has authorized 1,050 million shares of common stock, with a par value of $0.01 per share, of which 713.4 million and 740.4 million were outstanding as of December 31, 2019 and 2018, respectively. Fifty million shares of no par value preferred stock are authorized; none of such preferred shares was outstanding as of December 31, 2019 and 2018.

Capital of Host L.P.

As of December 31, 2019, Host Inc. is the owner of approximately 99% of Host L.P.’s common OP units. The remaining 1% of Host L.P.’s common OP units are held by various unaffiliated limited partners. Each common OP unit may be redeemed for cash or, at the election of Host Inc., Host Inc. common stock, based on the conversion ratio of 1.021494 shares of Host Inc. common stock for each OP unit. In connection with the issuance of shares by Host Inc., Host L.P. will issue OP units based on the same conversion ratio. As of December 31, 2019 and 2018, Host L.P. had 705.8 million and 732.4 million OP units outstanding, respectively, of which Host Inc. held 698.3 million and 724.8 million, respectively.

Repurchases and Issuances of Common Stock and Common OP Units

Pursuant to a distribution agreement entered into in May 2018, we may issue and sell, from time to time, shares of common stock having a combined aggregate offering price of up to $500 million. Additionally, in February 2017, the Board of Directors authorized a program to repurchase up to $500 million of common stock. On August 5, 2019, Host Inc.’s Board of Directors authorized an increase in its share repurchase program from $500 million to $1 billion. During 2019, we repurchased 27.8 million shares at an average price of $17.37 per share, exclusive of commissions, for a total of $482 million. Subsequent to year end, we purchased an additional 7.5 million shares at an average price of $16.90 per share, for a total of $127 million, pursuant to our trading plan designed to comply with Rule 10b5-1 under the securities Exchange Act. Following these transactions, we have $391 million available for repurchase under the program. No stock was sold in 2019 or 2018 and no stock was repurchased during 2018.

Dividends/Distributions

Host Inc. is required to distribute at least 90% of its annual taxable income, excluding net capital gains, to its stockholders in order to maintain its qualification as a REIT. Funds used by Host Inc. to pay dividends on its common stock are provided by distributions from Host L.P. The amount of any future dividends will be determined by Host Inc.’s Board of Directors.

The dividends that were taxable to our stockholders in 2019 were considered 63.4% qualified REIT dividends, 33.7% dividend income, 2.5% unrecaptured Section 1250 gain, and 0.4% long term capital gain. The dividends that were taxable to our stockholders in 2018 were considered 99.7% qualified REIT dividends and 0.3% unrecaptured Section 1250 gain. The 2019 and 2018 qualified REIT dividends are eligible for the 20% deduction provided by Section 199A.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The table below presents the amount of common dividends declared per share and common distributions per unit as follows:

Year ended December 31,
201920182017
Common stock$.85$.85$.85
Common OP units.868.868.868

On February 19, 2020, Host Inc.’s Board of Directors authorized a regular quarterly cash dividend of $0.20 per share on Host Inc.’s common stock. The dividend is payable on April 15, 2020, to stockholders of record on March 31, 2020.

7.Income Taxes

We elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with our taxable year beginning January 1, 1999. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our annual taxable income to our stockholders, excluding net capital gain. As a REIT, generally we will not be subject to federal and state corporate income tax on that portion of our annual taxable income that is distributed to our stockholders. If we fail to qualify for taxation as a REIT in any taxable year, we will be subject to federal and state corporate income taxes at regular corporate income tax rates and may not be able to qualify as a REIT for four subsequent taxable years. Even if we qualify to be treated as a REIT, we may be subject to certain state, local and foreign taxes on our income and property, and to federal and state corporate income and excise taxes on our undistributed taxable income. Our 2018 tax provision included approximately $77 million of U.S. federal and state corporate income tax that we paid on long-term capital gain generated in 2018 that we chose to retain rather than distribute to our stockholders.

