UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended March 23, 2007.
OR
Commission file number 001-14625
HOST HOTELS & RESORTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
(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. x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer x Accelerated filer ¨ Non-Accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
The registrant had 522,051,636 shares of its $0.01 par value common stock outstanding as of April 25, 2007.
INDEX
PART I. FINANCIAL INFORMATION
Item 1.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
2
CONDENSED CONSOLIDATED BALANCE SHEETS
March 23, 2007 and December 31, 2006
(in millions, except shares and per share amounts)
Property and equipment, net
Assets held for sale
Due from managers
Investments in affiliates
Deferred financing costs, net
Furniture, fixtures and equipment replacement fund
Other
Restricted cash
Cash and cash equivalents
Total assets
Debt
Senior notes, including $1,086 million and $495 million, respectively, net of
discount, of Exchangeable Senior Debentures
Mortgage debt
Credit facility
Total debt
Accounts payable and accrued expenses
Total liabilities
Interest of minority partners of Host Hotels & Resorts, L.P.
Interest of minority partners of other consolidated partnerships
Stockholders’ equity
Cumulative redeemable preferred stock (liquidation preference $100 million)
50 million shares authorized; 4.0 million shares issued and outstanding
Common stock, par value $.01, 750 million shares authorized; 522.0 million
shares and 521.1 million shares issued and outstanding, respectively
Additional paid-in capital
Accumulated other comprehensive income
Deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to condensed consolidated statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter Ended March 23, 2007 and March 24, 2006
(unaudited, in millions, except per share amounts)
REVENUES
Rooms
Food and beverage
Total hotel sales
Rental income
Total revenues
EXPENSES
Hotel departmental expenses
Management fees
Other property-level expenses
Depreciation and amortization
Corporate and other expenses
Total operating costs and expenses
OPERATING PROFIT
Interest income
Interest expense
Net gains on property transactions
Minority interest expense
Equity in earnings of affiliates
INCOME BEFORE INCOME TAXES
Benefit (provision) for income taxes
INCOME FROM CONTINUING OPERATIONS
Income from discontinued operations
NET INCOME
Less: Dividends on preferred stock
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
BASIC AND DILUTED EARNINGS PER COMMON SHARE:
Continuing operations
Discontinued operations
BASIC AND DILUTED EARNINGS PER COMMON SHARE
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in millions)
OPERATING ACTIVITIES
Net income
Adjustments to reconcile to cash provided by operations:
Discontinued operations:
Gain on dispositions
Depreciation
Amortization of deferred financing costs
Deferred income taxes
Distributions from investments in affiliates
Change in due from managers
Changes in other assets
Changes in other liabilities
Cash provided by operations
INVESTING ACTIVITIES
Proceeds from sales of assets, net
Acquisitions
Capital expenditures:
Renewals and replacements
Repositionings and other investments
Change in furniture, fixtures and equipment (FF&E) reserves
Change in restricted cash designated for FF&E reserves
Cash provided by investing activities
FINANCING ACTIVITIES
Financing costs
Debt issuances
Repayment of credit facility
Debt prepayments
Scheduled principal repayments
Dividends on common stock
Dividends on preferred stock
Distributions to minority interests
Change in restricted cash
Cash provided by financing activities
INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS, END OF PERIOD
5
Supplemental disclosure of cash flow information:
Interest paid
Income taxes paid
Supplemental disclosure of noncash investing and financing activities:
We issued approximately 0.2 million and 0.7 million shares for the first quarter of 2007 and 2006, respectively, upon the conversion of operating partnership units of Host Hotels & Resorts, L.P. held by minority partners valued at approximately $5 million and $13 million, respectively.
During the first quarter of 2006, we issued approximately 24.0 million shares upon the conversion of approximately 7.4 million Convertible Subordinated Debentures valued at approximately $368 million. Additionally, as a result of the conversion, we consolidated the wholly owned entity that issued the Convertible Subordinated Debentures and eliminated the $17 million investment not held by third parties.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Host Hotels & Resorts, Inc., or Host, a Maryland corporation operating through an umbrella partnership structure is the owner of hotel properties. We operate as a self-managed and self-administered real estate investment trust, or REIT, with our operations conducted solely through an operating partnership, Host Hotels & Resorts, L.P., or the operating partnership, or Host LP, and its subsidiaries. We are the sole general partner of the operating partnership and, as of March 23, 2007, own 96.6% of the partnership interests, which are referred to as OP units.
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, or 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, 2006.
In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary to present fairly our financial position as of March 23, 2007 and the results of our operations and cash flows for the quarters ended March 23, 2007 and March 24, 2006. Interim results are not necessarily indicative of full year performance because of the impact of seasonal and short-term variations.
Certain prior year financial statement amounts have been reclassified to conform with the current presentation.
Reporting Periods
The results we report are based on results of our hotels reported to us by our hotel managers. Our hotel managers use different reporting periods. Marriott International, Inc., the manager of the majority of our properties, uses a fiscal year ending on the Friday closest to December 31 and reports twelve weeks of operations for each of the first three quarters of the year and sixteen or seventeen weeks for the fourth quarter of the year. In contrast, other managers of our hotels, such as Starwood and Hyatt, report results on a monthly basis. For results reported by hotel managers using a monthly reporting period (approximately 40% of our hotels), the month of operation that ends after our fiscal quarter-end is included in our results of operations in the following fiscal quarter. Accordingly, our results of operations include results from hotel managers reporting results on a monthly basis as follows: first quarter (January, February), second quarter (March to May), third quarter (June to August), and fourth quarter (September to December). We elected to adopt the reporting period used by Marriott International modified so that our fiscal year always ends on December 31 because we are a REIT. Accordingly, our first three quarters of operations end on the same day as Marriott International but our fourth quarter ends on December 31.
We adjust the interest of the minority partners of Host LP each period to maintain a proportional relationship between the book value of equity associated with our common stockholders relative to that of the unitholders of Host LP since Host LP units may be exchanged into common stock on a one-for-one basis. Net income is allocated to the minority partners of Host LP based on their weighted average ownership percentage during the period. As of March 23, 2007, approximately $499 million of cash or Host stock, at our option, would be paid to the outside partners of the operating partnership if the partnership was terminated. The approximate $499 million is equivalent to the 18.6 million partnership units outstanding valued at the March 23, 2007, Host common stock price of $26.87, which we have assumed would be equal to the value provided to outside partners upon liquidation of the operating partnership.
