UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 9, 2011

OR

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-14625 (Host Hotels & Resorts, Inc.)

0-25087 (Host Hotels & Resorts, L.P.)

HOST HOTELS & RESORTS, INC.

HOST HOTELS & RESORTS, L.P.

(Exact name of registrant as specified in its charter)

 

Maryland (Host Hotels & Resorts, Inc.) Delaware (Host Hotels & Resorts, L.P.) (State or Other Jurisdiction of Incorporation or Organization)		53-0085950 52-2095412 (I.R.S. Employer Identification No.)
6903 Rockledge Drive, Suite 1500 Bethesda, Maryland (Address of Principal Executive Offices)		20817 (Zip Code)

(240) 744-1000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Host Hotels & Resorts, Inc.		Yes þ		No ¨
Host Hotels & Resorts, L.P.		Yes þ		No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Host Hotels & Resorts, Inc.		Yes þ		No ¨
Host Hotels & Resorts, L.P.		Yes ¨		No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Host Hotels & Resorts, Inc.

Large accelerated filer þ		Accelerated filer ¨
Non-accelerated filer (Do not check if a smaller reporting company) ¨		Smaller reporting company ¨
Host Hotels & Resorts, L.P.
Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer (Do not check if a smaller reporting company) þ		Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Host Hotels & Resorts, Inc.		Yes ¨		No þ
Host Hotels & Resorts, L.P.		Yes ¨		No þ

As of October 12, 2011 there were 706,234,337 shares of Host Hotels & Resorts, Inc.’s common stock, $.01 par value per share, outstanding.

 

 

 

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EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the quarter ended September 9, 2011 of Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. Unless stated otherwise or the context otherwise requires, references to “Host Inc.” mean Host Hotels & Resorts, Inc., a Maryland corporation, and references to “Host L.P.” mean Host Hotels & Resorts, L.P., a Delaware limited partnership, and its consolidated subsidiaries in cases where it is important to distinguish between Host Inc. and Host L.P. We use the terms “we” or “our” or “the company” to refer to Host Inc. and Host L.P. together, unless the context indicates otherwise.

Host Inc. operates as a self-managed and self-administered real estate investment trust (“REIT”). Host Inc. owns properties and conducts operations through Host L.P., of which Host Inc. is the sole general partner and in which it holds approximately 98.5% of the partnership interests (“OP units”). The remaining OP units are owned by various unaffiliated limited partners. As the sole general partner of Host L.P., Host Inc. has the exclusive and complete responsibility for Host L.P.’s day-to-day management and control. Management operates Host Inc. and Host L.P. as one enterprise. The management of Host Inc. consists of the same members who direct the management of Host L.P. As general partner with control of Host L.P., Host Inc. consolidates Host L.P. for financial reporting purposes, and Host Inc. does not have significant assets other than its investment in Host L.P. Therefore, the assets and liabilities of Host Inc. and Host L.P. are substantially the same on their respective consolidated financial statements and the disclosures of Host Inc. and Host L.P. are also substantially similar. For these reasons, we believe that combining into a single report the quarterly reports on Form 10-Q of Host Inc. and Host L.P. results in benefits to management and investors.

The substantive difference between Host Inc.’s and Host L.P.’s filings is the fact that Host Inc. is a REIT with public stock, while Host L.P. is a partnership with no publicly traded equity. In the financial statements, this difference is primarily reflected in the equity (or partners’ capital for Host L.P.) section of the consolidated balance sheets and in the consolidated statements of equity (or partners’ capital) and comprehensive income (loss). Apart from the different equity treatment, the consolidated financial statements of Host Inc. and Host L.P. are nearly identical.

This combined Form 10-Q for Host Inc, and Host L.P. includes for each entity separate interim financial statements (but combined footnotes), separate reports on disclosure controls and procedures and internal control over financial reporting and separate CEO/CFO certifications. In addition, with respect to any other financial and non-financial disclosure items required by Form 10-Q, any material differences between Host Inc. and Host L.P. are discussed herein separately. For a more detailed discussion of the substantive differences between Host Inc. and Host L.P. and why we believe the combined filing results in benefits to investors, see the discussion in the combined Annual Report on Form 10-K for the year ended December 31, 2010 under the heading “Explanatory Note”.

 

i

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

INDEX

 

		PART I.     FINANCIAL INFORMATION
				Page No.
Item 1.		Financial Statements for Host Hotels and Resorts, Inc.:
		Condensed Consolidated Balance Sheets- September 9, 2011 (unaudited) and December 31, 2010		1
		Condensed Consolidated Statements of Operations (unaudited)- Quarter and Year-to-date ended September 9, 2011 and September 10, 2010		2
		Condensed Consolidated Statements of Cash Flows (unaudited)- Year-to-date ended September 9, 2011 and September 10, 2010		4
		Financial Statements for Host Hotels and Resorts, L.P.:
		Condensed Consolidated Balance Sheets- September 9, 2011 (unaudited) and December 31, 2010		5
		Condensed Consolidated Statements of Operations (unaudited)- Quarter and Year-to-date ended September 9, 2011 and September 10, 2010		6
		Condensed Consolidated Statements of Cash Flows (unaudited)- Year-to-date ended September 9, 2011 and September 10, 2010		7
		Notes to Condensed Consolidated Financial Statements (unaudited)		9
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		31
Item 3.		Quantitative and Qualitative Disclosures about Market Risk		55
Item 4.		Controls and Procedures		55
		PART II.     OTHER INFORMATION
Item 1A.		Risk Factors		57
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		57
Item 6.		Exhibits		58

 

ii

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HOST HOTELS & RESORTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

September 9, 2011 and December 31, 2010

(in millions, except share and per share amounts)

 

		September 9, 2011				December 31, 2010
		(unaudited)
ASSETS
Property and equipment, net		$	11,444			$	10,514
Due from managers			34				45
Investments in affiliates			171				148
Deferred financing costs, net			44				44
Furniture, fixtures and equipment replacement fund			166				152
Other			386				354
Restricted cash			36				41
Cash and cash equivalents			524				1,113
Total assets		$	12,805			$	12,411
LIABILITIES, NON-CONTROLLING INTERESTS AND EQUITY
Debt
Senior notes, including $925 million and $1,156 million, respectively, net of discount, of Exchangeable Senior Debentures		$	4,266			$	4,249
Credit facility			119				58
Mortgage debt			1,016				1,025
Other			87				145
Total debt			5,488				5,477
Accounts payable and accrued expenses			173				208
Other			225				203
Total liabilities			5,886				5,888
Non-controlling interests - Host Hotels & Resorts, L.P.			115				191
Host Hotels & Resorts Inc. stockholders’ equity:
Common stock, par value $.01, 1,050 million shares authorized; 702.7 million shares and 675.6 million shares issued and outstanding, respectively			7				7
Additional paid-in capital			7,760				7,236
Accumulated other comprehensive income			31				25
Deficit			(1,032	)			(965	)
Total equity of Host Hotels & Resorts, Inc. stockholders			6,766				6,303
Non-controlling interests—other consolidated partnerships			38				29
Total equity			6,804				6,332
Total liabilities, non-controlling interests and equity		$	12,805			$	12,411

 

See notes to condensed consolidated statements.

