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HST Host Hotels & Resorts

Filed: 25 Feb 20, 4:22pm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

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

For the fiscal year ended December 31, 2019

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.)

 

53-0085950 (Host Hotels & Resorts, Inc.)

52-2095412 (Host Hotels & Resorts, L.P.)

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

 

4747 Bethesda Avenue, Suite 1300 Bethesda, Maryland

 

20814

(Address of Principal Executive Offices)

 

(Zip Code)

(240) 744-1000

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

  

Title of Each Class

  

Trading Symbol

 

Name of Each Exchange on

Which Registered

Host Hotels & Resorts, Inc.

  

Common Stock, $.01 par value (705,881,741

shares outstanding as of  February 20, 2020)

  

HST

 

New York Stock Exchange

Host Hotels & Resorts, L.P.

  

None

  

None

 

None

Securities registered pursuant to Section 12(g) of the Act:

 

Host Hotels & Resorts, Inc.

  

None

 

 

Host Hotels & Resorts, L.P.

  

Units of limited partnership interest (698,514,143 units outstanding as of February 20, 2020)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Host Hotels & Resorts, Inc.

  

Yes 

  

No 

Host Hotels & Resorts, L.P.

  

Yes 

  

No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

 

Host Hotels & Resorts, Inc.

  

Yes 

  

No 

Host Hotels & Resorts, L.P.

  

Yes 

  

No 

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 

  

No 

Host Hotels & Resorts, L.P.

  

Yes 

  

No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Host Hotels & Resorts, Inc.

  

Yes 

  

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

Host Hotels & Resorts, Inc.

 

Large accelerated filer

  

  

Accelerated filer

  

 

 

 

 

Non-accelerated filer

  

  

Smaller reporting company

  

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

 

 

Host Hotels & Resorts, L.P.

 

Large accelerated filer

  

  

Accelerated filer

  

 

 

 

 

Non-accelerated filer

  

  

Smaller reporting company

  

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

 

 

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 

Host Hotels & Resorts, L.P.

  

Yes 

  

No 

The aggregate market value of common shares held by non-affiliates of Host Hotels & Resorts, Inc. (based on the closing sale price on the New York Stock Exchange) on June 28, 2019 was $13,135,902,460.

Documents Incorporated by Reference

Portions of Host Hotels & Resorts, Inc.’s definitive proxy statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with its annual meeting of stockholders to be held on May 15, 2020 are incorporated by reference into Part III of this Form 10-K.

 

 

 

 


 

EXPLANATORY NOTE

This report combines the annual reports on Form 10-K for the fiscal year ended December 31, 2019 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. 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. We 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. (and its consolidated subsidiaries) in cases where it is important to distinguish between Host Inc. and Host L.P. Host Inc. owns properties and conducts operations through Host L.P., of which Host Inc. is the sole general partner and of which it holds approximately 99% of the partnership interests (“OP units”) as of December 31, 2019. The remaining partnership interests 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.

We believe combining the annual reports on Form 10-K of Host Inc. and Host L.P. into this single report results in the following benefits:

 

enhances investors’ understanding of Host Inc. and Host L.P. by enabling investors to view the business as a whole in the same manner as management views and operates the business;

 

eliminates duplicative disclosure and provides a more streamlined presentation, since a substantial portion of our disclosure applies to both Host Inc. and Host L.P.; and

 

creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.

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. The executive officers of Host Inc. are appointed by Host Inc.’s board of directors, but are employed by Host L.P. Host L.P. employs everyone who works for Host Inc. or 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 the same on their respective financial statements.

There are a few differences between Host Inc. and Host L.P., which are reflected in the disclosure in this report. We believe it is important to understand the differences between Host Inc. and Host L.P. in the context of how Host Inc. and Host L.P. operate as an interrelated consolidated company. Host Inc. is a real estate investment trust, or REIT, and its only material asset is its ownership of partnership interests of Host L.P. As a result, Host Inc. does not conduct business itself, other than acting as the sole general partner of Host L.P., and issuing public equity from time to time, the proceeds from which are contributed to Host L.P. in exchange for OP units. Host Inc. itself does not issue any indebtedness and does not guarantee the debt or obligations of Host L.P. Host L.P. holds substantially all of our assets and holds the ownership interests in our joint ventures. Host L.P. conducts the operations of the business and is structured as a limited partnership with no publicly traded equity. Except for net proceeds from public equity issuances by Host Inc., Host L.P. generates the capital required by our business through Host L.P.’s operations, by Host L.P.’s direct or indirect incurrence of indebtedness, or through the issuance of OP units.

The substantive difference between the filings of Host Inc. and Host L.P. is 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 primarily is 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 in the consolidated statements of operations and comprehensive income (loss) with respect to the manner in which income is allocated to non-controlling interests. Income allocable to the holders of approximately 1% of the OP units is reflected as income allocable to non-controlling interests at Host Inc. and within net income at Host L.P. Also, earnings per share generally will be slightly less than the earnings per OP unit, as each Host Inc. common share is the equivalent of .97895 OP units (instead of 1 OP unit). Apart from these differences, the financial statements of Host Inc. and Host L.P. are nearly identical.

i


 

To help investors understand the differences between Host Inc. and Host L.P., this report presents the following separate sections or portions of sections for each of Host Inc. and Host L.P.:

 

Part II Item 5 - Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities for Host Inc. / Market for Registrant’s Common Units, Related Unitholder Matters and Issuer Purchases of Equity Securities for Host L.P.;

 

Part II Item 6 - Selected Financial Data;

 

Part II Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations is combined, except for a separate discussion of material differences, if any, in the liquidity and capital resources between Host Inc. and Host L.P.;

 

Part II Item 7A - Quantitative and Qualitative Disclosures about Market Risk is combined, except for separate discussions of material differences, if any, between Host Inc. and Host L.P.; and

 

Part II Item 8 - Financial Statements and Supplementary Data. While the financial statements themselves are presented separately, the notes to the financial statements generally are combined, except for separate discussions of differences between equity of Host Inc. and capital of Host L.P.

This report also includes separate Item 9A. Controls and Procedures sections and separate Exhibit 31 and 32 certifications for each of Host Inc. and Host L.P. in order to establish that the Chief Executive Officer and the Principal Financial Officer of Host Inc. and the Chief Executive Officer and the Principal Financial Officer of Host Inc. as the general partner of Host L.P. have made the requisite certifications and that Host Inc. and Host L.P. are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934 and 18 U.S.C. §1350.

 

 

 

ii


 

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

 

 

 

Page

 

 

 

 

Part I

 

 

 

 

Item 1.

Business

1

Item 1A.

Risk Factors

15

Item 1B.

Unresolved Staff Comments

32

Item 2.

Properties

32

Item 3.

Legal Proceedings

32

Item 4.

Mine Safety Disclosures

32

 

 

 

 

Part II

 

 

 

 

Item 5.

Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities for Host Inc.

34

 

Market for Registrant’s Common Units, Related Unitholder Matters and Issuer Purchases of Equity Securities for Host L.P.

35

Item 6.

Selected Financial Data (Host Hotels & Resorts, Inc.)

36

 

Selected Financial Data (Host Hotels & Resorts, L.P.)

36

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

37

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

67

Item 8.

Financial Statements and Supplementary Data

68

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

111

Item 9A.

Controls and Procedures

111

Item 9B.

Other Information

112

 

 

 

 

Part III

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

113

Item 11.

Executive Compensation

113

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder and Unitholder Matters

113

Item 13.

Certain Relationships and Related Transactions, and Director Independence

113

Item 14.

Principal Accounting Fees and Services

113

 

 

 

 

Part IV

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

114

Item 16.

Form 10-K Summary

117

 

 

 

iii


 

PART I

Forward Looking Statements

Our disclosure and analysis in this 2019 Annual Report on Form 10-K and in Host Inc.’s 2019 Annual Report to Stockholders contain some forward-looking statements that set forth anticipated results based on management’s plans and assumptions. From time to time, we also provide forward-looking statements in other materials we release to the public. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. We have tried, wherever possible, to identify each such statement by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will,” “target,” “forecast” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these forward-looking statements include those relating to future actions, future acquisitions or dispositions, future capital expenditures plans, future performance or results of current and anticipated expenses, interest rates, foreign exchange rates or the outcome of contingencies, such as legal proceedings.

We cannot guarantee that any future results discussed in any forward-looking statements will be realized, although we believe that we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions, including those discussed in Item 1A “Risk Factors.” Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those results anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements.

We undertake no obligation to publicly update forward-looking statements, whether because of new information, future events or otherwise. You are advised, however, to consult any additional disclosures we make or related subjects in our reports on Form 10-Q and Form 8-K that we file with the Securities and Exchange Commission (“SEC”). Also note that, in our risk factors, we provide a cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our business. These are factors that, individually or in the aggregate, we believe could cause our actual results to differ materially from past results and those results anticipated, estimated or projected. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. It is not possible to predict or identify all such risk factors. Consequently, you should not consider the discussion of risk factors to be a complete discussion of all the potential risks or uncertainties that could affect our business.

Item 1.

Business

Host Inc. was incorporated as a Maryland corporation in 1998 and operates as a self-managed and self-administered REIT. Host Inc. owns properties and conducts operations through Host L.P., of which Host Inc. is the sole general partner and of which it holds approximately 99% of the partnership interests (“OP units”) as of December 31, 2019. The remaining partnership interests are owned by various unaffiliated limited partners. Host Inc. has the exclusive and complete responsibility for Host L.P.’s day-to-day management and control.