7
Application of New Accounting Standards
We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”) on January 1, 2007. As a result, we recognized an approximate $11 million reduction in the deferred tax liabilities, which was recorded as an increase to retained earnings as of January 1, 2007. The remaining balance of unrecognized tax benefits as of the date of adoption is approximately $4 million. All of such amount, if recognized, would impact our reconciliation between the income tax provision (benefit) calculated at the statutory federal income tax rate of 35% and the actual income tax provision (benefit) recorded each year. We believe that there will be no additional significant changes in unrecognized tax benefits that are reasonably possible in 2007. We also accrued approximately $.5 million for the payment of interest and penalties as of the date of adoption. We recognize interest accrued related to uncertain tax positions in interest expense and penalties in operating expenses. We, or our subsidiaries, file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Our open tax years generally include tax years 2003-2006 as of the date of adoption.
Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding. Diluted earnings per common share is computed by dividing net income available to common stockholders as adjusted for potentially dilutive securities, by the weighted average number of shares of common stock outstanding plus potentially dilutive securities. Dilutive securities may include shares granted under comprehensive stock plans, preferred OP units held by minority partners, exchangeable debt securities and other minority interests that have the option to convert their interests to common OP units. No effect is shown for securities that are anti-dilutive.
Basic earnings available to common stockholders
Assuming distribution of common shares granted under the comprehensive stock plan, less shares assumed purchased at average market price
Assuming conversion of minority OP units issuable
Diluted earnings available to common stockholders
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Property and equipment consists of the following as of:
Land and land improvements
Buildings and leasehold improvements
Furniture and equipment
Construction in progress
Less accumulated depreciation and amortization
$600 million Exchangeable Senior Debentures. On March 23, 2007, Host LP issued $600 million 25/8% Exchangeable Senior Debentures (the “2007 Debentures”) and received proceeds of $589 million, net of underwriting fees and expenses and original issue discount. The 2007 Debentures mature on April 15, 2027 and are equal in right of payment with all of our other senior notes. Interest is payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year beginning on July 15, 2007. We can redeem for cash all, or part of, the 2007 Debentures at any time on or after April 20, 2012 upon 15 days notice at a redemption price of 100% of the principal amount plus accrued interest. Holders have the right to require us to repurchase the 2007 Debentures on April 15, 2012, April 15, 2017 and April 15, 2022 for cash equal to 100% of the principal amount plus accrued interest. Holders may exchange their 2007 Debentures prior to maturity under certain conditions, including when the closing sale price of Host’s common stock is more than 130% of the exchange price per share for at least 20 of 30 consecutive trading days during certain periods or any time up to two days prior to the date on which the 2007 Debentures have been called for redemption. On exchange, we will deliver cash in an amount equal to not less than the lower of the exchange value (which is the applicable exchange rate multiplied by the average price of our common shares) and the aggregate principal amount of the 2007 Debentures to be exchanged, and, at our option, shares, cash or a combination thereof for any excess above the principal value. The initial exchange rate is 31.002 shares of our common stock per $1,000 principal amount of debentures, which is equivalent to an exchange price of $32.26 per share of Host common stock. The exchange rate may be adjusted under certain circumstances including the payment of common dividends exceeding $.20 per share in any given quarter. The 2007 Debentures and the common stock issuable, at our option, upon exchange of the debentures have yet not been registered under the Securities Act and may not be offered or sold except to qualified institutional buyers, as defined.
$500 million Exchangeable Senior Debentures. On March 16, 2004, Host LP issued $500 million of 3.25% Exchangeable Senior Debentures (the “2004 Debentures”) and received net proceeds of $484 million, after discounts, underwriting fees and expenses. The 2004 Debentures mature on April 15, 2024 and are equal in right of payment with all of our other senior notes. Interest is payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year. We can redeem for cash all, or part of, the 2004 Debentures at any time subsequent to April 19, 2009 upon 30 days notice at the applicable redemption price as set forth in the indenture. Holders have the right to require us to repurchase the 2004 Debentures on April 15, 2010, April 15, 2014 and April 15, 2019 for cash equal to 100% of the principal amount. Holders may exchange their 2004 Debentures prior to maturity under certain conditions, including at any time at which the closing sale price of our common stock is more than 120% of the exchange price per share, for at least 20 of 30 consecutive trading days during certain periods or any time up to two days prior to the date on which the 2004 Debentures have been called for redemption. The 2004 Debentures are currently exchangeable into shares of Host’s common stock at an exchange rate of 58.0682 shares for each $1,000 of principal amount of the debentures, or a total of approximately 29 million shares (which is equivalent to an exchange price of $17.22 per share of our common stock). The exchange rate is adjusted for certain circumstances, including the payment of all common dividends. The 2004 Debentures will remain exchangeable until July 1, 2007 (the last day of the current exchange period) and will continue to be exchangeable after July 1, 2007 if the trading price of Host common stock continues to exceed 120% of the exchange price, or if other conditions for exchange are satisfied.
9
Credit Facility. During the first quarter of 2007, we repaid the $250 million outstanding balance on our credit facility. As of March 23, 2007, we have $575 million available under our credit facility.
Mortgage Debt. During the first quarter of 2007, we completed the following mortgage debt repayments and refinancing transactions:
on March 7, 2007, we repaid the $88 million mortgage on the JW Marriott Hotel, Washington, D.C., due September 15, 2007, which had a floating rate of interest of LIBOR plus 210 basis points;
on March 2, 2007, we issued a $300 million mortgage secured by The Ritz-Carlton, Naples and the Newport Beach Marriott Hotel & Spa, which bears interest at rate of 5.53% and matures on March 1, 2014; and
on February 8, 2007, we refinanced the $88 million, 8.58% mortgage due March 1, 2007 on the Harbor Beach Marriott Resort and Spa with a $134 million mortgage that bears interest at a rate of 5.55% and matures on March 1, 2014.