1

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HOST HOTELS & RESORTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Quarter and Year-to-date Ended September 9, 2011 and September 10, 2010

(unaudited, in millions, except per share amounts)

 

		Quarter ended								Year-to-date ended
		September 9, 2011				September 10, 2010				September 9, 2011				September 10, 2010
REVENUES
Rooms		$	733			$	627			$	2,034			$	1,781
Food and beverage			285				253				935				848
Other			67				63				197				191
Owned hotel revenues			1,085				943				3,166				2,820
Other revenues			57				60				174				117
Total revenues			1,142				1,003				3,340				2,937
EXPENSES
Rooms			207				178				563				496
Food and beverage			236				212				706				639
Other departmental and support expenses			304				276				851				775
Management fees			41				36				126				112
Other property-level expenses			139				124				393				306
Depreciation and amortization			149				134				439				409
Corporate and other expenses			12				20				58				69
Total operating costs and expenses			1,088				980				3,136				2,806
OPERATING PROFIT			54				23				204				131
Interest income			5				2				15				3
Interest expense			(87	)			(89	)			(259	)			(268	)
Net gains on property transactions and other			3				—				6				—
Loss on foreign currency transactions and derivatives			(2	)			(1	)			—				(6	)
Equity in losses of affiliates			(5	)			(1	)			(3	)			(5	)
LOSS BEFORE INCOME TAXES			(32	)			(66	)			(37	)			(145	)
Benefit (provision) for income taxes			(3	)			5				9				21
LOSS FROM CONTINUING OPERATIONS			(35	)			(61	)			(28	)			(124	)
Loss from discontinued operations, net of tax			—				—				(4	)			(2	)
NET LOSS			(35	)			(61	)			(32	)			(126	)
Less: Net loss attributable to non-controlling interests			2				3				—				2
NET LOSS ATTRIBUTABLE TO HOST HOTELS & RESORTS, INC.			(33	)			(58	)			(32	)			(124	)
Less: Dividends on preferred stock			—				—				—				(4	)
Issuance costs of redeemed preferred stock			—				—				—				(4	)
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS		$	(33	)		$	(58	)		$	(32	)		$	(132	)
Basic loss per common share:
Continuing operations		$	(.05	)		$	(.09	)		$	(.04	)		$	(.20	)
Discontinued operations			—				—				(.01	)			—
Basic loss per common share		$	(.05	)		$	(.09	)		$	(.05	)		$	(.20	)
Diluted loss per common share:
Continuing operations		$	(.05	)		$	(.09	)		$	(.04	)		$	(.20	)
Discontinued operations			—				—				(.01	)			—
Diluted loss per common share		$	(.05	)		$	(.09	)		$	(.05	)		$	(.20	)

 

See notes to condensed consolidated statements.

2

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HOST HOTELS & RESORTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Year-to-date Ended September 9, 2011 and September 10, 2010

(unaudited, in millions)

 

		Year-to-date ended
		September 9, 2011				September 10, 2010
OPERATING ACTIVITIES
Net loss		$	(32	)		$	(126	)
Adjustments to reconcile to cash provided by operations:
Discontinued operations:
Loss on dispositions			—				1
Depreciation			3				—
Depreciation and amortization			439				409
Amortization of deferred financing costs			8				8
Amortization of debt premiums/discounts, net			13				24
Deferred income taxes			(13	)			(22	)
Net gain on property transactions and other			(6	)			—
Loss on foreign currency transactions and derivatives			—				6
Non-cash loss on extinguishment of debt			4				4
Equity in losses of affiliates, net			3				5
Distributions from equity investments			—				2
Change in due from managers			3				(25	)
Changes in other assets			(23	)			24
Changes in other liabilities			—				18
Cash provided by operations			399				328
INVESTING ACTIVITIES
Proceeds from sales of assets, net			6				12
Proceeds from transfer of Le Méridien Piccadilly to the Euro JV Fund II			40				—
Acquisitions			(1,047	)			(292	)
Deposits for acquisitions			(15	)			—
Investment in affiliates			(18	)			—
Purchase of mortgage note on a portfolio of hotels			—				(53	)
Capital expenditures:
Renewals and replacements			(182	)			(99	)
Return on investments			(153	)			(50	)
Change in furniture, fixtures and equipment (“FF&E”) replacement fund			5				(20	)
Change in FF&E replacement funds designated as restricted cash			—				4
Property insurance proceeds			7				—
Cash used in investing activities			(1,357	)			(498	)
FINANCING ACTIVITIES
Financing costs			(9	)			—
Issuances of debt			576				—
Draw on credit facility			153				56
Repayment on credit facility			(90	)			—
Repurchase/redemption of senior notes, including exchangeable debentures			(370	)			(571	)
Mortgage debt prepayments and scheduled maturities			(132	)			(124	)
Scheduled principal repayments			(4	)			(8	)
Common stock issuance			289				158
Redemption of preferred stock			—				(101	)
Dividends on common stock			(42	)			(14	)
Dividends on preferred stock			—				(6	)
Distributions to non-controlling interests			(4	)			(3	)
Contributions from non-controlling interests			—				7
Change in restricted cash for financing activities			2				(28	)
Cash provided by (used in) financing activities			369				(634	)
DECREASE IN CASH AND CASH EQUIVALENTS			(589	)			(804	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			1,113				1,642
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	524			$	838

 

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HOST HOTELS & RESORTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Year-to-date Ended September 9, 2011 and September 10, 2010

(unaudited)

Supplemental disclosure of cash flow information (in millions):

 

		Year-to-date ended
		September 9, 2011				September 10, 2010
Interest paid		$	199			$	209
Income taxes paid			5				3

Supplemental disclosure of noncash investing and financing activities:

For the year-to-date periods ended September 9, 2011 and September 10, 2010, Host Inc. issued approximately 0.2 million shares and 1.1 million shares, respectively, upon the conversion of operating partnership units (“OP units”) of Host Hotels & Resorts, L.P. (“Host L.P.”) held by non-controlling partners valued at approximately $4 million and $12 million, respectively.

On March 17, 2011, we acquired the 1,625-room Manchester Grand Hyatt San Diego, and certain related rights. In connection with the acquisition, Host L.P. issued approximately 0.3 million common OP units valued at $18.741 per unit, or approximately $6 million.

On April 29, 2011, we acquired a 75% controlling interest in the 364-room Hilton Melbourne South Wharf. In connection with the acquisition, we assumed AUD 80 million ($86 million) of mortgage debt and recorded the mortgage debt at its fair value at the acquisition date, which reflected a premium of $0.5 million.

On June 28, 2011, we transferred the Le Méridien Piccadilly to the European joint venture’s second fund (the “Euro JV Fund II”) at a price of £64 million ($102 million), including the assumption of the associated £32 million ($52 million) mortgage. We also transferred the capital lease asset and corresponding liability associated with the building, each valued at £38 million ($61 million), to the Euro JV Fund II. We retained a 33.4% interest in the property through our general and limited partner interests in the Euro JV Fund II and received cash proceeds on the transfer of £25 million ($40 million).

In June 2011, holders of approximately $134 million of the 3.25% Exchangeable Debentures elected to exchange their debentures for approximately 8.8 million shares of Host Inc. common stock.