As of February 20, 2020, our consolidated lodging portfolio consists of 80 primarily luxury and upper-upscale hotels containing approximately 46,500 rooms, with the majority located in the United States, and with five of the hotels located outside of the U.S. in Brazil and Canada. In addition, we own non-controlling interests in five domestic and one international joint venture that own hotels and in a timeshare joint venture in Hawaii.

Business Strategy

Our goal is to be the preeminent owner of high-quality lodging real estate in growing markets in the U.S. and to generate superior long-term returns for our stockholders throughout all phases of the lodging cycle through a combination of appreciation in asset values, growth in earnings and dividend distributions. The pillars of our strategy to achieve this objective include:

 

Geographically diverse portfolio of hotels in the U.S. - Own a diversified portfolio of hotels in the U.S. in major urban and resort destinations;

 

Strong scale and integrated platform – Utilize our scale to create value through enterprise analytics, asset management and capital investment initiatives, while aiding external growth by leveraging scale as a competitive advantage to acquire assets befitting our strategy. Allocate and recycle capital to seek returns that exceed our cost of capital and actively return capital to stockholders;

 

Investment grade balance sheet - Maintain a strong and flexible capital structure that allows us to execute our strategy throughout all phases of the lodging cycle; and

 

Employer of choice and responsible corporate citizen – Align our organizational structure with our business objectives to be an employer of choice and a responsible corporate citizen.

1


 

Geographically Diverse Portfolio.

We seek to have a geographically diversified portfolio in top U.S. major markets and premier resort destinations. We primarily focus on acquisitions and, occasionally, new development opportunities to enhance our portfolio. We focus generally on the following types of assets:

 

Resorts in locations with strong airlift and limited supply growth. These assets feature superior amenities and are operated by premier operators;

 

Convention destination hotels that are group oriented in urban and resort markets. These assets feature extensive and high-quality meeting facilities and often are connected to prominent convention centers; and

 

High-end urban hotels that are positioned in prime locations and possess multiple demand drivers for both business and leisure travelers.

As one of the largest owners of Marriott and Hyatt properties, our hotels primarily are operated under brand names that are among the most respected and widely recognized in the lodging industry. Within these brands, we have focused predominantly on the upper-upscale and luxury asset classes, as we believe these classes have a broad appeal for both individual and group leisure and business customers. In addition, we own several unbranded or soft-branded hotels that appeal to distinctive customer profiles in certain select submarkets.

Strong Scale and an Integrated Platform

Enterprise Analytics Platform. Due to the scale of our asset management and business intelligence platform, we believe we are in a unique position to implement value-added real estate decisions and to assist managers in driving operating performance. The size and composition of our portfolio and our affiliation with most of the leading brands and operators in the industry allow our enterprise analytics team to benchmark similar hotels and identify best practices and efficiencies that can improve long-term profitability. We perform independent underwriting of return on investment (“ROI”) projects and potential acquisitions, as well as revenue management analysis of ancillary revenue opportunities. Our goal is to continue to differentiate our assets within their competitive markets, drive operating performance and enhance the overall value of our real estate through the following:

 

Enhance profitability by using our business intelligence system to benchmark and monitor hotel performance and cost controls.

 

Drive revenue growth by conducting detailed strategic reviews with our managers on markets and business mix to assist them in developing the appropriate group/transient mix, on-line presence to address a broad customer base, and market share targets for each property.

 

Work with leading brands, such as Marriott and Hyatt, to take advantage of their worldwide presence and lodging infrastructure. We also have 15 hotels managed by independent operators where we believe these operators have more flexibility to drive revenues and control costs to maximize profits.

 

Improve asset value through the extension or purchase of ground leases or the restructuring of management agreements to increase contract flexibility.  

Disciplined Capital Allocation. Guided by a disciplined approach to capital allocation, we are aligned to make investment decisions that seek to deliver the greatest value and returns to stockholders. Our goal is to allocate capital to enhance and improve our portfolio, while balancing the importance of prudently returning capital to stockholders.

For 2020, we will continue our disciplined approach to capital allocation and intend to take advantage of our strong balance sheet and overall scale. We constantly are evaluating both single hotel and hotel portfolio transactions to acquire iconic upper-upscale and luxury properties that we believe have sustainable competitive advantages. Similarly, we intend to continue our capital recycling program with strategic and opportunistic dispositions. This may include the sale of assets where we believe the potential for growth is constrained or properties with significant capital expenditure requirements that we do not believe would generate an adequate return.

We may acquire additional properties or dispose of properties through various structures, including transactions involving single assets, portfolios, joint ventures, mergers and acquisitions of the securities or assets of other REITs or distributions of hotel properties to our stockholders. We anticipate that any acquisitions may be funded by, or through a combination of, proceeds from the sales of hotels, equity offerings of Host Inc., issuances of OP units by Host L.P., incurrence of debt, available cash or advances under our credit facility. We note, however, that the nature and supply of these assets make acquisitions inherently difficult to predict. For these reasons, we can make no assurances that we will be successful in purchasing any one or more hotels that we are reviewing currently, or may in the future review, bid on or negotiate to buy.

2


 

We also seek to create and mine value from our existing portfolio through value enhancement initiatives and ROI projects. We believe those investments provide a significant opportunity to achieve returns well in excess of our cost of capital. We work closely with our managers to attempt to schedule these projects to minimize operational disruption and environmental impact. Value enhancement initiatives seek to maximize the value of real estate within our existing portfolio through the highest and best use of our real estate. These projects may include hotel expansion, timeshare, office space or condominium units on excess land, redevelopment or expansion of existing retail space, and the acquisition of development entitlements. ROI projects are designed to improve the positioning of our hotels within their markets and competitive set. These projects include extensive renovations, including guest rooms, lobbies, food and beverage outlets; expansions and/or extensive renovation of ballroom and meeting rooms; major mechanical system upgrades; and green building initiatives and certifications. It also includes projects focused on increasing space profitability or lowering net operating costs, such as converting unprofitable or underutilized space into meeting space, adding guestrooms, and implementing energy and water conservation measures such as LED lighting, high-efficiency mechanical, electrical and plumbing equipment and fixtures, solar power, energy management systems, guestroom water efficient fixtures, and building automation systems.

Renewal and replacement capital expenditures are designed to maintain the quality and competitiveness of our hotels. Typically, renovations occur at intervals of approximately seven to ten years, but the timing may vary based on the type of property, function of area being renovated, hotel occupancy and other factors. These renovations generally are divided into the following types: soft goods, case goods, bathroom and architectural and engineering systems. Soft goods include items such as carpeting, textiles and wall finishes, which may require more frequent updates in order to maintain brand quality standards. Case goods include dressers, desks, couches, restaurant and meeting room tables and chairs, which generally are not replaced as frequently. Bathroom renovations include the refurbishment or replacement of tile, vanity, lighting and plumbing fixtures. Architectural and engineering systems include the physical plant of the hotel, including the roof, elevators/escalators, façade, heating, ventilation, and air conditioning and fire systems.

Throughout the lodging cycle, to the extent that we are unable to find appropriate investment opportunities that meet our return requirements, we will focus on returning capital to stockholders through dividends or common stock repurchases. Significant factors we review to determine the level and timing of the returns to stockholders include our current stock price compared to our determination of the underlying value of our assets, current and forecast operating results and the completion of hotel sales.  

Investment Grade Balance Sheet  

Our goal is to maintain a flexible capital structure that allows us to execute our strategy throughout the lodging cycle. To maintain its qualification as a REIT, Host Inc. is required to distribute 90% of its taxable income (other than net capital gain) to its stockholders each year and, as a result, generally relies on external sources of capital, as well as cash from operations, to finance growth.

Management believes that a strong balance sheet is a key competitive advantage that affords us a lower cost of capital and positions us for external growth. While we may issue debt at any time, we will target a net debt-to-earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio, (or “Leverage Ratio,” as defined in our credit facility) that allows us to maintain an investment grade rating on our senior unsecured debt. We believe an investment grade rating will give us the most consistent access to capital throughout the business cycle.

We seek to structure our debt profile to maintain financial flexibility and a balanced maturity schedule with access to different forms of financing, consisting primarily of senior notes and exchangeable debentures, as well as mortgage debt. Generally, we look to minimize the number of assets that are encumbered by mortgage debt, minimize near-term maturities and maintain a balanced maturity schedule. Depending on market conditions, we also may utilize variable rate debt which can provide greater protection during a decline in the lodging industry.

Corporate Responsibility

Our corporate responsibility strategic framework follows three themes to inform the integration of sustainability into the business and to guide our engagement with key stakeholders and communities:

 

Responsible Investment: When acquiring hotels, we seek to identify future capital investments and potential operational opportunities that reduce the property’s environmental footprint and mitigate climate change-related risks. During the ownership of our hotels, we evaluate investments in proven sustainability technologies and collaborate with our operators and managers to adopt industry best practices that seek to improve environmental performance and enhance asset value.

3


 

 

Environmental Stewardship: Our environmental goals focus on reducing energy consumption, water usage, waste to landfill and greenhouse emissions across our portfolio. We also seek certifications and alignment with leading verification and disclosure frameworks to support the effectiveness and transparency of our corporate responsibility program.