On March 15, 2007, our Board of Directors declared a cash dividend of $0.20 per share on our common stock. The dividend was paid on April 16, 2007 to stockholders of record as of March 31, 2007.
On March 15, 2007, our Board of Directors declared a cash dividend of $0.5546875 per share on our Class E cumulative redeemable preferred stock. The dividend was paid on April 16, 2007 to preferred stockholders of record as of March 31, 2007.
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. Our hotels meet the aggregation criteria for financial reporting and, accordingly, we report one business segment, hotel ownership. As of March 23, 2007, our foreign operations consist of four properties located in Canada, two properties located in Chile and one property located in Mexico. As of March 24, 2006, our foreign operations consist of the four Canadian properties and the one Mexican property. There were no intercompany sales between our domestic properties and our foreign properties. The following table presents revenues for each of the geographical areas in which we operate:
United States
Canada
Chile
Mexico
Total revenue
Typically, our other comprehensive income consists of unrealized gains and losses on foreign currency translation adjustments. Other comprehensive income was not significant for all periods presented.
10
Dispositions. We sold seven hotels (the Sheraton Milwaukee Brookfield Hotel, the Sheraton Providence Airport Hotel, the Capitol Hill Suites, the Marriott Mountain Shadows Resort & Golf Club, the Fairview Park Marriott, the Raleigh Marriott Crabtree Valley and the Miami Airport Marriott) during the first quarter of 2007 for a total sales price of approximately $333 million. We recorded a gain from the sales of approximately $141 million. The following table summarizes the revenues, income before taxes, and the gain on dispositions, net of tax, of the hotels which have been reclassified to discontinued operations in the consolidated statements of operations for the periods presented:
Revenues
Income before income taxes
Gain on dispositions, net of tax
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The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this report. Host Hotels & Resorts, Inc. is a Maryland corporation and operates as a self-managed and self-administered real estate investment trust, or REIT. Host Hotels & Resorts, Inc. owns properties and conducts operations through Host Hotels & Resorts, L.P., a Delaware limited partnership of which Host Hotels & Resorts, Inc. is the sole general partner and in which it holds 96.6% of the partnership interests on April 30, 2007. In this report, 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” to specifically refer to Host Hotels & Resorts, Inc. and the terms “operating partnership” or “Host LP” to refer to Host Hotels & Resorts, L.P. in cases where it is important to distinguish between Host and Host LP.
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. Forward-looking statements are based on management’s current expectations and assumptions and are not guarantees of future performance that 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. These risks and uncertainties include those risk factors discussed in our Annual Report on Form 10–K for the year ended December 31, 2006 and in other filings with the Securities and Exchange Commission (SEC). Although we believe the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that we will attain these expectations or that any deviations will not be material. Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release updates to any forward-looking statement contained in this report to conform the statement to actual results or changes in our expectations.
Outlook
As of April 30, 2007, we own 121 hotel properties, which operate primarily in the luxury and upper upscale hotel sectors. For a general overview of our business and a discussion of our reporting periods, see our most recent Annual Report on Form 10-K.
Management believes that we will continue to experience growth in RevPAR, margins and cash flow throughout the year as a result of strong operating fundamentals, including the growth of the U.S. economy and strong lodging demand. Although, the pace of new lodging supply has started to increase somewhat, the majority of new projects scheduled for completion in the near-term are concentrated in the economy and mid-scale segments, are outside of major urban markets and will have less than 200 rooms. As a result, we expect that comparable hotel RevPAR will increase approximately 6.5% to 8.0% for the full year 2007 and at the lower end of that range for the second quarter. Additionally, we expect Comparable Hotel plus the Starwood Portfolio RevPAR (described below) to increase 6.5% to 8.5% for both the second quarter and full year 2007.
We expect operating margin growth will further benefit from the increase in the average daily room rate in 2007 and continued increases in food and beverage revenues associated with the expected growth in group business. While we expect margins to improve, margin growth will be constrained by continued pressure from certain costs that are likely to increase at a rate greater than inflation, including wages and benefits, real estate taxes and, potentially, utilities.
In the near-term, some properties may experience temporary business disruption and displacement as rooms, common areas and meeting spaces are renovated as part of the maintenance capital expenditure and repositioning/return on investment projects at many of our properties. However, over the long term, we expect to see improvements in RevPAR and operating margins as these expenditures are expected to enhance the properties market position and profitability.
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We also expect to see improvements in RevPAR and operating margins as we continue our strategy of recycling assets. Over the past three years, we have acquired larger luxury and upper upscale properties in urban and resort/convention destinations, where further large-scale lodging development typically is limited, and have generally disposed of smaller hotels that are located in suburban and secondary markets. The assets we have acquired have higher RevPAR, higher margins and, we believe, higher growth potential than those we have sold. Over time, our capital recycling efforts should contribute to improvements in overall RevPAR and margins, as well as an increase in the average per room replacement cost of our portfolio. In addition to the recycling of assets, we may also dispose of core assets when we have the opportunity to capitalize on the inherent real estate value of our properties and apply the proceeds to other business objectives.
While we believe the positive trends in the lodging industry, discussed here and in our Annual Report on Form 10–K, create the opportunity for business improvements during the remainder of 2007, there can be no assurances that any increases in hotel revenues or earnings at our properties will continue for any number of reasons, including, but not limited to, slower than anticipated growth in the economy and changes in travel patterns.
Recent Events
On April 30, 2007, we commenced the processes necessary to defease a $515 million mortgage loan secured by eight properties with an interest rate of 7.61% maturing August 2009, which we refer to as the CMBS loan. To defease the loan, we have used available cash of approximately $545 million, which includes amounts for prepayment and other costs. This transaction is expected to be completed in early May 2007.