 

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HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

September 9, 2011 and December 31, 2010

(in millions)

		September 9, 2011				December 31, 2010
		(unaudited)
ASSETS
Property and equipment, net		$	11,444			$	10,514
Due from managers			34				45
Investments in affiliates			171				148
Deferred financing costs, net			44				44
Furniture, fixtures and equipment replacement fund			166				152
Other			386				353
Restricted cash			36				41
Cash and cash equivalents			524				1,113
Total assets		$	12,805			$	12,410
LIABILITIES, LIMITED PARTNERSHIP INTEREST OF THIRD PARTIES AND CAPITAL
Debt
Senior notes, including $925 million and $1,156 million, respectively, net of discount, of Exchangeable Senior Debentures		$	4,266			$	4,249
Credit facility			119				58
Mortgage debt			1,016				1,025
Other			87				145
Total debt			5,488				5,477
Accounts payable and accrued expenses			173				208
Other			225				203
Total liabilities			5,886				5,888
Limited partnership interests of third parties			115				191
Host Hotels & Resorts, L.P. capital:
General partner			1				1
Limited partner			6,734				6,276
Accumulated other comprehensive income			31				25
Total Host Hotels & Resorts, L.P. capital			6,766				6,302
Non-controlling interests—consolidated partnerships			38				29
Total capital			6,804				6,331
Total liabilities, limited partnership interest of third parties and capital		$	12,805			$	12,410

 

See notes to condensed consolidated statements.

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HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Quarter and Year-to-date Ended September 9, 2011 and September 10, 2010

(unaudited, in millions, except per unit amounts)

 

		Quarter ended								Year-to-date ended
		September 9, 2011				September 10, 2010				September 9, 2011				September 10, 2010
REVENUES
Rooms		$	733			$	627			$	2,034			$	1,781
Food and beverage			285				253				935				848
Other			67				63				197				191
Owned hotel revenues			1,085				943				3,166				2,820
Other revenues			57				60				174				117
Total revenues			1,142				1,003				3,340				2,937
EXPENSES
Rooms			207				178				563				496
Food and beverage			236				212				706				639
Other departmental and support expenses			304				276				851				775
Management fees			41				36				126				112
Other property-level expenses			139				124				393				306
Depreciation and amortization			149				134				439				409
Corporate and other expenses			12				20				58				69
Total operating costs and expenses			1,088				980				3,136				2,806
OPERATING PROFIT			54				23				204				131
Interest income			5				2				15				3
Interest expense			(87	)			(89	)			(259	)			(268	)
Net gains on property transactions and other			3				—				6				—
Loss on foreign currency transactions and derivatives			(2	)			(1	)			—				(6	)
Equity in losses of affiliates			(5	)			(1	)			(3	)			(5	)
LOSS BEFORE INCOME TAXES			(32	)			(66	)			(37	)			(145	)
Benefit (provision) for income taxes			(3	)			5				9				21
LOSS FROM CONTINUING OPERATIONS			(35	)			(61	)			(28	)			(124	)
Loss from discontinued operations, net of tax.			—				—				(4	)			(2	)
NET LOSS			(35	)			(61	)			(32	)			(126	)
Less: Net loss attributable to non-controlling interests			1				2				—				—
NET LOSS ATTRIBUTABLE TO HOST HOTELS & RESORTS, L.P.			(34	)			(59	)			(32	)			(126	)
Less: Distributions on preferred units			—				—				—				(4	)
Issuance costs of redeemed preferred units			—				—				—				(4	)
NET LOSS AVAILABLE TO COMMON UNITHOLDERS		$	(34	)		$	(59	)		$	(32	)		$	(134	)
Basic loss per common unit:
Continuing operations		$	(.05	)		$	(.09	)		$	(.04	)		$	(.21	)
Discontinued operations			—				—				(.01	)			—
Basic loss per common unit		$	(.05	)		$	(.09	)		$	(.05	)		$	(.21	)
Diluted loss per common unit:
Continuing operations		$	(.05	)		$	(.09	)		$	(.04	)		$	(.21	)
Discontinued operations			—				—				(.01	)			—
Diluted loss per common unit		$	(.05	)		$	(.09	)		$	(.05	)		$	(.21	)

 

See notes to condensed consolidated statements.

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HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Year-to-date Ended September 9, 2011 and September 10, 2010

(unaudited, in millions)

 

		Year-to-date ended
		September 9, 2011				September 10, 2010
OPERATING ACTIVITIES
Net loss		$	(32	)		$	(126	)
Adjustments to reconcile to cash provided by operations:
Discontinued operations:
Loss on dispositions			—				1
Depreciation			3				—
Depreciation and amortization			439				409
Amortization of deferred financing costs			8				8
Amortization of debt premiums/discounts, net			13				24
Deferred income taxes			(13	)			(22	)
Net gain on property transactions and other			(6	)			—
Loss on foreign currency transactions and derivatives			—				6
Non-cash loss on extinguishment of debt			4				4
Equity in (earnings) losses of affiliates, net			3				5
Distributions from equity investments			—				2
Change in due from managers			3				(25	)
Changes in other assets			(23	)			24
Changes in other liabilities			—				18
Cash provided by operations			399				328
INVESTING ACTIVITIES
Proceeds from sales of assets, net			6				12
Proceeds from transfer of the Le Méridien Piccadilly to the Euro JV Fund II			40				—
Acquisitions			(1,047	)			(292	)
Deposits for acquisitions			(15	)			—
Investment in affiliates			(18	)			—
Purchase of mortgage note on a portfolio of hotels			—				(53	)
Capital expenditures:
Renewals and replacements			(182	)			(99	)
Return on investments			(153	)			(50	)
Change in furniture, fixtures and equipment (“FF&E”) replacement fund			5				(20	)
Change in FF&E replacement funds designated as restricted cash			—				4
Property insurance proceeds			7				—
Cash used in investing activities			(1,357	)			(498	)
FINANCING ACTIVITIES
Financing costs			(9	)			—
Issuances of debt			576				—
Draw on credit facility			153				56
Repayment on credit facility			(90	)			—
Repayments/redemption of senior notes, including exchangeable debentures			(370	)			(571	)
Mortgage debt prepayments and scheduled maturities			(132	)			(124	)
Scheduled principal repayments			(4	)			(8	)
Common OP unit issuance			289				158
Redemption of preferred OP units			—				(101	)
Distributions on common OP units			(42	)			(14	)
Distributions on preferred OP units			—				(6	)
Distributions to non-controlling interests			(4	)			(3	)
Contributions from non-controlling interests			—				7
Change in restricted cash for financing activities			2				(28	)
Cash provided by (used in) financing activities			369				(634	)
DECREASE IN CASH AND CASH EQUIVALENTS			(589	)			(804	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			1,113				1,642
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	524			$	838

 

See notes to condensed consolidated statements.

7

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HOST HOTELS & RESORTS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Year-to-date Ended September 9, 2011 and September 10, 2010

(unaudited)

 

Supplemental disclosure of cash flow information (in millions):

 

		Year-to-date ended
		September 9, 2011				September 10, 2010
Interest paid		$	199			$	209
Income taxes paid			5				3

Supplemental disclosure of noncash investing and financing activities:

For the year-to-date periods ended September 9, 2011 and September 10, 2010, limited partners converted operating partnership units (“OP units”) valued at approximately $4 million and $12 million, respectively, in exchange for approximately 0.2 million and 1.1 million shares, respectively, of Host Hotels & Resorts, Inc. common stock.

On March 17, 2011, we acquired the 1,625-room Manchester Grand Hyatt San Diego, and certain related rights. In connection with the acquisition, Host Hotels & Resorts, L.P. issued approximately 0.3 million common OP units valued at $18.741 per unit, or approximately $6 million.

On April 29, 2011, we acquired a 75% controlling interest in the 364-room Hilton Melbourne South Wharf. In connection with the acquisition, we assumed AUD 80 million ($86 million) of mortgage debt and recorded the mortgage debt at its fair value at the acquisition date, which reflected a premium of $0.5 million.