We have recorded a 100% valuation allowance of approximately $9 million against the deferred tax asset related to our domestic capital loss carryover and a 100% valuation allowance of approximately $3 million against the deferred tax asset related to our foreign net operating loss carryover as of December 31, 2019. The net increase of our valuation allowance for the year ended December 31, 2019 is approximately $2 million from the year ended December 31, 2018. The primary components of our net deferred tax assets are as follows (in millions):

As of December 31,
20192018
Deferred tax assets
Net operating loss and capital loss carryovers$16$17
Property and equipment33
Deferred revenue and expenses2023
Foreign exchange net losses (AOCI)1212
Total gross deferred tax assets5155
Less: Valuation allowance(13)(11)
Total deferred tax assets, net of valuation allowance$38$44
Deferred tax liabilities
Investments in domestic affiliates(6)(5)
Total gross deferred tax liabilities(6)(5)
Net deferred tax assets$32$39

At December 31, 2019, we have aggregate gross domestic and foreign net operating loss and capital loss carryovers of approximately $60 million. We have deferred tax assets related to these domestic and foreign loss carryovers of approximately $16 million, with a valuation allowance of approximately $13 million. Our Canadian net operating loss carryovers expire through 2035, and our Canadian capital loss carryover has no expiration date. Our domestic capital loss carryover expires in 2023. Our Brazil net operating loss carryover has no expiration date. We believe that it is more likely than not that the results of future operations will generate sufficient taxable income in order to realize our total deferred tax assets, net of a valuation allowance of $13 million, of $38 million.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Our U.S. and foreign income from continuing operations before income taxes was as follows (in millions):

Year ended December 31,
201920182017
U.S. income$949$887$593
Foreign income1341458
Total$962$1,301$651

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

Year ended December 31,
201920182017
Current—Federal$14$79$17
—State6306
—Foreign33719
2314642
Deferred—Federal3232
—State114
—Foreign312
7438
Income tax provision – continuing operations$30$150$80

The differences between the income tax provision calculated at the statutory U.S. federal corporate income tax rate of 21% in 2019 and 2018 (35% in 2017) and the actual income tax provision recorded for continuing operations are as follows (in millions):

Year ended December 31,
201920182017
Statutory federal income tax provision$202$273$228
Adjustment for nontaxable income of Host Inc.(182)(192)(190)
State income tax provision, net73110
Change to uncertain tax position(3)——
Remeasurement of domestic net deferred tax assets——11
Foreign income tax provision63821
Income tax provision$30$150$80

Cash paid for income taxes, net of refunds received, was $93 million, $82 million, and $40 million in 2019, 2018, and 2017, respectively.

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

20192018
Balance at January 1$11$11
Reduction of unrecognized tax benefits due to expiration of statute of limitations(3)—
Balance at December 31$8$11

All of such uncertain tax position amounts, if recognized, would impact our reconciliation between the income tax provision calculated at the statutory U.S. federal corporate income tax rate of 21% and the actual income tax provision recorded each year.

We expect a decrease to the balance of unrecognized tax benefits within 12 months of the reporting date of approximately $3 million. As of December 31, 2019, the tax years that remain subject to examination by major tax jurisdictions generally include 2016-2019. There were no material interest or penalties recorded for the years ended December 31, 2019, 2018, and 2017.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.Leases

Taxable REIT Subsidiaries Leases

We lease substantially all our hotels to a wholly owned subsidiary that qualifies as a taxable REIT subsidiary due to the U.S. federal income tax prohibition on the ability of a REIT to derive revenues directly from the operations of a hotel.