Results of Operations
The following table reflects certain line items from our statements of operations and other significant operating statistics (in millions, except operating statistics and percentages):
Operating costs and expenses:
Property-level costs (1)
Operating profit
All hotel operating statistics (2):
RevPAR
Average room rate
Average occupancy
Comparable hotel operating statistics (3):
Comparable hotel plus Starwood portfolio operating
statistics (4):
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2007 Compared to 2006
Hotel Sales Overview
Hotel sales increased $210 million, or 26.4%, to $1.0 billion for the first quarter of 2007. First quarter 2007 hotel sales include $151 million of sales from the hotels purchased on April 10, 2006 in the Starwood transaction. Hotel sales exclude the properties we have sold in 2007 and the properties sold in 2006. Sales for properties sold in 2007 or sold in 2006 have been reclassified as discontinued operations. See “Discontinued Operations” below.
We discuss operating results for our hotels on a comparable basis. Comparable hotels are those properties that we have owned for the entirety of the reporting periods being compared. Comparable hotels do not include the results of properties acquired (including the Starwood portfolio) or sold, or that incurred significant property damage and business interruption or large scale capital improvements during these periods. As of March 23, 2007, 94 of our 121 hotels have been classified as comparable hotels. We also discuss operating results for our hotels on a Comparable Hotels plus the Starwood Portfolio (described below). See “Comparable Hotel and Comparable Hotels plus the Starwood Portfolio Operating Statistics” for a complete description of our comparable hotels and the hotels in the Starwood Portfolio. We discuss our operating results by property type (i.e. urban, suburban, resort/convention or airport), geographic region and mix of business (i.e. transient, group or contract).
Comparable hotel sales increased 5.4% to approximately $832 million for the first quarter of 2007. The revenue growth reflects the increase in comparable RevPAR of 6.2%, as a result of an increase in average room rates of 6.5% and a slight decrease in occupancy of 0.2 percentage points. The growth in average room rate was driven by a number of positive trends such as strong United States GDP growth, low growth in the supply of new luxury and upper upscale hotels and the strengthening in the group and transient segments of our business. Our occupancy levels were affected by weakness in individual markets and temporary disruption to certain properties due to our capital expenditure program. As a result of these trends, our operators were able to continue to increase room rates while generally maintaining the year-over-year occupancy level. Food and beverage revenues for our comparable hotels increased 3.9%, primarily due to increased sales from our catering and banquet business. In addition, during the first quarter of 2007, operating margins at our food and beverage outlets increased 0.8 percentage points.
In addition to comparable hotel RevPAR, we also have presented Comparable Hotel plus the Starwood Portfolio RevPAR. This represents our comparable hotels (described above) plus the 24 hotels acquired from Starwood on April 10, 2006 that we own as of March 23, 2007. Accordingly, we have included the results of the Starwood portfolio for periods prior to our ownership in 2006 in the determination of the Comparable Hotel plus Starwood Portfolio RevPAR. Comparable Hotel plus the Starwood Portfolio RevPAR increased 7.0%. The RevPAR increase was the result of an increase in average room rates of 6.3% and an increase in occupancy of .5 percentage points. Based on a March 31 calendar quarter end, our Comparable Hotel plus Starwood Portfolio RevPAR increased 7.6% over the first calendar quarter of 2006. Given the significant contribution of these hotels to our operating results, we believe this supplemental presentation provides useful information to investors.
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Comparable Hotel Sales by Property Type
The following tables set forth performance information for our comparable hotels and our comparable hotels plus the Starwood portfolio by property type as of March 23, 2007 and March 24, 2006:
Comparable Hotels by Property Type (a)
Urban
Suburban
Airport
Resort/
Convention
All Types
Comparable Hotels plus the Starwood Portfolio by Property Type (b)
For the first quarter of 2007, RevPAR increased across all of our hotel property types, led by our urban hotels, as we benefited from strong performance in several of our downtown markets, including Washington, D.C., New York City and San Francisco. RevPAR growth at our suburban hotels was led by the RevPAR increases at our suburban Denver hotels. Our resort/convention hotels lagged the portfolio, as the Coronado Island Marriott Resort was significantly affected by major renovations and the Orlando World Center Marriott Resort and Convention Center was impacted by three group cancellations.
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Comparable Hotel Sales by Geographic Region
The following tables set forth performance information for our comparable hotels and our comparable hotels plus the Starwood portfolio by geographic region as of March 23, 2007 and March 24, 2006:
Comparable Hotels by Region (a)
Pacific
Florida
Mid-Atlantic
DC Metro
North Central
South Central
Atlanta
New England
Mountain
International
All Regions
Comparable Hotels plus the Starwood Portfolio by Region (b)
Four of our regions performed exceptionally well. Performance for the Mid-Atlantic region was driven by outstanding RevPAR growth in New York City. The D.C. Metro region was led by our downtown Washington, D.C. hotels and the South Central region was driven by growth at our Dallas Quorum Marriott and San Antonio Marriott Rivercenter hotels. The Mountain region was led by the strength of the Denver market.
Four of our regions significantly underperformed. The Atlanta region underperformed due to an increase in demand in the first quarter of 2006 from disruption caused by the 2005 hurricanes in New Orleans and Florida. The
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North Central region experienced weakness in the Detroit market, due to the Super Bowl being held there in 2006, and the Minneapolis market was weak due to a rooms renovation at the Minneapolis Marriott City Center. The New England market primarily underperformed because of lower levels of group and transient demand at the Sheraton Boston and the Boston Marriott Copley Place. The International region was weak due to a rooms renovation at the Toronto Marriott Eaton Center and lower group demand at the Toronto Marriott Airport.
Hotels Sales by Business Mix. The majority of our customers fall into three broad groups: transient, group and contract business. Individual travelers are referred to as “Transient” customers. Those traveling as part of an organized group, meeting or convention are referred to as “Group” customers. “Contract” customers represent blocks of rooms sold to a specific company for an extended period of time at significantly discounted rates, such as airline crews. For further detail on our business mix, see our annual report on Form 10-K.
In the first quarter of 2007, our operators were able to significantly increase average daily room rates for both our transient and group business, while occupancy was up modestly for both. The increase in the average daily rate of slightly more than 6% for our transient business was driven by continued rate strength and an increase in demand in the premium and corporate segments of the business. The average daily rate for our group business also increased slightly more than 6% due to continued strong pricing power in all segments of group business. Group demand was up slightly for the quarter, as the discount and other segment demand offset declines in the association and corporate segments.