 

Corporate Citizenship: We are committed to being a responsible corporate citizen and strengthening our local communities through financial support, community engagement, volunteer service, and industry collaboration. Our approach is reinforced by our Code of Business Conduct and Ethics and periodic engagement with key stakeholders to understand their corporate responsibility priorities and expectations.

In October 2018, the Sustainability Accounting Standards Board (“SASB”) issued the Real Estate Sustainability Accounting Standard. The standard outlines disclosure topics and accounting metrics for the real estate industry. The energy and water management metrics that best correlate with our industry include energy consumption data coverage as a percentage of floor area (“Energy Intensity”); total energy consumed by portfolio area (“Total Energy Consumption”); water withdrawal as a percentage of total floor area, or number of units (for our calculation we use occupied rooms) (“Water Intensity”); and total water withdrawn by portfolio area (“Total Water Consumption”). The energy and water data we use is collected and reviewed by third-parties who compile the data from property utility statements. These metrics enable us to track the effectiveness of water and energy reduction ROI projects.

We reference key aspects and metrics of our sustainability efforts through the Global Reporting Initiative (“GRI”) Index, in accordance with the GRI framework and, beginning in 2015, we contracted with a third-party to provide further verification of our energy and water consumption data. The charts below detail our Energy Intensity, Total Energy Consumption, Water Intensity and Total Water Consumption for 2016 through 2018, the last three fiscal years for which data is available(1)(2):

  

  

 

(1)

Energy and water metrics relate to our consolidated domestic hotels owned for the entire year presented. The water data excludes one domestic hotel in 2016 as reliable utility data was not available. The excluded hotel was sold in 2017.

 

(2)

The increases in the 2018 metrics above are due our increased focus on resort properties, which require higher usage of energy and water, including for spas, pools and golf courses, combined with a higher number of heating and cooling degree days in 2018.

Our 2019 Corporate Responsibility report, which provides a summary of results and progress over the last reporting year, along with future commitments, was issued in October 2019.  

The Lodging Industry

The lodging industry in the United States consists of private and public entities that operate in a diversified market under a variety of brand names. The lodging industry has several key participants:

 

Owners—own the hotel and typically enter into an agreement for an independent third party to manage the hotel. These hotels may be branded and operated under the manager’s brand or branded under a franchise agreement and operated by the franchisee or by an independent hotel manager. The hotels also may be operated as an independent hotel by an independent hotel manager.

 

Owner/Managers—own the hotel and operate the property with their own management team. These hotels may be branded under a franchise agreement, operated as an independent hotel or operated under the owner’s brand. We are prohibited from operating and managing hotels by applicable REIT rules.

4


 

 

Franchisors—own a brand or brands and strive to grow their revenues by expanding the number of hotels in their franchise system. Franchisors provide their hotels with brand recognition, marketing support and centralized reservation systems for the franchised hotels.

 

Franchisor/Managers—own a brand or brands and operate hotels on behalf of the hotel owner or franchisee.

 

Managers—operate hotels on behalf of the hotel owner, but do not, themselves, own a brand. The hotels may be operated under a franchise agreement or as an independent hotel.

The hotel manager is responsible for the day-to-day operations of the hotel, including the employment of hotel staff, the determination of room rates, the development of sales and marketing plans, the preparation of operating and capital expenditures budgets and the preparation of financial reports for the owner. The hotel manager typically receives fees based on the revenues and profitability of the hotel.

Supply and Demand. Our industry is influenced by the cyclical relationship between the supply of and demand for hotel rooms. Lodging demand growth typically is related to the vitality of the overall economy, in addition to local market factors that stimulate travel to specific destinations. Trends in economic indicators such as gross domestic product (“GDP”) growth, business investment, corporate profits and employment growth are key indicators of the relative strength of lodging demand. Lodging demand also will be affected by changes to international travel patterns.

Lodging supply growth generally is driven by overall lodging demand, as extended periods of strong demand growth tend to encourage new development. However, the rate of supply growth also is influenced by several additional factors, including the availability of capital, interest rates, construction costs and unique market considerations. The relatively long lead-time required to complete the development of hotels makes supply growth easier to forecast than demand growth, but increases the volatility of the cyclical behavior of the lodging industry, as new supply may be planned during an upcycle but such supply may open for business in a weaker economy. Therefore, as illustrated in the charts below for the U.S. lodging industry, at different points in the cycle, demand growth may accelerate when supply growth is very low, or supply may accelerate while demand growth is slowing. A recent source of supply for the industry has been the rapid growth of online short-term rentals, including as a flexible option for apartment buildings. Though not reported through official industry statistics, the impact on the hotel industry and the availability of these outlets is more variable than typical changes in supply from hotel construction and tends to be very market specific. Local legislation has the potential to limit supply growth for these online short-term rentals in many top markets, though the growth of professional management for legal rentals remains a key trend.

5


 

Our portfolio primarily consists of upper upscale and luxury hotels and, accordingly, its performance is best understood in comparison to the upper upscale category rather than the entire industry. The charts below detail the historical supply, demand and revenue per available room (“RevPAR”) growth for the U.S. lodging industry and for the U.S. luxury and upper upscale categories for 2015 to 2019 and forecast data for 2020:  

U.S. Lodging Industry Supply, Demand and RevPAR Growth

Source: Historical data - STR, 2020 Forecast - CBRE Hotels’ Americas Research

 

U.S. Luxury and Upper Upscale Supply, Demand and RevPAR Growth

 

Source: Historical data - STR, 2020 Forecast - CBRE Hotels’ Americas Research

6


 

 

Managers and Operational Agreements

All our hotels are managed by third parties pursuant to management or operating agreements, with some of such hotels also subject to separate franchise or license agreements addressing matters pertaining to operations under the designated brand. Under these agreements, the managers have sole responsibility and exclusive authority for all activities necessary for the day-to-day operation of the hotels, including establishing room rates, securing and processing reservations, procuring inventories, supplies and services, providing periodic inspection and consultation visits to the hotels by the managers’ technical and operational experts and promoting and publicizing the hotels. The managers employ all managerial and other employees for the hotels, review hotel operations with a focus on improving revenues and managing expenses, review the maintenance of the hotels, prepare reports, budgets and projections, and provide other administrative and accounting support services to the hotels. These support services include planning and policy services, divisional financial services, product planning and development, employee staffing and training, corporate executive management and certain in-house legal services. We have certain approval rights over budgets, capital expenditures, significant leases and contractual commitments, and various other matters.

General Terms and Provisions – Agreements governing our hotels that are managed by brand owners (Marriott, Hyatt, Hilton and AccorHotels) typically include the terms described below:

 

Term and fees for operational services. The initial term of our management and operating agreements generally is 10 to 25 years, with one or more renewal terms at the option of the manager. The majority of our management agreements condition the manager’s right to exercise options for specified renewal terms upon the satisfaction of specified economic performance criteria. The manager typically receives compensation in the form of a base management fee, which is calculated as a percentage (generally 2-3%) of annual gross revenues, and an incentive management fee, which typically is calculated as a percentage (generally 10-20%) of operating profit after the owner has received a priority return on its investment in the hotel. In the case of our hotels operating under the W®, Westin®, Sheraton®, Luxury Collection® and St. Regis® brands and managed by Marriott following its acquisition of Starwood Hotels & Resorts Worldwide, Inc. on September 23, 2016 (collectively, the “Starwood Hotels”), the base management fee is only 1% of annual gross revenues, but that amount is supplemented by license fees payable under a separate license agreement (as described below).

 

License services. In the case of the Starwood Hotels, operations are governed by separate license agreements addressing matters pertaining to the designated brand, including rights to use trademarks, service marks and logos, matters relating to compliance with certain brand standards and policies, and the provision of certain system programs and centralized services. Although the term of these license agreements generally is coterminous with the corresponding operating agreements, the license agreements contemplate the potential for continued brand affiliation even in the event of a termination of the operating agreement (for instance, in the event the hotel is operated by an independent operator). Licensors receive compensation in the form of license fees (generally 5% of gross revenues attributable to room sales and 2% of gross revenues attributable to food and beverage sales), which amounts supplement the lower base management fee of 1% of gross revenues received by Marriott under the operating agreements, as noted above.

 

Chain or system programs and services. Managers are required to provide chain or system programs and services generally that are furnished on a centralized basis. Such services include the development and operation of certain computer systems and reservation services, regional or other centralized management and administrative services, marketing and sales programs and services, training and other personnel services, and other centralized or regional services as may be determined to be more efficiently performed on a centralized, regional or group basis rather than on an individual hotel basis. Costs and expenses incurred in providing these chain or system programs and services generally are allocated on a cost reimbursement basis among all hotels managed by the manager or its affiliates or that otherwise benefit from these services.

 

Working capital and fixed asset supplies. We are required to maintain working capital for each hotel and to fund the cost of certain fixed asset supplies (for example, linen, china, glassware, silver and uniforms). We also are responsible for providing funds to meet the cash needs for hotel operations if at any time the funds available from working capital are insufficient to meet the financial requirements of the hotels. For certain hotels, the working capital accounts which would otherwise be maintained by the managers for each of such hotels are maintained on a pooled basis, with managers being authorized to make withdrawals from such pooled account as otherwise contemplated with respect to working capital in accordance with the provisions of the management or operating agreements.