Ground Leases

As of December 31, 2019, all or a portion of 22 of our hotels are subject to ground leases, generally with multiple renewal options, all of which are accounted for as operating leases. Payments for ground leases account for approximately 76% of our 2019 minimum lease payments and 95% of our total future minimum lease payments. For lease agreements with scheduled rent increases, we recognize the fixed portion of the lease expense ratably over the term of the lease. As the exercise of the renewal options were determined to be reasonably certain, the payments associated with the renewals have been included in the measurement of the lease liability and ROU asset. Contingent rental payments based on a percentage of sales in excess of stipulated amounts are not included in the measurement of the lease liability and ROU asset but will be recognized as variable lease expense if and when they are incurred. However, certain of these leases contain provisions that increase the minimum lease payments based on an average of the variable lease payments made over the previous years, for which we will reevaluate the lease liability and ROU asset as these payments now represent an increase in the minimum payments for the remainder of the lease term. Certain of these leases also contain provisions that increase the minimum lease payments based on an index such as the Consumer Price Index. Subsequent to the initial adoption of the new standard, such amounts are not included in the measurement of the lease liability and ROU asset but will be recognized as variable lease expense if and when they are incurred. The discount rate used to calculate the lease liability and ROU asset is based on our incremental borrowing rate (“IBR”), as the rate implicit in each lease is not readily determinable. To calculate our IBR, we obtained a forward curve using LIBOR swap rates, with terms ranging from one to fifty years, as well as corresponding bond spreads based on the terms of the leases and our credit risk. The resulting discount rates for our ground leases range from 4.3% to 5.7%.

Offices Leases and Other

We have office leases for our headquarters office in Bethesda, which expires in 2036, as well as satellite offices in Miami and San Diego, which leases expire in 2022 and 2021, respectively, with no renewal options.

We also have leases on facilities used in our former restaurant business, all of which we subsequently subleased. These leases and subleases contain one or more renewal options, generally for five- or ten-year periods. The restaurant leases are accounted for as operating leases. Our contingent liability related to these leases is $5 million as of December 31, 2019. We, however, consider the likelihood of any material funding related to these leases to be remote. Our leasing activity also includes leases entered into by our hotels for various types of equipment that have been accounted for historically either as operating or capital leases, depending upon the characteristics of the particular lease arrangement. As we have elected to use the package of practical expedients, all existing capital leases now are classified as finance leases, which total $1 million at December 31, 2019.

As disclosed in Note 1 – Summary of Significant Accounting Policies, we adopted ASU No. 2016-02, Leases (Topic 842), as amended, using the effective date transition method. As a result, disclosures required under the new standard will not be provided for dates or periods prior to January 1, 2019. For the comparative periods, we will provide disclosures required by ASC 840, Leases.

The following table presents lease cost and other information (in millions):

Year ended December 31,
2019
Lease cost
Operating lease cost$47
Variable lease cost36
Sublease income(1)
Total lease cost$82
Other information
Operating cash flows used for operating leases for the year ended December 31, 2019$47
Weighted-average remaining lease term - operating leases50 years
Weighted-average discount rate - operating leases5.3%

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents a reconciliation of the total amount of lease payments, on an undiscounted basis, to the lease liability in the statement of financial position as of December 31, 2019 (in millions):

As of December 31, 2019
Ground LeasesOffice Leases and OtherTotal
Weighted-average discount rate - operating leases5.4%3.6%5.3%
2020$32$7$39
202132638
202232638
202332436
202432436
Thereafter1,530561,586
Total undiscounted cash flows$1,690$83$1,773
Present values
Long-term lease liabilities$543$63$606
Total lease liabilities$543$63$606
Difference between undiscounted cash flows and discounted cash flows$1,147$20$1,167

Minimum payments for the operating leases have not been reduced by aggregate minimum sublease rentals from restaurants of approximately $5 million that are payable to us under non-cancelable subleases. The following table presents the future minimum annual rental commitments, excluding renewal periods, as of December 31, 2018, for which we are the lessee, required under non-cancelable operating leases in accordance with ASC 840, under which we report prior to January 1, 2019 (in millions):