Our group booking pace remains solid for the remainder of the year. We expect that average group rates will increase in future periods as a greater percentage of business will consist of higher-rated groups that were booked in more recent periods. Approximately 44% of our rooms revenues are from group business, and as of the end of the first quarter, approximately 90% of our anticipated group business for the year is under contract.
Property-level Operating Expenses
Total property-level operating expenses
Property-level operating expenses increased $187 million, or 26.9%, for the first quarter of 2007. During the first quarter of 2007, property-level operating expenses include $138 million related to the operations of the hotels acquired in the Starwood transaction. Property-level operating expenses exclude the costs for hotels we have sold, which are included in discontinued operations. Our operating expenses, which are both fixed and variable, are affected by changes in occupancy, inflation and revenues, though the effect on specific costs will differ. We expect operating costs to continue to increase during the remainder of 2007 as a result of variable costs increasing with occupancy increases, and certain costs likely increasing at a rate greater than inflation, including wages and benefits, and real estate taxes and, potentially, utilities.
Corporate and Other Expenses. Corporate and other expenses primarily consist of employee salaries and bonuses and other costs such as employee stock-based compensation expense, travel, corporate insurance, audit fees, building rent and system costs. For the quarter, corporate expenses increased approximately $1 million from the same period last year.
Interest Income. Interest income increased $1 million for the first quarter due to an increase in our cash balance and an increase in the interest rate earned on the balance.
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Interest Expense. Interest expense increased $3 million for the first quarter, which is a result of the overall increase in debt offset by the decrease in our weighted average interest rate.
Minority Interest Expense.Minority interest expense declined by $2 million due to a decline in the outside ownership percentage in Host LP from approximately 5% during the first quarter of 2006 to approximately 3% during the first quarter of 2007. This decrease was partially offset by the $13 million increase in net income at Host LP. As of March 23, 2007, we held approximately 96.6% of the partnership interests in Host LP.
Equity in Earnings of Affiliates. Our share of income of affiliates increased by $1 million for the first quarter due to an increase in earnings for all of our affiliates, including earnings from our European Joint Venture, in which we became a partner during the second quarter of 2006.
Discontinued Operations. Discontinued operations for 2007 consist of seven hotels sold during the first quarter of 2007. Discontinued operations for 2006 consist of fourteen hotels sold during 2006 and the first quarter of 2007. Discontinued operations represent results of operations and the gain or loss on the disposition of the hotels during the period. For the first quarter of 2007 and 2006, revenues for these properties were $14 million and $42 million, respectively, and operating income before taxes was $4 million and $6 million, respectively. We recognized a gain, net of tax, of approximately $141 million and $153 million for the first quarter of 2007 and 2006, respectively, on the disposition of these hotels.
Liquidity and Capital Resources
Cash Requirements
Host uses cash primarily for acquisitions, capital expenditures, debt payment and dividends to stockholders. As a REIT, Host is required to distribute to its stockholders at least 90% of its taxable income, excluding net capital gain, on an annual basis. Funds used by Host to make these distributions are provided by Host LP. We depend primarily on external sources of capital to finance future growth, including acquisitions.
Cash Balances. As of March 23, 2007, we had $1.2 billion of cash and cash equivalents, which was an increase of $807 million from December 31, 2006. The increase in cash is primarily due to the issuance of debt, proceeds from asset sales and improved operations, partially offset by debt repayments, dividend payments and capital expenditures. During the second quarter, we used approximately $136 million to prepay additional mortgage debt and related costs and $106 million to pay common and preferred dividends. In addition, we intend to use approximately $545 million of our available cash to defease the 7.61%, $515 million CMBS loan in the second quarter, including prepayment and other costs. Excluding amounts necessary for working capital, we intend to use the remaining available funds over time to further invest in our portfolio, acquire new properties or make further debt repayments.
Debt Transactions. During the first quarter, we issued approximately $1.0 billion of debt, including $600 million of 25/8% Exchangeable Senior Debentures, as well as other mortgage debt. See the table of significant financing transactions in -” Cash Provided by Financing Activities.” As a result of these transactions and the use of the proceeds therefrom described above, our debt balance is expected to be reduced to approximately $5.8 billion with an average maturity of 6.5 years and a weighted average interest rate of 6.2%, which represents a decrease of approximately 60 basis points from December 31, 2006.
In addition to the above financing activity, approximately $6 million of senior notes mature and $21 million of principal amortization is due during the remainder of 2007. We also expect to repay a $190 million mortgage secured by four hotels in October 2007, at which time the interest rate on the loan would otherwise substantially increase and all excess cash flow from the properties would be required to be used to pay down the mortgage. We believe we have sufficient cash or availability under our line of credit to deal with our near-term maturities, as well as any unexpected decline in the cash flow from our business.
We may continue to redeem or refinance senior notes and mortgage debt from time to time to take advantage of favorable market conditions. We may purchase senior notes for cash through open market purchases, privately negotiated transactions, a tender offer or, in some cases, through the early redemption of such securities pursuant to their terms. Repurchases of debt, if any, will depend on prevailing market conditions, our liquidity requirements,
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contractual restrictions and other factors. Any refinancing or retirement before the maturity date would affect earnings and Funds From Operations, or FFO, per diluted share, as defined below, as a result of the payment of any applicable call premiums and the acceleration of previously deferred financing costs.
Acquisitions and Dispositions. During the first quarter of 2007, we sold seven properties for total proceeds of approximately $333 million and a gain of approximately $141 million. During the remainder of 2007, we expect to complete the sale of an additional $100 million to $300 million. We also expect acquisitions of $300 million to $500 million during the year.
Capital Expenditures. Our capital expenditures generally fall into three broad categories, renewal and replacement expenditures, repositioning/return on investment (or “ROI”) projects and value enhancement projects. ROI/repositioning capital expenditures are selective capital improvements outside the scope of the typical renewal and replacement capital expenditures. These projects include, for example, significant repositionings of guest rooms, lobbies or food and beverage platforms and expanding ballroom, spa or conference facilities. Value enhancement projects are opportunities where we seek to enhance the value of our portfolio by identifying and executing strategies that maximize the highest and best use of all aspects of our properties, such as the development of timeshare or condominium units on excess land.