On June 28, 2011, we transferred the Le Méridien Piccadilly to the Euro JV Fund II at a price of £64 million ($102 million), including the assumption of the associated £32 million ($52 million) mortgage. We also transferred the capital lease asset and corresponding liability associated with the building, each valued at £38 million ($61 million), to the Euro JV Fund II. We retained a 33.4% interest in the property through our general and limited partner interests in the Euro JV Fund II and received cash proceeds on the transfer of £25 million ($40 million).

In June 2011, holders of approximately $134 million of the 3.25% Exchangeable Debentures elected to exchange their debentures for approximately 8.8 million shares of Host Inc. common stock.

 

See notes to condensed consolidated statements.

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.	Organization

Description of Business

Host Hotels & Resorts Inc. operates as a self-managed and self-administered real estate investment trust (“REIT”) with its operations conducted solely through Host Hotels & Resorts L.P. and its subsidiaries. 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 condensed 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 specifically refer to Host Hotels & Resorts, Inc. and the term “Host L.P.” to specifically refer 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 98.5% of Host L.P.’s OP units.

As of September 9, 2011, we owned, or had controlling interests in, 105 lodging properties located throughout the United States, as well as 16 properties located in Australia, Brazil, Chile, Canada, Mexico and New Zealand, all operated under some of the leading brands in the lodging industry.

 

2.	Summary of Significant Accounting Policies

We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. generally accepted accounting principles (“GAAP”) in the accompanying unaudited condensed consolidated financial statements. We believe the disclosures made are adequate to prevent the information presented from being misleading. However, the unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10–K for the year ended December 31, 2010.

The preparation of financial statements in conformity with 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.

In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary to present fairly our financial position as of September 9, 2011 and the results of our operations for the quarterly and year-to-date periods ended September 9, 2011 and September 10, 2010 and cash flows for the year-to-date periods ended September 9, 2011 and September 10, 2010. Interim results are not necessarily indicative of full year performance because of the impact of seasonal and short-term variations.

 

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.	Earnings (Loss) Per Common Share (Unit)

  Host Inc. Earnings (Loss) per Common Share

Basic earnings (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of Host Inc. common stock outstanding. Diluted earnings (loss) per common share is computed by dividing net income (loss) available to common stockholders as adjusted for potentially dilutive securities, by the weighted average number of shares of Host Inc. common stock outstanding plus other potentially dilutive securities. Dilutive securities may include shares granted under comprehensive stock plans, other non-controlling interests that have the option to convert their limited partnership interests to common OP units and convertible debt securities. Due to the net loss for all periods presented, all of our securities are anti-dilutive and, therefore, no effect for such securities is shown.

 

 

 

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Host L.P. Earnings (Loss) Per Common Unit

Basic earnings (loss) per common unit is computed by dividing net income available to common unitholders by the weighted average number of common units outstanding. Diluted earnings (loss) per common unit is computed by dividing net income (loss) available to common unitholders as adjusted for potentially dilutive securities, by the weighted average number of common units outstanding plus other potentially dilutive securities. Dilutive securities may include units distributed to Host Inc. to support Host Inc. common shares granted under comprehensive stock plans, other non-controlling interests that have the option to convert their limited partnership interests to common OP units and convertible debt securities. Due to the net loss for all periods presented, all of our securities are anti-dilutive and, therefore, no effect for such securities is shown.

 

 

 

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

4.	Property and Equipment

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

 

 

5.	Investment in Affiliates

European Joint Venture. On June 27, 2011, the expansion of the European Joint Venture (Euro JV) was completed through the creation of the Euro JV Fund II in which each of the current partners in the Euro JV holds a 33.3% limited partner interest and we hold the 0.1% general partner interest. The Euro JV Fund II has a target size of approximately €450 million of new equity and a target investment of approximately €1 billion, after taking into account anticipated debt. As part of the expansion, on June 28, 2011, we transferred the Le Méridien Piccadilly to the Euro JV Fund II at a price of £64 million ($102 million), including the assumption of the associated £32 million ($52 million) mortgage. We also transferred the capital lease asset and corresponding liability associated with the building, each valued at £38 million ($61 million), to the Euro JV Fund II. Proceeds received from the Euro JV Fund II in exchange for the transfer of the Le Méridien Piccadilly were used to repay £25 million ($40 million) under our credit facility. In addition to the expansion of the capacity of the Euro JV, we have extended its term from 2016 to 2021, subject to two one-year extensions.

On September 30, 2011, the Euro JV Fund II acquired the 396-room Pullman Bercy, Paris, for approximately €96 million ($132 million), including customary transfer taxes and other closing costs. The Euro JV Fund II has agreed to invest an additional €9 million to renovate the rooms and public space at the hotel. The purchase price allocations are estimated based on available information; however, the Euro JV Fund II is still in the process of finalizing its accounting for the transaction.

 

6.

Debt

Senior Notes. In August 2011, we repurchased approximately $105 million face amount of 2 ⁵/8% exchangeable senior debentures (“2007 Debentures”), with a carrying value of $102 million, for $106 million and recorded a loss of approximately $4 million on the transaction. We have approximately $421 million face amount of the 2007 Debentures outstanding.

On May 27, 2011, we gave notice of our intent to redeem $150 million of the outstanding $325 million 3.25% exchangeable senior debentures (2004 Debentures). In June 2011, holders of approximately $134 million of the 2004 Debentures elected to exchange their debentures for approximately 8.8 million shares of Host Inc. common stock, rather than receive the cash redemption proceeds, while the remaining $16 million of debentures were redeemed for cash.

Mortgage Debt. On June 28, 2011, we transferred the £32 million ($52 million) mortgage on the Le Méridien Piccadilly, as well as the £38 million ($61 million) capital lease obligation, to the Euro JV Fund II.

Credit Facility. On June 28, 2011, we used the proceeds received from the transfer of the Le Méridien Piccadilly to the Euro JV Fund II to repay £25 million ($40 million) under the credit facility. We have

 

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

$481 million of remaining available capacity under our credit facility as of September 9, 2011. Additionally, on September 9, 2011, we exercised our option to extend the maturity of our credit facility through September 9, 2012.

 

7.	Equity of Host Inc. and Capital of Host L.P.

Equity of Host Inc.

Equity is allocated between controlling and non-controlling interests as follows (in millions):

 

Capital of Host L.P.

As of September 9, 2011, Host Inc. is the owner of approximately 98.5% of Host L.P.’s common OP units. The remaining 1.5% of the common OP units are held by third party limited partners. Each 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 exchange for any shares issued by Host Inc., Host L.P. will issue OP units to Host Inc. based on the applicable conversion ratio. Additionally, funds used by Host Inc. to pay dividends on its common stock are provided by distributions from Host L.P.

 

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Capital is allocated between controlling and non-controlling interests as follows (in millions):

 

Issuance of Common Stock

On April 21, 2011, we entered into a Sales Financing Agreement with BNY Mellon Capital Markets, LLC, through which Host Inc. may issue and sell, from time to time, shares having an aggregate offering price of up to $400 million. The sales will be made in “at the market” offerings under Securities and Exchange Commission (“SEC”) rules, including sales made directly on the NYSE. BNY Mellon Capital Markets, LLC is acting as sales agent. Host Inc. may sell shares of common stock under its program from time to time based on market conditions, although it is not under an obligation to sell any shares. During the third quarter 2011, we issued approximately 50 thousand shares of common stock under the program at an average price of $16.61 per share, for net proceeds of approximately $1 million. During 2011 (including sales under our prior “at the market” program), we have issued 16.7 million shares at an average price of $17.44 per share, for net proceeds of $289 million.