7


 

 

Furniture, fixtures and equipment replacements. We are required to provide the managers with all furniture, fixtures and equipment (“FF&E”) necessary for the operation of the hotels (including funding any required FF&E replacements). On an annual basis, the managers prepare budgets for FF&E to be acquired and certain routine repairs and maintenance to be performed in the next year and an estimate of the necessary funds, which budgets are subject to our review and approval. For purposes of funding such expenditures, a specified percentage (typically 4-5%) of the gross revenues of each hotel is deposited by the manager into an escrow or reserve account in our name, to which the manager has access. For certain hotels, we have negotiated flexibility with the manager that reduces the funding commitment required as follows:

 

o

For certain of our Marriott-managed hotels, we have entered into an agreement with Marriott to allow for such expenditures to be funded from one pooled reserve account, rather than periodic reserve fund contributions being deposited into separate reserve accounts at each of the subject hotels, with the minimum required balance maintained on an ongoing basis in that pooled reserve account being significantly less than the amount that would have been maintained otherwise in such separate hotel reserve accounts. Upon sale, a hotel-level reserve account would be funded (by either the purchaser or by us, as the seller) in the full amount of the reserve balance associated with the subject hotel.

 

o

For certain of the Starwood Hotels, periodic reserve fund contributions, which otherwise would be deposited into reserve accounts maintained by managers at each hotel, are distributed to us and we are responsible for providing funding of expenditures which otherwise would be funded from reserve accounts for each of the subject hotels. Upon sale, a hotel-level reserve account would be funded in the amount of the subject hotel’s pro rata share, if any, of the consolidated pooled reserve balance.

 

Building alterations, improvements and renewals. The managers are required to prepare an annual estimate of the expenditures necessary for major repairs, alterations, improvements, renewals and replacements to the structural, mechanical, electrical, heating, ventilating, air conditioning, plumbing and elevators of each hotel, along with alterations and improvements to the hotel as are required, in the manager’s reasonable judgment, to keep the hotel in a competitive, efficient and economical operating condition that is consistent with brand standards. We generally have approval rights over such budgets and expenditures, which we review and approve based on our manager’s recommendations and on our judgment. Expenditures for these major repairs and improvements affecting the hotel building typically are funded directly by owners, although our agreements with Marriott in respect of the Starwood Hotels contemplate that certain such expenditures also may be funded from the FF&E reserve account.

 

Treatment of additional owner funding. As additional owner funding becomes necessary, either for expenditures generally funded from the FF&E replacement funds, or for any major repairs or improvements to the hotel building which may be required to be funded directly by owners, most of our agreements provide for an economic benefit to us through an impact on the calculation of incentive management fees payable to our managers. One approach frequently utilized at some of our Marriott-managed hotels (excluding the Starwood Hotels) is to provide such owner funding through loans which are repaid, with interest, from operational revenues, with the repayment amounts reducing operating profit available for payment of incentive management fees. Another approach that is used at the Starwood Hotels, as well as with certain capital expenditures projects at some of our other hotels, is to treat such owner funding as an increase to our investment in the hotel, resulting in an increase to the owner’s priority return with a corresponding reduction to the amount of operating profit available for payment of incentive management fees. For the hotels that are subject to the pooled arrangement described above, the amount of any additional FF&E reserve account funding is allocated to each of such hotels on a pro rata basis, determined with reference to the net operating income of each hotel and the total net operating income of all such pooled hotels for the most recent operating year.

 

Territorial protections. Certain management and operating agreements impose restrictions for a specified period which limit the manager and its affiliates from owning, operating or licensing a hotel of the same brand within a specified area. The area restrictions vary with each hotel, from city blocks in urban areas to up to a multi-mile radius from the hotel in other areas.

 

Sale of the hotel. Subject to specific agreements as to certain hotels (see below under “Special Termination Rights”), we generally are limited in our ability to sell, lease or otherwise transfer such hotels by the requirement that the transferee assumes the related management agreements and meets specified other conditions, including the condition that the transferee not be a competitor of the manager.

8


 

 

Performance Termination Rights. In addition to any right to terminate that may arise as a result of a default by the manager, most of our management and operating agreements include reserved rights for us to terminate on the basis of the manager’s failure to meet certain performance-based metrics, typically including a specified threshold return on owner’s investment in the hotel, along with a failure of the hotel to achieve a specified RevPAR performance threshold established with reference to other competitive hotels in the market. Typically, such performance-based termination rights arise in the event the operator fails to achieve these specified performance thresholds over a consecutive two-year period and are subject to the manager’s ability to “cure” and avoid termination by payment to us of specified deficiency amounts (or, in some instances, waiver of the right to receive specified future management fees). We have agreed in the past, and may agree in the future, to waive certain of these termination rights in exchange for consideration from a manager or its affiliates, which consideration may include cash compensation or amendments to management agreements.

 

Special Termination Rights. In addition to any performance-based or other termination rights set forth in our management and operating agreements, we have specific negotiated termination rights as to certain management and operating agreements. While the brand affiliation of a hotel may increase its value, the ability to dispose of a property unencumbered by a management agreement, or even brand affiliation, also can increase the value for prospective purchasers. These termination rights can take several different forms, including termination of agreements upon sale that leave the property unencumbered by any agreement; termination upon sale provided that the property continues to be operated under a license or franchise agreement with continued brand affiliation; or termination without sale or other conditions, which may require the payment of a fee. These termination rights also may restrict the number of agreements that may be terminated over any annual or other period; impose limitations on the number of agreements terminated as measured by EBITDA; require that a certain number of hotels continue to maintain the brand affiliation; or be restricted to a specific pool of assets.  

In addition to hotels managed by brand owners, we have both branded hotels and non-branded hotels operated by independent managers. Our management agreements with independent managers, while similar in operational scope to agreements with our brand managers, typically have shorter initial terms, no renewal rights, more flexible termination rights, and more limited system-wide services. However, while we have additional flexibility with respect to these operators, certain of those hotels remain subject to underlying franchise or licensing agreements. These franchise or licensing agreements allow us to engage independent managers to operate our hotels under the applicable brand names and to participate in the brands’ reservation and loyalty-rewards systems. Under these agreements, we pay the brand owners a franchise or licensing fee equal to a specified percentage of gross room revenues, as well as other system fees and reimbursements. In addition, we are obligated to maintain applicable brand standards at our franchised hotels.  

Operating Structure

Host Inc. operates through an umbrella partnership structure in which substantially all its assets are owned by Host L.P., of which Host Inc. is the sole general partner and holds approximately 99% of the OP units as of December 31, 2019. A REIT is a corporation that has elected to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), and that meets certain ownership, organizational and operating requirements set forth under the Code. In general, by payments of dividends to stockholders, a REIT is permitted to reduce or eliminate federal income taxes at the corporate level. Each OP unit owned by unaffiliated limited partners other than Host Inc. is redeemable, at the option of the limited partner, for an amount of cash equal to the market value of one share of Host Inc. common stock multiplied by the current conversion factor of 1.021494. Host Inc. has the right to acquire any OP unit offered for redemption directly from the limited partner in exchange for 1.021494 shares of Host Inc. common stock instead of Host L.P. redeeming such OP unit for cash. Additionally, for every share of common stock issued by Host Inc., Host L.P. will issue .97895 OP units to Host Inc. in exchange for the consideration received from the issuance of the common stock. As of December 31, 2019, unaffiliated limited partners owned 7.5 million OP units, which were convertible into 7.6 million Host Inc. common shares. Assuming that all OP units held by unaffiliated limited partners were converted into common shares, there would have been 721.0 million common shares of Host Inc. outstanding at December 31, 2019.

9


 

Our operating structure is as follows:

 

 

As a REIT, certain tax laws limit the amount of “non-qualifying” income that Host Inc. and Host L.P. can earn, including income derived directly from the operation of hotels. As a result, we lease substantially all our consolidated hotels to certain of our subsidiaries designated as taxable REIT subsidiaries (“TRS”) for federal income tax purposes. Our TRS are subject to income tax and are not limited as to the amount of non-qualifying income they can generate, but they are limited in terms of their value as a percentage of the total value of our assets. Our TRS enter into agreements with third parties to manage the operations of the hotels. Our TRS also may own assets engaging in activities that produce non-qualifying income, such as the development of timeshare or condominium units, subject to certain restrictions. The difference between the hotels’ net operating cash flow and the aggregate rents paid to Host L.P. is retained by our TRS as taxable income. Accordingly, the net effect of the TRS leases is that a portion of the net operating cash flow from our hotels is subject to federal, state and, if applicable, foreign corporate income tax.

Our Consolidated Hotel Portfolio

As of February 20, 2020, we owned a portfolio of 80 hotels, of which 75 are in the United States and five are located in Brazil and Canada. Our consolidated hotels located outside the United States collectively have approximately 1,500 rooms. Approximately 2% of our revenues were attributed to the operations of these five foreign hotels in each of 2019, 2018 and 2017.

The lodging industry is viewed as consisting of six different categories, each of which caters to a discrete set of customer tastes and needs: luxury, upper upscale, upscale, upper midscale, midscale and economy. Our portfolio primarily consists of luxury and upper upscale properties, which are operated under internationally recognized brand names such as Marriott, Westin, Ritz-Carlton, Hyatt and Hilton. There also has been a trend towards specialized, smaller boutique hotels that are customized towards a particular customer profile. Generally, these hotels will be operated by an independent third party and either will have no brand affiliation, or will be associated with a major brand, while maintaining most of its independent identity (which we refer to as “soft-branded” properties).