For the quarter ended March 23, 2007, our renewal and replacement capital expenditures were approximately $52 million. We expect total renewal and replacement capital expenditures for 2007 to be approximately $310 million. Our renewal and replacement capital expenditures are generally funded by the furniture, fixture and equipment funds established at certain of our hotels (typically funded with approximately 5% of property revenues) and by our available cash. We also spent approximately $67 million during the quarter on repositioning/ROI projects. We expect total repositioning/ROI expenditures for 2007 to be approximately $330 million.
In January of 2007, we completed the sale of the Marriott Mountain Shadows Resort & Golf Club for $42 million and recognized a gain of approximately $21 million. This sale represents an example of one of the value enhancement opportunities in our portfolio where we can realize the inherent real estate value of our holdings.
Sources and Uses of Cash
Our principal sources of cash are cash from operations, the sale of assets, borrowing under our credit facility and our ability to obtain additional financing through various capital market transactions. Our principal uses of cash are debt service, asset acquisitions, capital expenditures, operating costs, corporate expenses and distributions to equity holders.
Cash Provided by Operations. Our cash provided by operations for the first quarter of 2007 increased $21 million to $121 million, due primarily to the increase in net income.
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Cash Used in Investing Activities. Approximately $223 million of cash was provided by investing activities during the first quarter of 2007. This included approximately $331 million of net proceeds from the sales of seven properties in 2007, primarily offset by capital expenditures of $119 million. Additionally, in February 2007, we purchased the land under the Atlanta Marriott Perimeter Center, which we previously leased, for approximately $15 million. The following table summarizes the significant investing activities that have been completed since the beginning of 2007 (in millions):
Transaction
Date
Description of Transaction
(Investment)/
Sales Price
February
January
Cash Provided by Financing Activities. Approximately $463 million of cash was provided by financing activities during 2007. We issued approximately $1.0 billion of debt in the first quarter of 2007. Cash used in financing activities in the first quarter consisted of debt prepayments of approximately $175 million and scheduled principal repayments of $11 million. During the first quarter of 2007, we also repaid the $250 million outstanding balance under our credit facility and paid dividends on our common and preferred stock of $133 million, an increase of $84 million from the first quarter 2006. The following table summarizes the significant financing transactions, including activity subsequent to the end of the quarter (in millions):
Amount
April
March
Proceeds from the issuance of 25/8% Exchangeable Senior Debentures
due 2027
Prepayment of the 7.42% mortgage on the JW Marriott,
Washington, D.C. (1)
Proceeds from the issuance of the 5.53% mortgage loan secured by the
Ritz-Carlton, Naples and Newport Beach Marriott Hotel & Spa
Proceeds from the 5.55% Harbor Beach Marriott Resort & Spa mortgage
refinancing
As of March 23, 2007, our total debt was $6.5 billion. The weighted average interest rate of our debt was approximately 6.3% and the weighted average maturity was 6.0 years. Additionally, all of our debt has a fixed rate of interest.
As of March 23, 2007 and December 31, 2006, our debt was comprised of (in millions):
Series K senior notes, with a rate of 71/8% due November 2013
Series M senior notes, with a rate of 7% due August 2012
Series O senior notes, with a rate of 63/8% due March 2015
Series Q senior notes, with a rate of 63/4% due June 2016
Series S senior notes, with a rate of 67/8% due November 2014
$500 million Exchangeable Senior Debentures, with a rate of 3.25% due April 2024
$600 million Exchangeable Senior Debentures, with a rate of 25/8% due April 2027
Senior notes, with an average rate of 9.7%, maturing through 2012
Total senior notes
Mortgage debt (non-recourse) secured by $3.6 billion of real estate assets, with an average interest rate of 7.1% at March 23, 2007 and 7.5% at December 31, 2006 respectively
$600 million Exchangeable Senior Debentures. On March 23, 2007, Host LP issued $600 million 25/8% Exchangeable Senior Debentures (the “2007 Debentures”) and received proceeds of $589 million, net of
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underwriting fees and expenses and original issue discount. The 2007 Debentures mature on April 15, 2027 and are equal in right of payment with all of our other senior notes. Interest is payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year beginning on July 15, 2007. We can redeem for cash all, or part of, the 2007 Debentures at any time on or after April 20, 2012 upon 15 days notice at a redemption price of 100% of the principal amount plus accrued interest. Holders have the right to require us to repurchase the 2007 Debentures on April 15, 2012, April 15, 2017 and April 15, 2022 for cash equal to 100% of the principal amount plus accrued interest. Holders may exchange their 2007 Debentures prior to maturity under certain conditions, including when the closing sale price of Host’s common stock is more than 130% of the exchange price per share for at least 20 of 30 consecutive trading days during certain periods or any time up to two days prior to the date on which the debentures have been called for redemption. On exchange, we will deliver cash in an amount equal to not less than the lower of the exchange value (which is the applicable exchange rate multiplied by the average price of our common shares) and the aggregate principal amount of the 2007 Debentures to be exchanged, and, at our option, shares, cash or a combination thereof for any excess above the principal value. The initial exchange rate is 31.002 shares of our common stock per $1,000 principal amount of debentures, which is equivalent to an exchange price of $32.26 per share of Host common stock. The exchange rate may be adjusted under certain circumstances including the payment of common dividends exceeding $.20 per share in any given quarter. The 2007 Debentures and the common stock issuable, at our option, upon exchange of the debentures have not yet been registered under the Securities Act and may not be offered or sold except to qualified institutional buyers, as defined.