Dividends/Distributions

On September 19, 2011, Host Inc.’s Board of Directors declared a dividend of $0.04 per share on its common stock. The dividend is payable on October 17, 2011 to stockholders of record as of September 30, 2011. Accordingly, Host L.P. will make a distribution of $0.04085976 per unit on its common OP units based on the current conversion ratio.

 

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

8.	Geographic 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 leased hotels and office buildings) are immaterial and meet the aggregation criteria. Thus, we report one segment: hotel ownership. As of September 9, 2011, our foreign operations consist of 16 properties in six countries. There were no intercompany sales during the periods presented. The following table presents total revenues and long-lived assets for each of the geographical areas in which we operate (in millions):

 

 

9.	Comprehensive Income

Other comprehensive income consists of unrealized gains and losses on foreign currency translation adjustments and hedging instruments.

The following table presents comprehensive income for all periods presented (in millions):

 

 

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

10.	Dispositions

We disposed of one hotel during 2011 and two hotels in 2010, for net proceeds of approximately $6 million and $12 million, respectively. The following table summarizes the revenues, loss before income taxes, and the loss on dispositions, net of income taxes, of the hotels which have been included in discontinued operations for all periods presented:

 

 

11.	Acquisitions

We record the assets acquired, liabilities assumed and non-controlling interests issued at the estimated fair value on the date of purchase.

During the first and second quarters of 2011, we acquired the 364-room Hilton Melbourne South Wharf, Australia, for AUD 142 million ($152 million), including the 25% voting interest retained by the previous owners; the 775-room New York Helmsley Hotel for $313.5 million; the 1,625-room Manchester Grand Hyatt San Diego for $572 million; and a portfolio of seven hotels containing 1,207 rooms in New Zealand for approximately $145 million. Acquisition-related costs, such as broker fees, due diligence costs, transfer taxes and legal and accounting fees, are expensed in the period incurred and are not capitalized or applied in determining the fair value of the acquired assets. For these acquisitions, we recorded approximately $4 million of acquisition-related expenses year-to-date. These costs are included in corporate and other expenses on the consolidated statement of operations. The purchase price allocations are estimated based on available information, however, we are still in the process of finalizing our accounting for these transactions.

Additionally, on July 14, 2011, we reached an agreement to acquire the 888-room Grand Hyatt Washington, D.C. for $442 million, which includes a $15 million deposit and may include the assumption of a $166 million mortgage loan. The Grand Hyatt, which includes over 43,000 square feet of meeting space, is centrally located in the nation’s capital. We recently amended the purchase agreement to extend the closing to December 14, 2011, subject to customary closing conditions. To the extent that the transaction does not close, we would lose our $15 million deposit.

 

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed related to our acquisitions completed in 2011 (in millions):

 

Property and equipment			$        1,156
Restricted cash, FF&E reserves and other assets			27
Total assets			1,183
Mortgage debt			(86	)
Other liabilities			(6	)
Total net assets acquired			$        1,091

Our summarized unaudited consolidated pro forma results of operations, assuming all of our acquisitions completed during 2010 and 2011 occurred on January 1, 2010, are as follows (in millions, except per share amounts):

 

The above pro forma results of operations exclude $4 million of acquisition costs for the year-to-date period ended September 9, 2011 and $3 million of acquisition costs for the quarter and year-to-date periods ended September 10, 2010. For the third quarter and year-to-date 2011, we have included approximately $72 million and $128 million of revenues, respectively, and $7 million and $11 million of net income for each of the periods, respectively, in our consolidated statements of operations related to our 2011 acquisitions.

 

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

12.	Fair Value Measurements

We have adopted the provisions under GAAP for both recurring and non-recurring fair value measurements. Our recurring fair value measurements consist of the valuation of our derivative instruments, which may or may not be designated as accounting hedges. 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) and includes an evaluation of counterparty credit risk.

The following table details the fair value of our financial assets and liabilities that are required to be measured at fair value on a recurring basis at September 9, 2011 (in millions).

 

						Fair Value at Measurement Date Using
		Balance at September 9, 2011				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Fair Value Measurements on a Recurring Basis:
Interest rate swap derivatives		$	10.0			$	—			$	10.0			$	—
Foreign currency forward purchase contracts			5.2				—				5.2				—
						Fair Value at Measurement Date Using
		Balance at December 31, 2010				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Fair Value Measurements on a Recurring Basis:
Interest rate swap derivatives		$	10.6			$	—			$	10.6			$	—
Foreign currency forward purchase contracts			6.9				—				6.9				—

Interest Rate Swap Derivatives. In connection with the acquisition of the Hilton Melbourne South Wharf on April 29, 2011, we assumed an interest rate swap agreement with a notional amount of AUD 80 million ($86 million) related to its mortgage debt. The purpose of the interest rate swap is to hedge against changes in cash flows (interest payments) attributable to fluctuations in the Reuters BBSY. As a result, we will pay an all-in rate of 10.77% on the loan. The derivative value is based on the prevailing market yield curve on the date of measurement. We also evaluate counterparty credit risk in the calculation of the fair value of the swap. The swap did not qualify for hedge accounting at acquisition; therefore, the changes in the fair value of the derivative are recorded in gain (loss) on foreign currency transactions and derivatives on the accompanying unaudited condensed consolidated statements of operations at each balance sheet date. As of September 9, 2011, we have recorded a liability of $1.5 million related to the fair value of the swap.

On February 18, 2011, we entered into an interest rate swap agreement with a notional amount of NZD 79 million ($60 million) related to the mortgage debt on the seven properties acquired in New Zealand on February 18, 2011. We entered into the swap in order to hedge against changes in cash flows (interest payments) attributable to fluctuations in the 3-month NZD Bank Bill rate. As a result, we will pay an all-in rate of 5.95% on the notional amount of the swap. We have designated the derivative as a cash flow hedge.

 

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The derivative value is based on the prevailing market yield curve on the date of measurement. We also evaluate counterparty credit risk in the calculation of the fair value of the swap. The change in fair value of the derivative is recorded in accumulated other comprehensive income within the equity portion of our balance sheet. As of September 9, 2011, we recorded a liability of $2.3 million related to the fair value of the swap. No portion of the cash flow derivative was ineffective during the quarter.

We have three additional interest rate swap agreements for an aggregate notional amount of $300 million. We entered into these derivative instruments in order to hedge changes in the fair value of the fixed-rate debt that occur as a result of changes in market interest rates. We have designated these derivatives as fair value hedges. The derivatives are valued based on the benchmark yield curve on the date of measurement. We also evaluate counterparty credit risk in the calculation of the fair value of the swaps. As of September 9, 2011 and December 31, 2010, we recorded an asset of $13.8 million and $10.6 million, respectively, related to the fair value of the swaps. We record the change in the fair value of the underlying debt due to a change in the LIBOR rate as an adjustment to the carrying amount of the debt. Any difference between the change in the fair value of the swap and the change in the fair value in the underlying debt, which was not significant for the period presented, is considered the ineffective portion of the hedging relationship and is recognized in net income (loss).