Revenues earned at our hotels consist of three broad categories: rooms, food and beverage, and other revenues. While approximately 63% of our revenues in 2019 are generated from room sales, the majority of our properties feature a variety of amenities that help drive demand and profitability. Our hotels typically include meeting and banquet facilities, a variety of restaurants and lounges, swimming pools, exercise facilities and/or spas, gift shops and parking facilities, the combination of which enable them to serve business, leisure and group travelers.  

10


 

Our top 40 hotels by RevPAR represent approximately 70% of our total revenues. Additionally, 33 of our consolidated hotels have more than 500 rooms. The average age of our properties is 35 years, although substantially all of them have benefited from significant renovations or major additions, as well as regularly scheduled renewal and replacement expenditures and other capital improvements.

By Brand. The following table details our consolidated hotel portfolio by brand as of February 20, 2020:

 

 

 

Number

 

 

 

 

 

 

Percentage of

 

Brand

 

of Hotels

 

 

Rooms

 

 

Revenues (1)

 

Marriott:

 

 

 

 

 

 

 

 

 

 

 

 

Marriott

 

 

30

 

 

 

20,506

 

 

 

37.7

%

Ritz-Carlton

 

 

5

 

 

 

1,893

 

 

 

7.1

 

Autograph Collection

 

 

1

 

 

 

277

 

 

 

0.4

 

JW Marriott

 

 

4

 

 

 

1,909

 

 

 

3.2

 

W

 

 

2

 

 

 

729

 

 

 

1.5

 

St. Regis

 

 

1

 

 

 

232

 

 

 

0.4

 

Luxury Collection

 

 

2

 

 

 

1,152

 

 

 

3.6

 

Westin

 

 

10

 

 

 

5,077

 

 

 

8.4

 

Sheraton

 

 

3

 

 

 

3,370

 

 

 

6.0

 

Total Marriott

 

 

58

 

 

 

35,145

 

 

 

68.3

 

Hyatt:

 

 

 

 

 

 

 

 

 

 

 

 

Andaz

 

 

1

 

 

 

301

 

 

 

1.7

 

Grand Hyatt

 

 

4

 

 

 

3,632

 

 

 

8.1

 

Hyatt Place

 

 

1

 

 

 

426

 

 

 

0.5

 

Hyatt Regency

 

 

5

 

 

 

3,405

 

 

 

7.6

 

Total Hyatt

 

 

11

 

 

 

7,764

 

 

 

17.9

 

Hilton:

 

 

 

 

 

 

 

 

 

 

 

 

Curio

 

 

1

 

 

 

391

 

 

 

1.0

 

Hilton

 

 

1

 

 

 

223

 

 

 

0.3

 

Embassy Suites

 

 

1

 

 

 

455

 

 

 

0.6

 

Total Hilton

 

 

3

 

 

 

1,069

 

 

 

1.9

 

AccorHotels:

 

 

 

 

 

 

 

 

 

 

 

 

Swissôtel

 

 

1

 

 

 

662

 

 

 

1.1

 

Fairmont

 

 

1

 

 

 

450

 

 

 

2.3

 

ibis

 

 

1

 

 

 

256

 

 

 

0.1

 

Novotel

 

 

1

 

 

 

149

 

 

 

0.1

 

Total AccorHotels

 

 

4

 

 

 

1,517

 

 

 

3.6

 

Other/Independent

 

 

4

 

 

 

1,175

 

 

 

3.8

 

 

 

 

80

 

 

 

46,670

 

 

 

96

%

___________

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Based on our 2019 revenues; sold hotels accounted for the remaining 4% of our revenues. No individual hotel contributed more than 6% of total revenues in 2019. Hotels that are not considered upper upscale or luxury constitute less than 2% of our revenues.    

 

 

11


 

By Location. The following table details the locations of and number of rooms at our consolidated hotels as of February 20, 2020:

 

Location

 

Rooms

 

 

Location

 

Rooms

 

Arizona

 

 

 

 

 

Illinois (continued)

 

 

 

 

The Phoenician, A Luxury Collection Resort

 

 

645

 

 

The Westin Chicago River North

 

 

445

 

The Camby Hotel

 

 

277

 

 

Louisiana

 

 

 

 

The Westin Kierland Resort & Spa

 

 

732

 

 

New Orleans Marriott

 

 

1,333

 

California

 

 

 

 

 

Maryland

 

 

 

 

Axiom Hotel, San Francisco

 

 

152

 

 

Gaithersburg Marriott Washingtonian Center

 

 

284

 

Coronado Island Marriott Resort & Spa (1)

 

 

300

 

 

Massachusetts

 

 

 

 

Grand Hyatt San Francisco

 

 

668

 

 

Boston Marriott Copley Place (1)

 

 

1,144

 

Hyatt Regency San Francisco Airport

 

 

789

 

 

Sheraton Boston Hotel

 

 

1,220

 

Manchester Grand Hyatt San Diego (1)

 

 

1,628

 

 

The Westin Waltham Boston

 

 

351

 

Marina del Rey Marriott (1)

 

 

370

 

 

Minnesota

 

 

 

 

Marriott Marquis San Diego Marina (1)

 

 

1,360

 

 

Minneapolis Marriott City Center

 

 

585

 

Newport Beach Marriott Hotel & Spa

 

 

532

 

 

New Jersey

 

 

 

 

San Francisco Marriott Fisherman’s Wharf

 

 

285

 

 

Newark Liberty International Airport Marriott (1)

 

 

591

 

San Francisco Marriott Marquis (1)

 

 

1,500

 

 

Sheraton Parsippany Hotel

 

 

370

 

San Ramon Marriott (1)

 

 

368

 

 

New York

 

 

 

 

Santa Clara Marriott (1)

 

 

766

 

 

New York Marriott Downtown

 

 

513

 

The Ritz-Carlton, Marina del Rey (1)

 

 

304

 

 

New York Marriott Marquis

 

 

1,966

 

The Westin Los Angeles Airport (1)

 

 

747

 

 

Sheraton New York Times Square Hotel

 

 

1,780

 

The Westin South Coast Plaza, Costa Mesa (2)

 

 

393

 

 

Ohio

 

 

 

 

W Hollywood (1)

 

 

305

 

 

The Westin Cincinnati (1)

 

 

456

 

Colorado

 

 

 

 

 

Pennsylvania

 

 

 

 

Denver Marriott Tech Center

 

 

605

 

 

Philadelphia Airport Marriott (1)

 

 

419

 

Denver Marriott West (1)

 

 

305

 

 

The Logan

 

 

391

 

The Westin Denver Downtown

 

 

430

 

 

Texas

 

 

 

 

Florida

 

 

 

 

 

Houston Airport Marriott at George Bush

 

 

 

 

1 Hotel South Beach, Miami Beach

 

 

433

 

 

     Intercontinental (1) (3)

 

 

573

 

Hilton Singer Island Oceanfront/Palm Beaches

 

 

 

 

 

Houston Marriott Medical Center/Museum

 

 

 

 

     Resort

 

 

223

 

 

     District (1)

 

 

395

 

Hyatt Regency Coconut Point Resort and Spa

 

 

454

 

 

JW Marriott Houston by the Galleria

 

 

516

 

Miami Marriott Biscayne Bay

 

 

600

 

 

San Antonio Marriott Rivercenter (1)

 

 

1,000

 

Orlando World Center Marriott

 

 

2,004

 

 

San Antonio Marriott Riverwalk

 

 

512

 

Tampa Airport Marriott (1)

 

 

298

 

 

The St. Regis Houston

 

 

232

 

The Don CeSar

 

 

347

 

 

Virginia

 

 

 

 

The Ritz-Carlton, Amelia Island

 

 

446

 

 

Hyatt Regency Reston

 

 

518

 

The Ritz-Carlton, Naples

 

 

450

 

 

The Ritz-Carlton, Tysons Corner (1)

 

 

398

 

The Ritz-Carlton Golf Resort, Naples

 

 

295

 

 

Westfields Marriott Washington Dulles

 

 

336

 

YVE Hotel Miami

 

 

243

 

 

Washington

 

 

 

 

Georgia

 

 

 

 

 

The Westin Seattle

 

 

891

 

Grand Hyatt Atlanta in Buckhead

 

 

439

 

 

W Seattle

 

 

424

 

JW Marriott Atlanta Buckhead

 

 

371

 

 

Washington, D.C.

 

 

 

 

The Westin Buckhead Atlanta

 

 

365

 

 

Grand Hyatt Washington

 

 

897

 

The Whitley, A Luxury Collection Hotel,

 

 

 

 

 

Hyatt Regency Washington on Capitol Hill

 

 

838

 

Atlanta Buckhead

 

 

507

 

 

JW Marriott Washington, DC

 

 

777

 

Hawaii

 

 

 

 

 

The Westin Georgetown, Washington D.C.