As of December 31, 2018
2019$46
202044
202143
202240
202337
Thereafter1,309
Total minimum lease payments$1,519

Rent expense in accordance with ASC 840, under which we report prior to January 1, 2019, consists of (in millions):

Year ended December 31,
20182017
Minimum rentals on operating leases$45$46
Additional rentals based on sales3838
Less: sublease rentals(1)(1)
$82$83

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.Employee Stock Plans

Upon the issuance of Host Inc.’s common stock for stock-based compensation, Host L.P. issues to Host Inc. common OP units of an equivalent value. Accordingly, these awards and related disclosures are included in both Host Inc.’s and Host L.P.’s consolidated financial statements.

In 2019, Host Inc. awarded participating employees restricted stock units (“RSUs”) under the Comprehensive Stock and Cash Incentive Plan (the “2009 Comprehensive Plan”). We recognize costs resulting from share-based payments in our financial statements over their vesting periods. No compensation cost is recognized for awards for which employees do not render the requisite services. We classify share-based payment awards granted in exchange for employee services as either equity-classified or liability-classified awards. Equity-classified awards are measured based on their fair value as of the date of grant. In contrast, liability-classified awards are re-measured to fair value each reporting period.

During 2019, 2018 and 2017, we recorded stock-based compensation expense of approximately $15 million, $14 million and $11 million, respectively. Shares granted in 2019, 2018 and 2017 totaled 1.4 million, 1.2 million and 1.5 million, respectively, while 0.9 million, 0.8 million and 0.6 million shares, respectively, vested during those years.

Senior Executive Plan

During 2019, Host Inc. granted 1.3 million RSU awards under the 2009 Comprehensive Plan, which amount represents the maximum number of RSUs that can be earned during the period of 2019 through 2021 if performance is at the “high” level of achievement and, for time based awards, the executive remains employed. The RSUs vest over a one, two or three-year period and 1.0 million RSUs were unvested at December 31, 2019. Total unrecognized compensation cost related to unvested RSU awards that vest through 2021 is approximately $8 million. Prior to 2017, all restricted stock awards were fully vested.

RSU awards

Vesting of RSUs awarded in 2019 is based on (1) continued employment on the vesting date (“Time-Based Award”); (2) the achievement of relative total shareholder return (“TSR”); and (3) our performance against certain annual strategic objectives. Approximately 40% of the RSUs are Time-Based Awards and vest on an annual basis over three years; approximately 30% of the RSUs are based on the satisfaction of the TSR compared to the NAREIT Lodging & Resort index that serves as a relevant industry/asset specific measurement to our competitors and vest following a three year performance period; and the remaining 30% are based on our performance against certain strategic objectives and vest on an annual basis. The RSUs granted are considered equity-classified awards. As a result, the fair value of these awards is based on the fair value on the grant date, and such grant date fair value is not adjusted for subsequent movements thereof.

We value the time based awards using the closing stock price on the grant date multiplied by the percentage of shares expected to be released, which is 100% of the time based awards. We also value the strategic objective awards using the closing stock price on the grant date multiplied by the percentage of shares expected to be released; however, as a result of the strategic objective awards’ performance conditions, we reevaluate the percentage based on the probability of meeting the performance conditions each period. We value the TSR awards using the economic theory that is the basis for all valuation models, including Binominal, Black-Scholes, exotic options formulas, and Monte Carlo valuations, with the following assumptions, to determine the fair value of the awards granted in 2019.

2019 Award Grants
NAREIT Lodging & Resorts Index
Grant date stock price$17.97
Volatility23.7%
Beta1.029
Risk-free rate - three year award2.43%

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2018 Award Grants
NAREIT indexStandard & Poor's indexSelected Lodging Company index
Grant date stock price$18.75$18.75$18.75
Volatility26.2%26.2%26.2%
Beta1.1491.2141.016
Risk-free rate - three year award2.32%2.32%2.32%

In making these assumptions, we base the expected volatility on the historical volatility over three years using daily stock price observations. The beta is calculated by comparing the risk of our stock to the risk of the applicable peer group index, using three years of daily price data. We base the risk-free rate on the Treasury bond yields corresponding to the length of each performance period as reported by the Federal Reserve.