Foreign Currency Forward Purchase Contracts. As of September 9, 2011, we had six foreign currency forward purchase contracts that hedge a portion of the foreign currency exposure resulting from the eventual repatriation of our net investments in the Euro JV and HHR New Zealand Holdings Limited, the consolidated owner of the portfolio of seven hotels in New Zealand. These derivatives are considered a hedge of the foreign currency exposure of a net investment in a foreign operation with changes in fair value recorded to accumulated other comprehensive income. The forward purchase contracts are valued based on the forward yield curve of the Euro to U.S. dollar forward exchange rate on the date of measurement. The following tables summarize our foreign currency forward purchase contracts (in millions):

 

On July 15, 2011, we entered into two forward purchase contracts totaling €50 million ($69 million) in order to hedge a portion of the foreign currency exposure resulting from the eventual repatriation of our net investment in the Euro JV. We will sell the Euro amount and receive the U.S. dollar amount on the forward purchase dates of October 22, 2012 and August 18, 2015. As part of the contract, we also entered into a forward purchase contract to net-settle the existing February 2008 €30 million foreign currency purchase contract and received cash of $0.4 million on the settlement date of August 18, 2011. Following these transactions, we have hedged our foreign currency exposure related to €100 million ($140 million) of our net investment in the Euro JV.

On July 29, 2011, we also entered into an NZD 30 million ($25 million) forward purchase contract in order to hedge a portion of the foreign currency exposure resulting from the eventual repatriation of our net investment in HHR New Zealand Holdings Limited. We will sell the NZD amount and receive the U.S. dollar amount on the forward purchase date of August 2, 2013.

Fair Value of Other Financial Assets and Liabilities. For financial statement purposes, we did not elect the fair value measurement option for any of our financial assets or liabilities. We have calculated the fair value of our other financial assets and liabilities as detailed below. Notes receivable and other financial

 

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

assets are valued based on the expected future cash flows discounted at risk-adjusted rates and are adjusted to reflect the effects of foreign currency translation. Valuations for secured debt and the credit facility are determined based on the expected future payments, discounted at risk-adjusted rates. Senior notes and the exchangeable senior debentures 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 carrying amount and fair value of certain financial assets and liabilities are shown below (in millions):

 

 

13.	Non-controlling Interests

Other Consolidated Partnerships. As of September 9, 2011, we consolidate five majority-owned partnerships that have third-party, non-controlling ownership interests. The third-party partnership interests are included in non-controlling interest—other consolidated partnerships on the unaudited condensed consolidated balance sheets and totaled $38 million and $29 million as of September 9, 2011 and December 31, 2010, respectively. Three of the partnerships have finite lives ranging from 99 to 100 years that terminate between 2081 and 2095, and the associated non-controlling interests are mandatorily redeemable at our option at the end of, but not prior to, the finite life. At September 9, 2011 and December 31, 2010, the fair values of the
non-controlling interests in the partnerships with finite lives were approximately $62 million and $65 million, respectively.

Net loss attributable to non-controlling interests of consolidated partnerships is included in our determination of net loss. However, net loss has been reduced by the amount attributable to non-controlling interests of third parties of $1 million and $2 million for the quarters ended September 9, 2011 and September 10, 2010, respectively, in the determination of net income (loss) attributable to Host Inc. and Host L.P.

 

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Host Inc.’s treatment of the non-controlling interests of Host L.P.: Host Inc. adjusts the non-controlling interests of Host L.P. each period so that the amount presented equals the greater of its carrying value based on the accumulated historical cost or its redemption value. The historical cost is based on the proportional relationship between the historical cost of equity held by our common stockholders relative to that of the unitholders of Host L.P. The redemption value is based on the amount of cash or Host Inc. stock, at our option, that would be paid to the non-controlling interests of Host L.P. if it were terminated. Therefore, we have assumed that the redemption value is equivalent to the number of shares issuable upon conversion of the OP units held by third parties valued at the market price of Host Inc. common stock at the balance sheet date. Subsequent to the stock dividend issued in 2009, one OP unit may now be exchanged into 1.021494 shares of Host Inc. common stock. 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:

 

		September 9, 2011				December 31, 2010
OP units outstanding (millions)			10.6				10.5
Market price per Host Inc. common share		$	10.69			$	17.87
Shares issuable upon conversion of one OP unit			1.021494				1.021494
Redemption value (millions)		$	115			$	191
Historical cost (millions)		$	104			$	101
Book value (millions) (1)		$	115			$	191

 

 

(1)

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

Net loss is allocated to the non-controlling interests of Host L.P. based on their weighted average ownership percentage during the period. Net loss attributable to Host Inc. has been reduced by the amount attributable to non-controlling interests in Host L.P. The loss attributable to the non-controlling interests of Host L.P. was $1 million for the quarters ended September 9, 2011 and September 10, 2010, and $2 million for the year-to-date period ended September 10, 2010.

 

14.	Legal Proceedings

We are involved in various legal proceedings in the normal course of business regarding the operation of our hotels. 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 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 are currently involved or aware of and our experience in resolving similar claims in the past, we have accrued approximately $6 million as of September 9, 2011 and estimate that, in the aggregate, our losses related to these proceedings could be as much as $8 million. We are not aware of any other matters with a reasonably possible negative outcome for which disclosure of a loss contingency is required. No assurances can be given as to the outcome of any pending legal proceedings.

We have accrued a loss contingency of approximately $49 million related to the San Antonio Marriott Rivercenter as of September 9, 2011. For further detail on this legal proceeding, see our annual report on Form 10-K for the year ended December 31, 2010.

 

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

15.	Supplemental Guarantor and Non-Guarantor Subsidiary Information for Host L.P.

A portion of our subsidiaries guarantee our senior notes. Among the subsidiaries not providing guarantees are those owning 39 of our full-service hotels, our taxable REIT subsidiaries and all of their respective subsidiaries, and HMH HPT CBM LLC, the lessee of Courtyard properties. The separate financial statements of each guaranteeing subsidiary (each, a “Guarantor Subsidiary”) are not presented because we have concluded that such financial statements are not material to investors. The guarantee of each Guarantor Subsidiary is full and unconditional and joint and several and each Guarantor Subsidiary is wholly owned by us.

The following unaudited condensed consolidating financial information sets forth the financial position as of September 9, 2011 and December 31, 2010, results of operations for the quarter and year-to-date periods ended September 9, 2011 and September 10, 2010 and cash flows for the year-to-date periods ended September 9, 2011 and September 10, 2010 of the parent, Guarantor Subsidiaries and the Non-Guarantor Subsidiaries:

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Supplemental Condensed Consolidating Balance Sheets

(in millions)

September 9, 2011

 

		Parent				Guarantor Subsidiaries				Non- Guarantor Subsidiaries				Eliminations				Consolidated
Property and equipment, net		$	693			$	5,558			$	5,193			$	—			$	11,444
Due from managers			(16	)			4				54				(8	)			34
Investments in affiliates			6,832				1,486				8				(8,155	)			171
Rent receivable			—				29				—				(29	)			—
Deferred financing costs, net			39				—				5				—				44
Furniture, fixtures and equipment replacement fund			43				39				84				—				166
Other			521				139				249				(523	)			386
Restricted cash			24				1				11				—				36
Cash and cash equivalents			372				13				139				—				524
Total assets		$	8,508			$	7,269			$	5,743			$	(8,715	)		$	12,805
Debt		$	1,508			$	2,966			$	1,209			$	(195	)		$	5,488
Rent payable			—				—				29				(29	)			—
Other liabilities			119				205				410				(336	)			398
Total liabilities			1,627				3,171				1,648				(560	)			5,886
Limited partnership interests of third parties			115				—				—				—				115
Capital			6,766				4,098				4,057				(8,155	)			6,766
Total liabilities and capital			8,508				7,269				5,705				(8,715	)			12,767
Non-controlling interests — consolidated partnerships			—				—				38				—				38
Total liabilities, limited partnership interests of third parties and capital		$	8,508			$	7,269			$	5,743			$	(8,715	)		$	12,805