 

 

267

 

Andaz Maui at Wailea Resort

 

 

301

 

 

Washington Marriott at Metro Center

 

 

459

 

Fairmont Kea Lani, Maui

 

 

450

 

 

Brazil

 

 

 

 

Hyatt Place Waikiki Beach

 

 

426

 

 

ibis Rio de Janeiro Parque Olimpico

 

 

256

 

Hyatt Regency Maui Resort and Spa

 

 

806

 

 

JW Marriott Hotel Rio de Janeiro

 

 

245

 

Illinois

 

 

 

 

 

      Novotel Rio de Janeiro Parque Olimpico

 

 

149

 

Chicago Marriott Suites Downers Grove

 

 

254

 

 

Canada

 

 

 

 

Embassy Suites by Hilton Chicago Downtown

 

 

 

 

 

Calgary Marriott Downtown Hotel

 

 

388

 

     Magnificent Mile

 

 

455

 

 

Marriott Downtown at CF Toronto Eaton

 

 

 

 

Swissôtel Chicago

 

 

662

 

 

     Centre (1)

 

 

461

 

 

 

 

 

 

 

Total

 

 

46,670

 

 

 

 

 

 

 

 

 

 

 

 

(1)

The land on which this hotel is built is leased from a third party under one or more lease agreements.

(2)

The land, building and improvements are leased from a third party under a long-term lease agreement.

(3)

This property is not wholly owned.

 

12


 

By Market Location: With our geographically diverse portfolio, no individual market represents more than 10% of total revenues. The following chart summarizes the composition of our consolidated hotels as of February 20, 2020 by each market location based on its percentage of 2019 revenues:  

 

 

(1)

Our sold hotels accounted for the remaining 4% of our 2019 revenues.

13


 

Other Real Estate Interests

We own non-controlling interests in several entities that, as of February 20, 2020, owned, or owned an interest in, 10 hotels. The operations of the properties owned by these entities are not consolidated and are included in equity in earnings in our consolidated results of operations. See Part II Item 8. “Financial Statements and Supplementary Data – Note 4. Investments in Affiliates.”

Competition

The lodging industry is highly competitive. Competition often is specific to individual markets and is based on several factors, including location, brand, guest facilities and amenities, level of service, room rates and the quality of accommodations. The lodging industry is viewed as consisting of six different categories, each of which caters to a discrete set of customer tastes and needs: luxury, upper upscale, upscale, upper midscale, midscale and economy. The classification of a hotel is based on lodging industry standards, which take into consideration many factors, such as guest facilities and amenities, level of service and quality of accommodations. Most of our hotels operate in urban and resort markets either as luxury properties under such brand names as Andaz®, Fairmont®, Grand Hyatt®, JW Marriott®, Ritz-Carlton®, St. Regis®, The Luxury Collection® and W®, or as upper upscale properties under such brand names as Embassy Suites®, Hilton®, Hyatt®,  Marriott®, Marriott Marquis®, Autograph Collection®, Curio – A Collection by Hilton®, Marriott Suites®, Pullman®, Sheraton®, Swissôtel® and Westin®. (1)  While our hotels compete primarily with other hotels in the luxury and upper upscale category, they also may compete with hotels in other lower-tier categories. A recent source of supply for the lodging industry has been the rapid growth of online short-term rentals, including as a flexible option for apartment buildings. Our hotels also may compete with these short-term rentals in certain markets. In addition, many management contracts for our hotels do not prohibit our managers from converting, franchising or developing other hotels in our markets. As a result, our hotels compete with other hotels that our managers may own, invest in, manage or franchise.  

We also compete with other REITs and other public and private investors for the acquisition of new properties and investment opportunities as we attempt to position our portfolio to best take advantage of changes in markets and travel patterns of our customers.

Seasonality

Our hotel sales traditionally have experienced moderate seasonality, which varies based on the individual hotel and the region. Hotel sales for our consolidated portfolio were approximately 26%, 27%, 23% and 24% for the first, second, third and fourth calendar quarters, respectively, in 2019.

Environmental and Regulatory Matters

Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances. These laws may impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, certain environmental laws and common law principles could be used to impose liability for release of hazardous or toxic materials, and third parties may seek recovery from owners or operators of real properties for personal injury associated with exposure to released hazardous or toxic materials. Environmental laws also may impose restrictions on the way property may be used or businesses may be operated, and these restrictions may require corrective or other expenditures. In connection with our current or prior ownership or operation of hotels, we potentially may be liable for various environmental costs or liabilities. Although currently we are not aware of any material environmental claims pending or threatened against us, we can offer no assurance that a material environmental claim will not be asserted against us in the future.

Employees

As of February 20, 2020, we had 175 employees, all of which work in the United States, including our regional offices in Miami and San Diego. None of Host’s employees are covered by collective bargaining agreements. The employees at all of our U.S. and Canadian hotels are employees of our third-party hotel managers, who are responsible for hiring and maintaining employees. The number of employees referenced above does not include the hotel employees of our three hotels in Brazil, which, while technically Host employees, are under the direct supervision and control of our third-party hotel managers. Although we do not manage employees at our consolidated hotels, we still are subject to many of the costs and risks generally associated with the hotel labor force, particularly those hotels with unionized labor. For a discussion of these relationships, see Part I Item 1A. “Risk Factors—We are subject to risks associated with the employment of hotel personnel, particularly with hotels that employ unionized labor.”

 

(1) This annual report contains registered trademarks that are the exclusive property of their respective owners, which are companies other than us. None of the owners

of these trademarks, their affiliates or any of their respective officers, directors, agents or employees, has or will have any responsibility or liability for any

information contained in this annual report.  

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Employees at certain of our third-party managed hotels are covered by collective bargaining agreements that are subject to review and renewal on a regular basis. For a discussion of these relationships, see Part I Item 1A. “Risk Factors—We are subject to risks associated with the employment of hotel personnel, particularly with hotels that employ unionized labor.”  

Where to Find Additional Information

The address of our principal executive office is 4747 Bethesda Avenue, Suite 1300, Bethesda, Maryland, 20814. Our phone number is (240) 744-1000. We maintain an internet website at: www.hosthotels.com. Through our website, we make available free of charge as soon as reasonably practicable after they are filed electronically with, or furnished to, the SEC, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers at http://www.sec.gov.

Our website also is a key source of important information about us. We routinely post to the Investor Relations section of our website important information about our business, our operating results and our financial condition and prospects, including, for example, information about material acquisitions and dispositions, our earnings releases and certain supplemental financial information to our earnings releases. We also post to our website copies of investor presentations, which also contain important information about us, and we update those presentations periodically. The website has a Governance page in the Our Company section that includes, among other things, copies of our Bylaws, our Code of Business Conduct and Ethics, our Corporate Governance Guidelines and the charters for each standing committee of Host Inc.’s Board of Directors, which currently include the Audit Committee, the Compensation Policy Committee and the Nominating and Corporate Governance Committee. Copies of these charters and policies, Host Inc.’s Bylaws and Host L.P.’s partnership agreement also are available in print to stockholders and unitholders upon request to Host Hotels & Resorts, Inc., 4747 Bethesda Avenue, Suite 1300, Bethesda, Maryland 20814, Attn: Secretary. Please note that the information contained on our website is not incorporated by reference in, or considered to be a part of, any document, unless expressly incorporated by reference therein.

 

Item 1A.

Risk Factors

For an enterprise as large and complex as we are, a wide range of factors could materially affect future results and performance. The statements in this section describe the major risks to our business and should be considered carefully. In addition, these statements constitute our cautionary statements under the Private Securities Litigation Reform Act of 1995.

Financial Risks and Risks of Operation

Our revenues and the value of our hotels are subject to conditions affecting the lodging industry.

The performance of the lodging industry traditionally has been affected by the strength of the general economy and, specifically, growth in gross domestic product (“GDP”). Because lodging industry demand typically follows the general economy, the lodging industry is highly cyclical, which contributes to potentially large fluctuations in our financial condition and our results of operations. Changes in travel patterns of both business and leisure travelers, particularly during periods of economic contraction or low levels of economic growth, may create difficulties for the industry over the long-term and adversely affect our results of operations.

In addition, the majority of our hotels are classified as luxury or upper upscale and generally target business and high-end leisure travelers. In periods of economic difficulties, business and leisure travelers may seek to reduce travel costs by limiting travel or seeking to reduce the cost of their trips. Consequently, our hotels may be more susceptible to a decrease in revenues during an economic downturn, as compared to hotels in other categories that have lower room rates.  For instance, reductions in overall travel and reductions in travel to luxury and upper upscale hotels during the recession in 2008 and 2009 significantly affected our results of operations.

Other circumstances affecting the lodging industry which may affect our performance and the forecasts we make include:

 

the effect on lodging demand of changes in national and local economic and business conditions, including concerns about the duration and strength of U.S. economic growth, global economic prospects, consumer confidence and the value of the U.S. dollar;

 

factors that may shape public perception of travel to a particular location, such as natural disasters, weather events, pandemics and outbreaks of contagious diseases, such as the coronavirus originating in China (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – 2020 Outlook”), and the occurrence or potential occurrence of terrorist attacks, all of which will affect occupancy rates at our hotels and the demand for hotel products and services;

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risks that U.S. immigration policies will suppress international travel to the United States generally or decrease the labor pool;

 

the impact of geopolitical developments outside the U.S., such as the pace of economic growth in Europe, the effects of the United Kingdom’s withdrawal from the European Union, trade tensions and tariffs between the United States and its trading partners such as China, or conflicts in the Middle East, all of which could affect global travel and lodging demand within the United States;

 

volatility in global financial and credit markets, and the impact of budget deficits and pending and future U.S. governmental action to address such deficits through reductions in spending and similar austerity measures, as well as the impact of U.S. government shutdowns, which could materially adversely affect U.S. and global economic conditions, business activity, credit availability, borrowing costs, and lodging demand;

 

operating risks associated with the hotel business, including the effect of labor stoppages or strikes, increasing operating or labor costs or changes in workplace rules that affect labor costs;

 

the ability of our hotels to compete effectively against other lodging businesses in the highly competitive markets in which we operate in areas such as access, location, quality of accommodations and room rate structures;

 

changes in the desirability of the geographic regions of the hotels in our portfolio or in the travel patterns of hotel customers;

 

changes in taxes and governmental regulations that influence or set wages, hotel employee health care costs, prices, interest rates or construction and maintenance procedures and costs;

 

the ability of third-party internet and other travel intermediaries to attract and retain customers; and

 

decreases in the frequency of business travel that may result from alternatives to in-person meetings, including virtual meetings hosted online or over private teleconferencing networks.