The payout schedule for the TSR awards is as follows, with linear interpolation for points between the 30th and 75th percentiles.

TSR Percentile RankingPayout (% of Maximum)
At or above 75th percentile100%
50th percentile50
30th percentile25
Below 30th percentile0

During 2019, 2018 and 2017, we recorded compensation expense of approximately $13 million, $12 million and $9 million, respectively, related to the RSU awards to senior executives. The following table is a summary of the status of our senior executive plans for the three years ended December 31, 2019:

Year ended December 31,
201920182017
SharesFair ValueSharesFair ValueSharesFair Value
(in millions)(per share)(in millions)(per share)(in millions)(per share)
Balance, at beginning of year0.9$140.7$14—$—
Granted1.3141.1161.415
Vested (1)(0.7)19(0.7)17(0.5)20
Forfeited/expired(0.3)19(0.2)17(0.2)20
Balance, at end of year1.2130.9140.714
Issued in calendar year (1)0.4170.3200.319
___________
(1)Shares that vest at December 31 of each year are issued to the employees in the first quarter of the following year, although the requisite service period is complete. Accordingly, the 0.4 million shares issued in 2019 include shares vested at December 31, 2018, after adjusting for shares withheld to meet employee tax requirements. The shares withheld for employee tax requirements were valued at $5.4 million, $4.8 million and $4.9 million for 2019, 2018 and 2017, respectively.

Stock Option Awards

Beginning in 2017, we no longer grant stock option awards as part of the 2009 Comprehensive Plan. As of December 31, 2019, 0.3 million shares of stock option awards were outstanding and exercisable, with a weighted average remaining life of 5 years and a weighted average exercise price of $19.03 per share. During 2019, 2018 and 2017, we received proceeds of $0.4 million, $3 million and $7 million, respectively, from the exercise of stock options.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other Stock Plans

In addition to the share-based plans described above, we maintain an upper-middle management plan and an employee stock purchase plan. The upper-middle management awards are time-based, equity-classified awards that vest within three years of the grant date and compensation expense is recognized over the life of the award based on the grant date fair value. Through the employee stock purchase plan, employees can purchase stock at a discount of 10% of the lower of the beginning and ending stock price each quarter. During 2019, 2018 and 2017, we granted a total of 133,000 shares, 136,000 shares and 69,000 shares, respectively, under these two programs and recorded compensation expense of $2.0 million, $1.9 million and $1.7 million, respectively.

10.Profit Sharing and Post-employment Benefit Plans

We contribute to defined contribution plans for the benefit of employees who meet certain eligibility requirements and who elect participation in the plans. The discretionary amount to be matched by us is determined annually by Host Inc.’s Board of Directors. Our liability recorded for this obligation is not material. Payments for these items were not material for the three years ended December 31, 2019.

11.Dispositions

We disposed of 14 hotels in 2019, four hotels in 2018 and four hotels in 2017 and recorded gains on sales of approximately $339 million, $279 million and $99 million, respectively. In connection with the sale of the Hilton Melbourne South Wharf in 2017, we recorded in 2017 Australian capital gain tax of $17 million that was paid with respect to the gain on sale.

Additionally, on September 21, 2018, we sold the New York Marriott Marquis retail and theater commercial units and the related signage areas of the hotel (the “Retail”) to Vornado Realty Trust for a sale price of $442 million and recorded a gain of approximately $386 million, which is net of the non-cash incurrence of a liability of approximately $35 million related to Vornado’s contractual right to future real estate tax rebates. Substantially all of the net proceeds from the sale of the Retail were used to close out a reverse like-kind exchange structure established in connection with the acquisition of the Hyatt portfolio in March 2018. We elected to pay U.S. federal and applicable state corporate income tax of approximately $16 million on the capital gain generated by the sale proceeds not used to close out the reverse like-kind exchange rather than distribute such capital gain to our stockholders.