 

23

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Supplemental Condensed Consolidating Balance Sheets

(in millions)

 

December 31, 2010
		Parent				Guarantor Subsidiaries				Non- Guarantor Subsidiaries				Eliminations				Consolidated
Property and equipment, net		$	675			$	5,227			$	4,612			$	—			$	10,514
Due from managers			(22	)			1				66				—				45
Investments in affiliates			6,566				1,547				22				(7,987	)			148
Rent receivable			—				29				—				(29	)			—
Deferred financing costs, net			38				—				6				—				44
Furniture, fixtures and equipment replacement fund			67				30				55				—				152
Other			319				124				325				(415	)			353
Restricted cash			29				1				11				—				41
Cash and cash equivalents			733				30				350				—				1,113
Total assets		$	8,405			$	6,989			$	5,447			$	(8,431	)		$	12,410
Debt		$	1,785			$	2,766			$	1,178			$	(252	)		$	5,477
Rent payable			—				—				29				(29	)			—
Other liabilities			127				166				281				(163	)			411
Total liabilities			1,912				2,932				1,488				(444	)			5,888
Limited partnership interests of third parties			191				—				—				—				191
Capital			6,302				4,057				3,930				(7,987	)			6,302
Total liabilities and capital			8,405				6,989				5,418				(8,431	)			12,381
Non-controlling interests – consolidated partnerships			—				—				29				—				29
Total liabilities, limited partnership interests of third parties and capital		$	8,405			$	6,989			$	5,447			$	(8,431	)		$	12,410

 

24

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Supplemental Condensed Consolidating Statements of Operations (in millions)
Quarter ended September 9, 2011
		Parent				Guarantor Subsidiaries				Non- Guarantor Subsidiaries				Eliminations				Consolidated
REVENUES		$	29			$	134			$	1,141			$	(162	)		$	1,142
Hotel operating expenses			—				—				(788	)			—				(788	)
Other property-level expenses			(5	)			(39	)			(95	)			—				(139	)
Depreciation and amortization			(13	)			(71	)			(65	)			—				(149	)
Corporate and other expenses			(2	)			(6	)			(4	)			—				(12	)
Rental expense			—				—				(162	)			162				—
Interest income			5				6				1				(7	)			5
Interest expense			(25	)			(49	)			(20	)			7				(87	)
Net gain on property transactions and other			2				—				1				—				3
Loss on foreign currency transactions and derivatives			—				—				(2	)			—				(2	)
Equity in earnings (losses) of affiliates			(26	)			5				(3	)			19				(5	)
Income (loss) before income taxes			(35	)			(20	)			4				19				(32	)
Provision for income taxes			—				—				(3	)			—				(3	)
INCOME (LOSS) FROM CONTINUING OPERATIONS			(35	)			(20	)			1				19				(35	)
NET INCOME (LOSS)			(35	)			(20	)			1				19				(35	)
Less: Net loss attributable to non-controlling interests			—				—				1				—				1
Net income (loss) attributable to Host Hotels & Resorts, L.P.		$	(35	)		$	(20	)		$	2			$	19			$	(34	)

 

25

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Supplemental Condensed Consolidating Statements of Operations

(in millions)

 

Quarter ended September 10, 2010
		Parent				Guarantor Subsidiaries				Non- Guarantor Subsidiaries				Eliminations				Consolidated
REVENUES		$	15			$	127			$	1,001			$	(140	)		$	1,003
Hotel operating expenses			—				—				(702	)			—				(702	)
Property-level expenses			(6	)			(27	)			(91	)			—				(124	)
Depreciation and amortization			(12	)			(65	)			(57	)			—				(134	)
Corporate and other expenses			(4	)			(9	)			(7	)			—				(20	)
Rental expense			—				—				(140	)			140				—
Interest income			1				1				3				(3	)			2
Interest expense			(20	)			(52	)			(20	)			3				(89	)
Net gains (losses) on property transactions and other			(12	)			—				12				—				—
Gain (loss) on foreign currency transactions and derivatives			—				—				(1	)			—				(1	)
Equity in earnings (losses) of affiliates			(23	)			4				3				15				(1	)
Income (loss) before income taxes			(61	)			(21	)			1				15				(66	)
Income tax benefit			—				—				5				—				5
INCOME (LOSS) FROM CONTINUING OPERATIONS			(61	)			(21	)			6				15				(61	)
NET INCOME (LOSS)			(61	)			(21	)			6				15				(61	)
Less: Net loss attributable to non-controlling interests			—				—				2				—				2
Net income (loss) attributable to Host Hotels & Resorts, L.P.		$	(61	)		$	(21	)		$	8			$	15			$	(59	)

 

26

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Supplemental Condensed Consolidating Statements of Operations

(in millions)

 

Year-to-date ended September 9, 2011
		Parent				Guarantor Subsidiaries				Non- Guarantor Subsidiaries				Eliminations				Consolidated
REVENUES		$	216			$	374			$	3,337			$	(587	)		$	3,340
Hotel operating expenses			—				—				(2,246	)			—				(2,246	)
Other property-level expenses			(15	)			(105	)			(273	)			—				(393	)
Depreciation and amortization			(38	)			(213	)			(188	)			—				(439	)
Corporate and other expenses			(4	)			(28	)			(26	)			—				(58	)
Rental expense			—				—				(587	)			587				—
Interest income			11				14				5				(15	)			15
Interest expense			(71	)			(145	)			(58	)			15				(259	)
Net gain (loss) on property transactions and other			76				—				(70	)			—				6
Equity in earnings (losses) of affiliates			(201	)			22				(1	)			177				(3	)
Loss before income taxes			(26	)			(81	)			(107	)			177				(37	)
Benefit (provision) for income taxes			(2	)			—				11				—				9
LOSS FROM CONTINUING OPERATIONS			(28	)			(81	)			(96	)			177				(28	)
Loss from discontinued operations, net of tax			(4	)			—				—				—				(4	)
NET LOSS			(32	)			(81	)			(96	)			177				(32	)
Less: Net loss attributable to non-controlling interests			—				—				—				—				—
Net loss attributable to Host Hotels & Resorts, L.P.		$	(32	)		$	(81	)		$	(96	)		$	177			$	(32	)

 

27

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Supplemental Condensed Consolidating Statements of Operations

(in millions)

 