$500 million Exchangeable Senior Debentures. On March 16, 2004, Host LP issued $500 million of 3.25% Exchangeable Senior Debentures (the “2004 Debentures”) and received net proceeds of $484 million, after discounts, underwriting fees and expenses. The 2004 Debentures mature on April 15, 2024 and are equal in right of payment with all of our other senior debt. Interest is payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year. We can redeem for cash all, or part of, the 2004 Debentures at any time subsequent to April 19, 2009 upon 30 days notice at the applicable redemption price as set forth in the indenture. Holders have the right to require us to repurchase the 2004 Debentures on April 15, 2010, April 15, 2014 and April 15, 2019 for cash equal to 100% of the principal amount. Holders may exchange their 2004 Debentures prior to maturity under certain conditions, including at any time at which the closing sale price of our common stock is more than 120% of the exchange price per share, for at least 20 of 30 consecutive trading days during certain periods or any time up to two days prior to the date on which the debentures have been called for redemption. The 2004 Debentures are currently exchangeable into shares of Host’s common stock at an exchange rate of 58.0682 shares for each $1,000 of principal amount of the 2004 Debentures, or a total of approximately 29 million shares (which is equivalent to an exchange price of $17.22 per share). The exchange rate is adjusted for certain circumstances, including the payment of all common dividends. The 2004 Debentures will remain exchangeable until July 1, 2007 (the last day of the current exchange period) and will continue to be exchangeable after July 1, 2007 if the trading price of Host common stock continues to exceed 120% of the exchange price, or if other conditions for exchange are satisfied.
Mortgage Debt. Substantially all of our mortgage debt is recourse solely to specific assets except in instances of fraud, misapplication of funds and other customary recourse provisions. As of March 23, 2007, we have 27 assets that are encumbered by mortgage debt. Certain of these assets are secured by mortgage debt that contains restrictive covenants that require the mortgage servicer or lender to retain and hold in escrow the cash flow after debt service if it declines below specified operating levels. We are currently above the specified operating levels; therefore, no cash is being held in escrow under these restrictive covenants.
During the first quarter of 2007, we issued a $300 million mortgage secured by The Ritz-Carlton, Naples and the Newport Beach Marriott Hotel & Spa, which bears interest at a rate of 5.53% and matures in 2014; refinanced the $88 million 8.58% mortgage on the Harbor Beach Marriott Resort and Spa due March 1, 2007 with a $134 million mortgage at a rate of 5.55% that matures in 2014; and repaid the $88 million floating rate mortgage due September 15, 2007 on the JW Marriott Hotel, Washington, D.C.
Dividend Policy
Host is required to distribute to stockholders at least 90% of its annual taxable income, excluding net capital gain, in order to qualify as a REIT, including taxable income recognized for tax purposes but with regard to which we do not receive corresponding cash. Funds used by Host to pay dividends on its common and preferred stock are provided through distributions from Host LP. For every share of common and preferred stock of Host, Host LP has issued to Host a corresponding common OP unit and preferred OP unit. As of April 30, 2007, Host is the owner of
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substantially all of the preferred OP units and approximately 96.6% of the common OP units. The remaining 3.4% of the common OP units are held by various third-party limited partners.
Investors should take into account the 3.4% minority position in Host LP common OP units when analyzing common and preferred dividend payments by Host to its stockholders, as these holders share, on a pro rata basis, in amounts being distributed by Host LP to holders of its corresponding common and preferred OP units. When Host pays a common or preferred dividend, Host LP pays an equivalent per unit distribution on all common or corresponding preferred OP units. For example, if Host paid a $1 per share dividend on its common stock, it would be based on payment of a $1 per unit distribution by Host LP to Host, as well as to other common OP unit holders.
Host’s current policy on common dividends is generally to distribute 100% of its annual taxable income. Going forward, Host intends to pay a regular quarterly dividend of $0.20 per share, and, in addition, to declare a special dividend during the fourth quarter of each year, the amount of which will vary depending on Host’s level of taxable income. Additionally, based on our forecast for the rest of 2007, we expect meaningful growth in the fourth quarter special dividend relative to the 2006 special dividend of $.05 per share. Host currently intends to continue paying dividends on its preferred stock, regardless of the amount of taxable income, unless contractually restricted. The amount of any dividends will be determined by Host’s Board of Directors.
On March 15, 2007, our Board of Directors declared a cash dividend of $0.20 per share on our common stock. The dividend was paid on April 16, 2007 to stockholders of record as of March 31, 2007. The amount of any future common dividend will be determined by our Board of Directors.
On March 15, 2007, our Board of Directors also declared a cash dividend of $0.5546875 per share on our Class E cumulative redeemable preferred stock. The dividend was paid on April 16, 2007 to preferred stockholders of record as of March 31, 2007.
Comparable Hotel and Comparable Hotel plus the Starwood Portfolio Operating Statistics
We present certain operating statistics (i.e., RevPAR, average daily rate and average occupancy) and operating results (revenues, expenses and adjusted operating profit) for the periods included in this report on a comparable hotel basis. We define our comparable hotels as properties (i) that are owned or leased by us and the operations of which are included in our consolidated results, whether as continuing operations or discontinued operations for the entirety of the reporting periods being compared and (ii) that have not sustained substantial property damage or business interruption, or undergone large-scale capital projects during the reporting periods being compared. Of the 121 hotels that we owned on March 23, 2007, 94 have been classified as comparable hotels. The operating results of the following hotels that we owned as of March 23, 2007 are excluded from comparable hotel results for these periods:
Atlanta Marriott Marquis (major renovation started in August 2005);
New Orleans Marriott (property damage and business interruption from Hurricane Katrina in August 2005);
The Westin Kierland Resort & Spa (acquired in September 2006); and
24 consolidated hotels that we acquired from Starwood on April 10, 2006.
The operating results of the 14 hotels we disposed of as of March 23, 2007 or in 2006 are also not included in comparable hotel results for the periods presented herein. Moreover, because these statistics and operating results are for our hotel properties, they exclude results for our non-hotel properties and other real estate investments.
In addition to comparable hotel RevPAR, we also have presented comparable hotel plus the Starwood portfolio RevPAR. This represents our comparable hotels (described above) plus the 24 hotels acquired from Starwood on April 10, 2006 that we own as of March 23, 2007. Accordingly, we have included the results of the Starwood portfolio for periods prior to our ownership in 2006 in the determination of the comparable hotel plus Starwood portfolio RevPAR. As properties managed by Starwood report results on a monthly basis, the first quarter RevPAR reflects the results of these hotels for January and February consistent with our treatment of reporting periods discussed in our most recent Annual Report of Form 10-K. Given the significance of the Starwood portfolio to our operating results, we believe this supplemental presentation provides useful information to investors.