The gain on sale of assets is included in other gains/(losses) on the consolidated statement of operations.

12.Acquisitions

Asset Acquisitions

In February 2019, we acquired the fee simple interest in the 429-room 1 Hotel South Beach for a total purchase price of $610 million. Consideration included the issuance of $23 million of preferred Host L.P. OP units that are included in debt, as they are redeemable for cash at the option of the holder, and $3 million of common Host L.P. OP units. In March 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 a total purchase price of $1 billion.

13.Fair Value Measurements

Impairment

During 2019, we recorded impairment expense of $14 million related to the Sheraton San Diego Hotel & Marina and a right-of-use asset associated with an operating lease, based on the expected sale proceeds and expected sub-rental income, respectively, which are considered observable inputs other than quoted prices (Level 2) in the GAAP fair value hierarchy. The Sheraton San Diego Hotel & Marina was sold in 2019.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During 2018, we recorded an impairment expense of $44 million related to the W New York, the W New York – Union Square and the Westin New York Grand Central based on the expected sale proceeds of the properties, which is considered an observable input other than quoted prices (Level 2) in the GAAP fair value hierarchy. The W New York and W New York – Union Square hotels were sold during 2018 and the Westin New York Grand Central was classified as held-for-sale as of December 31, 2018. The fair value of the Westin New York Grand Central, less costs to sell, at December 31, 2018 was $270 million. The Westin New York Grand Central was sold in 2019.

During 2018, we also recorded an impairment expense of $216 million related to the Sheraton New York Times Square Hotel based on a range of sale prices negotiated with a potential buyer, which is considered an observable input other than quoted prices (Level 2) in the GAAP fair value hierarchy. The fair value of the Sheraton New York Times Square Hotel following the impairment was $495 million.

In 2017, we recorded an impairment expense of $43 million related to the W New York. The fair value was based on the expected sale proceeds of the property, which is considered an observable input other than quoted prices (Level 2) in the GAAP fair value hierarchy.

Impairment expense for 2019, 2018 and 2017 is recorded in depreciation and amortization on the consolidated statements of operations.

Other Liabilities

Fair Value of Other Financial Liabilities. We did not elect the fair value measurement option for any of our other financial liabilities. The fair values of secured debt and our credit facility are determined based on the expected future payments discounted at risk-adjusted rates. Senior notes are valued based on quoted market prices. The fair values of financial instruments not included in this table are estimated to be equal to their carrying amounts. The fair value of certain financial liabilities is shown below (in millions):

December 31, 2019December 31, 2018
Carrying AmountFair ValueCarrying AmountFair Value
Financial liabilities
Senior notes (Level 1)$2,776$2,953$2,782$2,808
Credit facility (Level 2)9891,0001,0491,055
14.Relationship with Marriott International

We have entered into various agreements with Marriott, including those for the management or franchise of approximately 68% of our hotels (as measured by revenues) and certain limited administrative services.

In 2019, 2018 and 2017, we paid Marriott $186 million, $200 million and $199 million, respectively, of hotel management fees and approximately $11.5 million, $11.7 million and $9.7 million, respectively, of franchise fees.