Year-to-date ended September 10, 2010
		Parent				Guarantor Subsidiaries				Non- Guarantor Subsidiaries				Eliminations				Consolidated
REVENUES		$	139			$	378			$	2,933			$	(513	)		$	2,937
Hotel operating expenses			—				—				(2,022	)			—				(2,022	)
Property-level expenses			(19	)			(95	)			(192	)			—				(306	)
Depreciation and amortization			(38	)			(204	)			(167	)			—				(409	)
Corporate and other expenses			(8	)			(34	)			(27	)			—				(69	)
Rental expense			—				—				(513	)			513				—
Interest income			3				2				8				(10	)			3
Interest expense			(71	)			(156	)			(51	)			10				(268	)
Net gains (losses) on property transactions			(12	)			—				12				—				—
Loss on foreign currency and derivatives			(3	)			—				(3	)			—				(6	)
Equity in earnings (losses) of affiliates			(115	)			25				3				82				(5	)
Income (loss) before income taxes			(124	)			(84	)			(19	)			82				(145	)
Income tax benefit			—				—				21				—				21
INCOME (LOSS) FROM CONTINUING OPERATIONS			(124	)			(84	)			2				82				(124	)
Income (loss) from discontinued operations, net of tax			(2	)			—				(3	)			3				(2	)
NET INCOME (LOSS)			(126	)			(84	)			(1	)			85				(126	)
Less: Net income attributable to non-controlling interests			—				—				—				—				—
Net income (loss) attributable to Host Hotels & Resorts, L.P.		$	(126	)		$	(84	)		$	(1	)		$	85			$	(126	)

 

28

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Supplemental Condensed Consolidating Statements of Cash Flows (in millions)
Year-to-date ended September 9, 2011
		Parent				Guarantor Subsidiaries				Non- Guarantor Subsidiaries				Consolidated
OPERATING ACTIVITIES
Cash provided by operations		$	164			$	84			$	151			$	399
INVESTING ACTIVITIES
Proceeds from sales of assets, net			6				—				—				6
Proceeds from transfer of Le Méridien Piccadilly to the Euro JV Fund II			—				—				40				40
Acquisitions			(11	)			(283	)			(753	)			(1,047	)
Deposits for acquisitions			(15	)			—				—				(15	)
Investment in affiliates			(18	)			—				—				(18	)
Capital expenditures			(20	)			(163	)			(152	)			(335	)
Change in furniture, fixtures and equipment (FF&E) replacement fund			24				(10	)			(9	)			5
Property insurance proceeds			—				—				7				7
Cash used in investing activities			(34	)			(456	)			(867	)			(1,357	)
FINANCING ACTIVITIES
Financing costs			(9	)			—				—				(9	)
Issuances of debt			496				—				80				576
Draw on credit facility			50				103				—				153
Repayment on credit facility			(50	)			—				(40	)			(90	)
Repayments/redemption of senior notes, including exchangeable debentures			(370	)			—				—				(370	)
Mortgage debt prepayments and scheduled maturities			—				(132	)			—				(132	)
Scheduled principal repayments			(1	)			—				(3	)			(4	)
Common OP unit issuance			289				—				—				289
Distributions on common OP units			(42	)			—				—				(42	)
Distributions to non-controlling interests			—				—				(4	)			(4	)
Change in restricted cash for financing activities			(1	)			—				3				2
Transfers to/from Parent			(853	)			384				469				—
Cash provided by (used in) financing activities			(491	)			355				505				369
DECREASE IN CASH AND CASH EQUIVALENTS		$	(361	)		$	(17	)		$	(211	)		$	(589	)

 

29

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Supplemental Condensed Consolidating Statements of Cash Flows (in millions)
Year-to-date ended September 10, 2010
		Parent				Guarantor Subsidiaries				Non- Guarantor Subsidiaries				Consolidated
OPERATING ACTIVITIES
Cash provided by operations		$	52			$	114			$	162			$	328
INVESTING ACTIVITIES
Proceeds from sales of assets, net			3				9				—				12
Acquisitions			—				(165	)			(127	)			(292	)
Purchase of mortgage note on a portfolio of hotels			—				(53	)			—				(53	)
Capital expenditures			(9	)			(74	)			(66	)			(149	)
Change in furniture, fixtures and equipment (FF&E) replacement fund			2				(7	)			(15	)			(20	)
Change in FF&E replacement funds designated as restricted cash			21				—				(17	)			4
Cash used in investing activities			17				(290	)			(225	)			(498	)
FINANCING ACTIVITIES
Draw on credit facility			56				—				—				56
Repurchase/redemption of senior notes, including exchangeable debentures			(571	)			—				—				(571	)
Mortgage debt prepayments and scheduled maturities			—				—				(124	)			(124	)
Scheduled principal repayments			—				(1	)			(7	)			(8	)
Common OP unit issuance			158				—				—				158
Redemption of preferred OP units			(101	)			—				—				(101	)
Distributions on common OP units			(14	)			—				—				(14	)
Distributions on preferred OP units			(6	)			—				—				(6	)
Contributions from non-controlling interests			—				—				7				7
Distributions to non-controlling interests			—				—				(3	)			(3	)
Change in restricted cash other than FF&E replacement fund			3				(1	)			(30	)			(28	)
Transfers to/from Parent			(345	)			171				174				—
Cash provided by (used in) financing activities			(820	)			169				17				(634	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		$	(751	)		$	(7	)		$	(46	)		$	(804	)

 

30

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this report. Host Inc. operates as a self-managed and self-administered REIT. Host Inc. is the sole general partner of Host L.P. and holds 98.5% of its partnership interests. Host L.P. is a limited partnership operating through an umbrella partnership structure.

Forward-Looking Statements

In this report on Form 10-Q, we make some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by their use of terms and phrases such as “anticipate,” “believe,” “could,” “expect,” “may,” “intend,” “predict,” “project,” “plan,” “will,” “estimate” and other similar terms and phrases, including references to assumptions and forecasts of future results. Forward-looking statements are based on management’s current expectations and assumptions and are not guarantees of future performance. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results to differ materially from those anticipated at the time the forward-looking statements are made.

The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

 

•

national and local economic and business conditions, including concerns about global economic prospects and the speed and strength of a recovery and its impact on overall lodging demand, as well as the potential for terrorist attacks and the impact of natural disasters and weather, that will affect occupancy rates at our hotels and the demand for hotel products and services;

 

•

the impact of a downgrade of credit ratings assigned to obligations of the United States, the continuing volatility in the global financial and credit markets, and the impact of pending and future U.S. governmental action to address budget deficits through reductions in spending and similar austerity measures, which could materially adversely affect the U.S. and global economic conditions, business activity, credit availability, borrowing costs, and hotel demand;

 

•

the impact of developments outside the United States, such as the sovereign credit issues in certain countries in the European Union, which could affect the relative volatility of global credit markets generally and demand for our international hotel properties;

 

•

the effect on global travel and lodging demand due to geopolitical concerns, including current unrest in the Middle East and its effect on oil prices;

 

•

relationships with property managers and joint venture partners and our ability to realize the expected benefits of our joint ventures and other strategic relationships;

 

•

changes in travel patterns, taxes and government regulations, which influence or determine wages, prices, construction processes and costs;

 

•

government approvals, actions and initiatives, including the need for compliance with environmental and safety requirements, and changes in laws and regulations or the interpretation thereof;

 

•

operating risks associated with the hotel business;

 

•

our ability to compete effectively in areas such as access, location, quality of accommodations and room rate structures;

 

•

our ability to maintain our properties in a first-class manner, including meeting capital expenditure requirements;

 

•

the effect of anticipated renovations on our hotel occupancy and financial results;

 

31

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•

our ability to acquire or develop additional properties and the risk that potential acquisitions or developments may not perform in accordance with our expectations;

 

•

risks associated with the level of our indebtedness, including our ability to meet covenants in our debt agreements, obtain financing and consummate refinancings in the future;

 

•

the ability of Host Inc. and each of the REIT entities acquired, established or to be established by Host Inc. to continue to satisfy complex rules to qualify as REITs for federal income tax purposes, our ability to satisfy the rules required to maintain Host L.P.’s status as a partnership for federal income tax