We cannot assure you that adverse changes in the general economy or other circumstances that affect the lodging industry will not have an adverse effect on the hotel revenues or earnings at our hotels. A reduction in our revenues or earnings because of the above risks may reduce our working capital, impact our long-term business strategy and impact the value of our assets and our ability to meet certain covenants in our existing debt agreements. In addition, we may incur impairment expense in the future, which expense will affect negatively our results of operations. We can provide no assurance that any impairment expense recognized will not be material to our results of operations.

In addition to general economic conditions affecting the lodging industry, new hotel room supply is an important factor that can affect the lodging industry’s performance and overbuilding has the potential to further exacerbate the negative impact of an economic downturn.  Room rates and occupancy, and thus RevPAR, tend to increase when demand growth exceeds supply growth.  A reduction or slowdown in the growth of lodging demand or increased growth in lodging supply could result in returns that are substantially below expectations or result in losses which could materially and adversely affect our revenues and profitability as well as limit or slow our future growth.

We depend on external sources of capital for future growth; therefore, any disruption to our ability to access capital at times, and on terms reasonably acceptable to us, may affect adversely our business and results of operations.

Since we have elected REIT status, Host Inc. must finance its growth and fund debt repayments largely with external sources of capital because it is required to pay dividends to its stockholders in an amount equal to at least 90% of its taxable income (other than net capital gain) each year in order to qualify as a REIT. Funds used by Host Inc. to make required dividends are provided by distributions from Host L.P. Our ability to access external capital could be hampered by several factors, many of which are outside of our control, including:

 

price volatility, dislocations and liquidity disruptions in the U.S. and global equity and credit markets;

 

changes in market perception of our growth potential, including rating agency downgrades by Moody’s Investors Service, Standard & Poor’s Ratings Services or Fitch Ratings;

 

decreases in our current or estimated future earnings;

 

decreases or fluctuations in the market price of the common stock of Host Inc.;

 

increases in interest rates; and

 

the terms of our existing indebtedness which, under certain circumstances, restrict our incurrence of additional debt.

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The occurrence of any of these factors, individually or in combination, could prevent us from being able to obtain the external capital we require on terms that are acceptable to us, or at all, which could have a material adverse effect on our ability to finance our future growth and on our results of operations and financial condition.  Potential consequences of disruptions in U.S. and global equity and credit markets and, as a result, an inability for us to access external capital at times, and on terms, reasonably acceptable to us could include:

 

a need to seek alternative sources of capital with less attractive terms, such as more restrictive covenants and shorter maturity;

 

adverse effects on our financial condition and liquidity, and our ability to meet our anticipated requirements for working capital, debt service and capital expenditures;

 

higher costs of capital;

 

an inability to enter into derivative contracts in order to hedge risks associated with changes in interest rates and foreign currency exchange rates; or

 

an inability to execute on our acquisition strategy.

We operate in a highly competitive industry.

The lodging industry is highly competitive. Our principal competitors are other owners and investors in upper upscale and luxury full-service hotels, including other lodging REITs. Our hotels face strong competition for individual guests, group reservations and conference business from major hospitality chains with well-established and recognized brands as well as from other smaller hotel chains, independent and local hotel owners and operators. We compete for customers primarily based on brand name recognition and reputation, as well as location, room rates, property size and availability of rooms and conference space, quality of the accommodations, customer satisfaction, amenities and the ability to earn and redeem loyalty program points. New hotels may be constructed and these additions to supply create new competitors, in some cases without corresponding increases in demand for hotel rooms. Our competitors may have similar or greater commercial and financial resources which allow them to improve their hotels in ways that affect our ability to compete for guests effectively and adversely affect our revenues and profitability as well as limit or slow our future growth.

We also compete for hotel acquisitions with others that have similar investment objectives to ours. This competition could limit the number of investment opportunities that we find suitable for our business. It also may increase the bargaining power of hotel owners seeking to sell to us, making it more difficult for us to acquire new hotels on attractive terms or on the terms contemplated in our business plan.

There are inherent risks with investments in real estate, including their relative illiquidity.

Investments in real estate are inherently illiquid and generally cannot be sold quickly. For this reason, we cannot predict whether we will be able to sell any hotel that we desire to sell for the price or on terms acceptable to us, or the length of time needed to find a willing purchaser and to close on the sale of a hotel. Therefore, we may not be able to vary the composition of our portfolio promptly in response to changing economic, financial and investment conditions and dispose of hotels at opportune times or on favorable terms, which may adversely affect our cash flows and our ability to pay dividends to stockholders.

In addition, real estate ownership is subject to various risks, including:

 

government regulations relating to real estate ownership or operations, including tax, environmental, zoning and eminent domain laws;

 

loss in value of real estate due to changes in market conditions or the area in which it is located;

 

potential civil liability for accidents or other occurrences on owned or leased properties;

 

the ongoing need for owner-funded capital improvements and expenditures in order to maintain or upgrade hotels;

 

periodic total or partial closures due to renovations and facility improvements;

 

changes in tax laws and property taxes, or an increase in the assessed valuation of a hotel for real estate tax purposes; and

 

force majeure events, such as earthquakes, hurricanes, floods or other possibly uninsured losses.

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We have significant indebtedness and may incur additional indebtedness.

As of December 31, 2019, we and our subsidiaries had total indebtedness of approximately $3.8 billion. Our indebtedness requires us to commit a significant portion of our annual cash flow from operations to debt service payments, which reduces the availability of our cash flow to fund working capital, capital expenditures, expansion efforts, dividends and distributions and other general corporate needs. Additionally, our substantial indebtedness could:

 

make it more difficult for us to satisfy our obligations with respect to our indebtedness;

 

limit our ability in the future to undertake refinancings of our debt or to obtain financing for expenditures, acquisitions, development or other general corporate needs on terms and conditions acceptable to us, if at all; or

 

affect adversely our ability to compete effectively or operate successfully under adverse economic conditions.

If our cash flow and working capital are not sufficient to fund our expenditures or service our indebtedness, we will be required to raise additional funds through:

 

sales of OP units of Host L.P. or common stock of Host Inc.;

 

the incurrence of additional permitted indebtedness by Host L.P.; or

 

sales of our assets.

We cannot make any assurances that any of these sources of funds will be available to us or, if available, will be on terms that we would find acceptable or in amounts sufficient to meet our obligations or fulfill our business plan. Under certain circumstances, we would be required to use the cash generated by any or all the events described above to repay other indebtedness.

The terms of our indebtedness and preferred OP units place restrictions on us and on our subsidiaries and these restrictions reduce our operational flexibility and create default risks.

We are, and may in the future become, party to agreements and instruments that place restrictions on us and on our subsidiaries.  For instance, the covenants in the documents governing the terms of our senior notes and our credit facility restrict, among other things, our ability to:

 

execute acquisitions, mergers or consolidations, unless the successor entity in such transaction assumes our indebtedness;

 

incur additional indebtedness in excess of certain thresholds and without satisfying certain financial metrics;

 

incur liens securing indebtedness, unless provision is made to secure our other indebtedness by such liens;

 

sell hotels without using the proceeds from such sales for certain permitted uses or to make an offer to repay or repurchase outstanding indebtedness;

 

pay dividends on classes and series of Host Inc. capital stock and pay distributions on Host L.P.’s classes of units without satisfying certain financial metrics concerning leverage, fixed charge coverage and unsecured interest coverage; and

 

conduct transactions with affiliates on other than an arm’s length basis and, in certain instances, without obtaining opinions as to the fairness of such transactions.

In addition, certain covenants in our credit facility also require us and our subsidiaries to meet financial metrics. The restrictive covenants in the applicable indenture(s), the credit facility and the documents governing our other debt (including any mortgage debt we incur in the future) will reduce our flexibility in conducting our operations and will limit our ability to engage in activities that may be in our long-term best interest. Failure to comply with these restrictive covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all or a substantial portion of our indebtedness. For a detailed description of the covenants and restrictions imposed by the documents governing our indebtedness, see Part II Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition.”

An increase in interest rates would increase the interest costs on our credit facility and on our floating rate indebtedness and could impact adversely our ability to refinance existing indebtedness or to sell assets.

Interest payments for borrowings on our credit facility and the mortgages on certain non-consolidated properties are based on floating rates. As a result, an increase in interest rates will reduce our cash flow available for other corporate purposes, including investments in our portfolio. As of December 31, 2019, approximately 26% of our debt is subject to floating interest rates.