15.Hotel Management Agreements and Operating and License Agreements

All of our hotels are managed by third parties pursuant to management or operating agreements, with some of our hotels also being subject to separate license agreements addressing matters pertaining to operations under the designated brand. Hotels managed or franchised by Marriott and Hyatt represent 68% and 18% of our total revenues, respectively. Under these agreements, the managers generally have sole responsibility for all activities necessary for the day-to-day operation of the hotels, including establishing room rates, processing reservations and promoting and publicizing the hotels. The managers also provide all employees for the hotels, prepare reports, budgets and projections, control the working capital, and provide other administrative and accounting support services to the hotels. Costs and expenses incurred by the managers are reimbursed by us. We have approval rights over budgets, capital expenditures, significant leases and contractual commitments, and various other matters.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The initial term of our agreements generally is 10 to 25 years, with one or more renewal terms at the option of the manager. The majority of our agreements condition the manager’s right to exercise options for renewal upon the satisfaction of specified economic performance criteria. The manager typically receives a base management fee, which is calculated as a percentage (generally 2-3%) of annual gross revenues, and an incentive management fee, which typically is calculated as a percentage (generally 10-20%) of operating profit after the owner has received a priority return on its investment. In the case of our hotels operating under the W®, Westin®, Sheraton®, Luxury Collection® and St. Regis® brands, the base management fee is 1% of annual gross revenues, but that amount is supplemented by license fees payable to Marriott under a separate license agreement pertaining to the designated brand, including rights to use trademarks, service marks and logos, matters relating to compliance with certain brand standards and policies, and the provision of certain system programs and centralized services. Under the license agreement, Marriott generally receives 5% of gross revenues attributable to room sales and 2% of gross revenues attributable to food and beverage sales in addition to the base management fee.

Pursuant to the agreements, the manager furnishes the hotels with certain chain services, which generally are provided on a central or regional basis to all hotels in the manager’s hotel system. Chain services include central training, advertising and promotion, national reservation systems, computerized payroll and accounting services, and such additional services as needed which may be more efficiently performed on a centralized basis. Costs and expenses incurred in providing such services are allocated among the hotels managed, owned or leased by the manager on a fair and equitable basis. In addition, our managers generally sponsor a guest rewards program, the costs of which are charged to all of the hotels that participate in such program.

We are obligated to provide the manager with sufficient funds, generally 4-5% of the revenues generated at the hotel, to cover the cost of (a) certain non-routine repairs and maintenance to the hotels which normally are capitalized, and (b) replacements and renewals to the hotels’ furniture, fixtures and equipment. Under certain circumstances, we will be required to establish escrow accounts for such purposes under terms outlined in the agreements.

We generally are limited in our ability to sell, lease or otherwise transfer our hotels unless the transferee assumes the related management agreement. However, most agreements include owner rights to terminate on the basis of the manager’s failure to meet certain performance-based metrics. Typically, these criteria are subject to the manager’s ability to ‘cure’ and avoid termination by payment to us of specified deficiency amounts (or, in some instances, waiver of the right to receive specified future management fees).

In addition to any performance-based or other termination rights, we have negotiated with Marriott and some of our other managers specific termination rights related to specific agreements. These termination rights can take a number of different forms, including termination of agreements upon sale that leave the property unencumbered by any agreement; termination upon sale provided that the property continues to be operated under a license or franchise agreement with continued brand affiliation; and termination without sale or other condition, which may require the payment of a fee. These termination rights also may restrict the number of agreements that may be terminated over any annual or other period; impose limitations on the number of agreements terminated as measured by EBITDA; require that a certain number of hotels continue to maintain the brand affiliation; or be restricted to a specific pool of assets.

16.Geographic and Business Segment Information

We consider each one of our hotels to be an operating segment, none of which meets the threshold for a reportable segment. We also allocate resources and assess operating performance based on individual hotels. All of our other real estate investment activities (primarily our retail spaces and office buildings) are immaterial and, with our operating segments, meet the aggregation criteria, and thus, we report one segment: hotel ownership. Our international operations consist of hotels in two countries as of December 31, 2019. There were no intersegment sales during the periods presented. The following table presents revenues and long-lived assets for each of the geographical areas in which we operate (in millions):