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Non-GAAP Financial Measures
We use certain “non-GAAP financial measures,” which are measures of our historical financial performance that are not calculated and presented in accordance with GAAP, within the meaning of applicable SEC rules. They are as follows: (i) Funds From Operations (FFO) per diluted share, and (ii) Comparable Hotel Operating Results. A complete discussion of these measures (including the reasons why we believe they are useful to investors, the additional purposes for which management uses these measures and their limitations) is included in our most recent Annual Report on Form 10–K.
FFO per Diluted Share
We present FFO per diluted share as a non-GAAP measure of our performance in addition to our earnings per share (calculated in accordance with GAAP). We calculate FFO per diluted share for a given operating period as our FFO (defined as set forth below) for such period divided by the number of fully diluted shares outstanding during such period. The National Association of Real Estate Investment Trusts (NAREIT) defines FFO as net income (calculated in accordance with GAAP) excluding gains (or losses) from sales of real estate, the cumulative effect of changes in accounting principles, real estate-related depreciation and amortization and adjustments for unconsolidated partnerships and joint ventures. FFO is presented on a per share basis after making adjustments for the effects of dilutive securities, including the payment of preferred stock dividends, in accordance with NAREIT guidelines. We believe that FFO per diluted share is a useful supplemental measure of our operating performance and that presentation of FFO per diluted share, when combined with the primary GAAP presentation of earnings per share, provides beneficial information to investors. The following table provides a reconciliation of net income available to common stockholders per share to FFO per diluted share (in millions, except per share amounts):
Reconciliation of Net Income Available to
Common Stockholders to Funds From Operations per Diluted Share
Income
(Loss)
Per Share
Net income available to common stockholders
Adjustments:
Gain on dispositions, net of taxes
Amortization of deferred gains, net of taxes
Partnership adjustments
FFO of minority partners of Host LP(a)
Adjustments for dilutive securities:
Assuming distribution of common shares granted under the comprehensive stock plan less shares assumed purchased at average market price
Assuming conversion of 2004 Exchangeable Senior Debentures
Assuming conversion of Convertible Subordinated Debentures
FFO per diluted share(b)
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Comparable Hotel Operating Results
We present certain operating results for our hotels, such as hotel revenues, expenses and adjusted operating profit, on a comparable hotel, or “same store” basis as supplemental information for investors. We present these hotel operating results on a comparable hotel basis because we believe that doing so provides investors and management with useful information for evaluating the period-to-period performance of our hotels and facilitates comparisons with other hotel REITs and hotel owners. The following table presents certain operating results and statistics for our comparable hotels for the periods presented herein:
Comparable Hotel Results (a)
(in millions, except hotel statistics)
Number of hotels
Number of rooms
Percent change in Comparable Hotel RevPAR
Comparable hotel sales
Room
Food and beverage (b)
Comparable hotel sales (c)
Comparable hotel expenses
Food and beverage (d)
Management fees, ground rent and other costs
Comparable hotel expenses (e)
Comparable hotel adjusted operating profit
Non-comparable hotel results, net (f)
Office building and limited service properties, net (g)
Operating profit per the consolidated statements of operations
Food and beverage sales per the consolidated statements of operations
Non-comparable food and beverage sales
Food and beverage sales for the property for which we record rental income
Adjustment for food and beverage sales for comparable hotels to reflect
Marriott’s fiscal year for Marriott-managed hotels
Comparable food and beverage sales
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Revenues per the consolidated statements of operations
Non-comparable hotel sales
Hotel sales for the property for which we record rental income, net
Rental income for office buildings and select service hotels
Adjustment for hotel sales for comparable hotels to reflect Marriott’s
fiscal year for Marriott-managed hotels
Food and beverage expenses per the consolidated statements of operations
Non-comparable food and beverage expense
Food and beverage expenses for the property for which we record rental income
Adjustment for food and beverage expenses for comparable hotels to reflect Marriott’s fiscal year for Marriott-managed hotels
Comparable food and beverage expenses
Operating costs and expenses per the consolidated statements of operations
Non-comparable hotel expenses
Hotel expenses for the property for which we record rental income
Rent expense for office buildings and select service hotels
Adjustment for hotel expenses for comparable hotels to reflect Marriott’s fiscal year for Marriott-managed hotels
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Interest Rate Sensitivity
During the first quarter of 2007, we repaid the balance of our floating rate debt. Floating rate debt accounted for 5.8% of our outstanding debt balance at December 31, 2006. See our most recent Annual Report on Form 10–K.
As required by Rules 13a-15 under the Securities Exchange Act of 1934, management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, no matter how well-designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
There have been no changes in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Period
Total Number ofCommon
SharesPurchased
Average Price Paid
per CommonShare
January 1, 2007—
January 31, 2007
February 1, 2007—
February 28, 2007
March 1, 2007—
March 23, 2007
Total
Item 5. Other Items
On April 25, 2007, Host Hotels & Resorts, Inc. held a public conference call to discuss the company’s first quarter results of operations. A copy of the prepared comments by Christopher J. Nassetta, president and chief executive officer, and W. Edward Walter, executive vice president and chief financial officer, discussing these results has been included as exhibit 99.1 to this Form 10-Q and is incorporated by reference herein. This information is being furnished to satisfy Item 2.02 (Results of Operations and Financial Condition) of Form 8-K.
The information in exhibit 99.1 is provided under Item 2.02 of Form 8-K and shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section. Furthermore, the information in this exhibit shall not be deemed to be incorporated by reference into the filings of the registrant under the Securities Act of 1933 regardless of any general incorporation language in such filings.
Item 6. Exhibits
The exhibits listed on the accompanying Exhibit Index are filed as part of this report and such Exhibit Index is incorporated herein by reference.
Exhibit No.
Description
4.19
10.42
12.1
31.1
27
31.2
32†
99.1
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Larry K. Harvey
Senior Vice President,
Chief Accounting Officer
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