201920182017
RevenuesProperty and Equipment, netRevenuesProperty and Equipment, netRevenuesProperty and Equipment, net
United States$5,381$9,570$5,417$9,651$5,260$9,548
Australia————19—
Brazil234519492259
Canada655667605971
Mexico——21—2714
Total$5,469$9,671$5,524$9,760$5,387$9,692

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17.Legal Proceedings, Guarantees and Contingencies

We are involved in various legal proceedings in the ordinary course of business regarding the operation of our hotels and company matters. To the extent not covered by insurance, these lawsuits generally fall into the following broad categories: disputes involving hotel-level contracts, employment litigation, compliance with laws such as the Americans with Disabilities Act, tax disputes and other general matters. Under our management agreements, our operators have broad latitude to resolve individual hotel-level claims for amounts generally less than $150,000. However, for matters exceeding such threshold, our operators may not settle claims without our consent.

Based on our analysis of legal proceedings with which we currently are involved or of which we are aware and our experience in resolving similar claims in the past, we have recorded minimal accruals as of December 31, 2019 related to such claims. We have estimated that, in the aggregate, our losses related to these proceedings would not be material. We are not aware of any other matters with a reasonably possible unfavorable outcome for which disclosure of a loss contingency is required. No assurances can be given as to the outcome of any pending legal proceedings.

Hurricane Loss Contingency

All of our hotels in Houston and Florida were affected by Hurricanes Harvey and Irma in August and September 2017, respectively. We estimated that the loss for the book value of the property and equipment written off, and the related repairs and cleanup costs, was approximately $34 million. In total, we received property insurance proceeds of approximately $38 million related to these claims and recognized a gain on property insurance of $4 million. Additionally, in 2019, 2018 and 2017, we received $1 million, $7 million and $8 million of business interruption insurance proceeds, respectively, related to the disruption from the hurricanes, which is included in gain on insurance and business interruption settlements on our consolidated statements of operations.

Guarantees and Contingencies

We have entered into certain guarantees which consist of commitments made to third parties for leases or debt that are not recognized in our consolidated financial statements due to various dispositions, spin-offs and contractual arrangements, but that we have agreed to pay in the event of certain circumstances, including the default by an unrelated party. We also may have contingent environmental liabilities related to the presence of hazardous or toxic substances. We consider the likelihood of any material payments under these guarantees and contingencies to be remote.

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.

18.Quarterly Financial Data (unaudited)
2019
FirstSecondThirdFourth
QuarterQuarterQuarterQuarter
(in millions, except per share/unit amounts)
Host Hotels & Resorts, Inc.:
Revenues$1,390$1,483$1,262$1,334
Operating profit216280137166
Net income18929037281
Net income attributable to Host Hotels & Resorts, Inc.18628636880
Basic earnings per common share.25.39.51.11
Diluted earnings per common share.25.39.51.11
Host Hotels & Resorts, L.P.(1):
Net income attributable to Host Hotels & Resorts, L.P.18828937281
Basic earnings per common unit.26.40.52.11
Diluted earnings per common unit.26.40.52.11

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2018
FirstSecondThirdFourth
QuarterQuarterQuarterQuarter
(in millions, except per share/unit amounts)
Host Hotels & Resorts, Inc.:
Revenues$1,346$1,518$1,299$1,361
Operating profit (loss)171263(92)188
Net income256211378306
Net income attributable to Host Hotels & Resorts, Inc.253209322303
Basic earnings per common share.34.28.43.41
Diluted earnings per common share.34.28.43.41
Host Hotels & Resorts, L.P.(1):
Net income attributable to Host Hotels & Resorts, L.P.256211325307
Basic earnings per common unit.35.29.44.42
Diluted earnings per common unit.35.29.44.42
___________
(1)Other income statement line items not presented for Host L.P. are equal to the amounts presented for Host Inc.

The sum of the basic and diluted earnings per common share and OP units for the four quarters in all years presented differs from the annual earnings per common share and OP units due to the required method of computing the weighted average number of shares and OP units in the respective periods.

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