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Rising interest rates also could limit our ability to refinance existing indebtedness when it matures and increase interest costs on any indebtedness that is refinanced. We may from time to time enter into agreements such as floating-to-fixed interest rate swaps, caps, floors and other hedging contracts in order to fully or partially hedge against the cash flow effects of changes in interest rates for floating rate debt. These agreements expose us to the risk that other parties to the agreements will not perform or that the agreements will be unenforceable. In addition, an increase in interest rates could decrease the amount third parties are willing to pay for our hotels, thereby limiting our ability to dispose of them as part of our business strategy.

A portion of our long-term indebtedness, specifically $1 billion of credit facility term loans, bears interest at floating interest rates based on USD-LIBOR, which may be subject to regulatory guidance and/or reform that could cause interest rates under our current or future debt agreements to perform differently than in the past or cause other unanticipated consequences. The U.K. Financial Conduct Authority, which regulates LIBOR, has announced that it intends to stop encouraging or requiring banks to submit LIBOR rates after 2021, and it is unclear if LIBOR will cease to exist or if new methods of calculating LIBOR will evolve. If LIBOR ceases to exist or if the methods of calculating LIBOR change from their current form, interest rates on our current or future indebtedness may be adversely affected.

Our expenses may not decrease if our revenues decrease.

Many of the expenses associated with owning and operating hotels, such as debt-service payments, property taxes, insurance, utilities, and employee wages and benefits, are relatively inflexible. They do not necessarily decrease directly with a reduction in revenues at the hotels and may be subject to increases that are not tied to the performance of our hotels or the increase in the rate of inflation generally. Also, as of December 31, 2019, 22 of our hotels are subject to third-party ground leases, which generally require periodic increases in ground rent payments. Our ability to make these rent payments could be affected adversely if our hotel revenues do not increase at the same or a greater rate than the increases in rent payments under the ground leases. For further information on our ground leases, please see Exhibit 99.1 filed with this report.

Additionally, certain costs, such as wages, benefits and insurance, may exceed the rate of inflation in any given period. In the event of a significant decrease in demand, our hotel managers may not be able to reduce the size of hotel work forces in order to decrease wages and benefits. Our managers also may be unable to offset any fixed or increased expenses with higher room rates. Any of our efforts to reduce operating costs also could adversely affect the future growth of our business and the value of our hotels.

Our acquisition or disposition of hotels may have a significant effect on our business, liquidity, financial position and/or results of operations.

We may acquire hotels through various structures, including transactions involving portfolios, single assets, joint ventures and acquisitions of all or substantially all of the securities or assets of other REITs or similar real estate ownership entities. We anticipate that our acquisitions will be financed with a combination of methods and a variety of sources of external capital, including proceeds from Host Inc. equity offerings, issuance of limited partner interests of Host L.P., advances under our credit facility, the incurrence or assumption of indebtedness and proceeds from the sale of hotels. Our inability to access external sources of capital may limit our ability to finance acquisitions. For a discussion of factors that may limit our access to sources of capital, see “—We depend on external sources of capital for future growth; therefore, any disruption to our ability to access capital at times, and on terms reasonably acceptable to us, may affect adversely our business and results of operations.”  In addition, certain of these factors, such as disruption in the global capital markets, may limit the ability of purchasers to finance their acquisition of our hotels and therefore our ability to use disposition proceeds to finance our acquisitions.

We routinely are actively engaged in the process of identifying, analyzing and negotiating possible transactions for acquiring hotels. We cannot provide any assurances that we will be successful in consummating future acquisitions on favorable terms or that we will realize the benefits that we anticipate from such acquisitions. Our failure to realize the intended benefits from one or more acquisitions could have a significant adverse effect on our business, liquidity, financial position and/or results of operations. These adverse effects may occur because the performance of the hotel does not support the additional indebtedness and related interest expense that we incurred as a result of the acquisition. In addition, hotels and entities that we have acquired, or may in the future acquire, may be subject to unknown or contingent liabilities for which we may have no recourse, or only limited recourse, against the sellers.  In general, the representations and warranties provided in the transaction agreements may not survive long enough for us to become aware of such liabilities and to seek recourse against our sellers and indemnification covering representations and warranties often is limited and subject to various materiality thresholds, a significant deductible or an aggregate cap on losses. As a result, there is no guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of their representations and warranties. The total amount of costs and expenses that may be incurred with respect to liabilities associated with acquired hotels and entities may exceed our expectations, plus we may experience other unanticipated adverse effects, all of which may affect adversely our revenues, expenses, operating results and financial condition. Finally, indemnification agreements between us and the sellers typically provide that the sellers will retain certain limited liabilities relating to the hotels and entities acquired by us. While the sellers generally are contractually obligated to pay all losses and other expenses relating to such retained liabilities without regard to survival limitations, materiality thresholds, deductibles or caps on losses, there can be no guarantee that such arrangements will not require us to incur losses or other expenses in addition to those incurred by the sellers.

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We also are actively engaged in the process of identifying, analyzing and negotiating possible transactions for disposing of certain of our hotels. Under current market conditions, based on our experience, we expect that any future sale of our hotels may be effected through any of several structures, including sale transactions involving portfolios or single assets, joint ventures with third parties and distributions of hotels to our security holders. We anticipate that any potential purchaser of our hotels may finance its purchase through a combination of methods, including cash or the issuance to us of its securities or those of one of its affiliates. Therefore, to maximize the value of hotels that we may in the future decide to sell, we may consider a range of transaction structures that we determine under the circumstances to be in our best interest. We cannot provide any assurances that we will successfully conclude any transaction to dispose of any one or more of our hotels or that the terms of any such transaction will maximize the value of hotels being sold.

We may not achieve the value we anticipate from new hotel developments or value enhancement projects at our existing hotels.

We currently are, and in the future may be, involved in the development or redevelopment of hotels, timeshare units or other alternate uses of portions of our existing hotels, including the development of retail, office or apartments, and including through joint ventures. There are risks inherent in any new development, including:

 

We may not obtain the zoning, occupancy and other required governmental permits and authorizations necessary to complete the development. A delay in receiving these approvals could affect adversely the returns we expect to receive.  

 

Any new construction involves the possibility of construction delays and cost overruns that may increase project costs.

 

Defects in design or construction may result in delays and additional costs to remedy the defect or require a portion of a hotel to be closed during the period required to remedy the defect.

 

We may not be able to meet the loan covenants in any indebtedness obtained to fund the new development, creating default risks.  

 

Natural or manmade disasters may delay construction or increase construction costs.

 

Risks related to change in economic and market conditions between development commencement and stabilization.

 

The development of timeshare units could become less attractive due to decreases in demand for residential, fractional or interval ownership, increases in mortgage rates and/or decreases in mortgage availability, market absorption or oversupply, with the result that we may not be able to sell the timeshare units for a profit or at the prices or selling pace we initially anticipated.  

In addition, to the extent that developments are conducted through joint ventures, this creates additional risks, including the possibility that our partners may not meet their financial obligations or will develop business interests, policies or objectives that are inconsistent with ours. See “—We may acquire hotels in joint ventures with third parties that could result in conflicts.”

Any of the above factors could affect adversely our and our partners’ ability to complete the developments on schedule and consistent with the scope that currently is contemplated, or to achieve the intended value of these projects. For these reasons, there can be no assurances of the value to be realized by us from these transactions or any future similar transactions.

We do not control our hotel operations and we are dependent on the managers of our hotels.

To maintain our status as a REIT, we are not permitted to operate or manage any of our hotels. As a result, we, through our taxable REIT subsidiaries, have entered into management agreements with third-party managers to operate our hotels. For this reason, we are unable to directly implement strategic business decisions with respect to the daily operation and marketing of our hotels, such as decisions with respect to the setting of room rates, food and beverage pricing and certain similar matters. Although we consult with our hotel operators with respect to strategic business plans, the hotel operators are under no obligation to implement any of our recommendations with respect to these matters. While we monitor the hotel managers’ performance, we have limited recourse under our management agreements if we believe that the hotel managers are not performing adequately. The cash flow from our hotels may be affected adversely if our managers fail to provide quality services and amenities or if they or their affiliates fail to maintain a quality brand name.  Because our management agreements are long-term in nature, we also may not be able to terminate these agreements if we believe the manager is not performing adequately.

From time to time, we have had, and continue to have, disputes with the managers of our hotels over their performance and compliance with the terms of our management agreements. We generally resolve issues with our managers through discussions and negotiations. However, if we are unable to reach satisfactory results through discussions and negotiations, we may choose to litigate the dispute or submit the matter to third-party dispute resolution. Failure by our hotel managers to fully perform the duties agreed to in our management agreements or the failure of our managers to adequately manage the risks associated with hotel operations could affect adversely our results of operations.

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In addition, our hotel managers or their affiliates manage, and in some cases own, have invested in, or provided credit support or operating guarantees, to hotels that compete with our hotels, all of which may result in conflicts of interest. As a result, our hotel managers have in the past made, and may in the future make, decisions regarding competing lodging facilities that are not or would not be in our best interest.

Furthermore, our management agreements for our brand managed properties generally have provisions that can restrict our ability to sell, lease or otherwise transfer our hotels, unless the transferee is not a competitor of the manager and the transferee assumes the related management agreements and meets other specified conditions. Our ability to finance or sell our hotels, depending upon the structure of the transactions, may require the manager’s consent. Similarly, decisions with respect to the repositioning of a hotel, such as the outsourcing of food and beverage outlets, also may require the manager’s consent.

The properties managed by Marriott International account for most of our revenues and operating income. Adverse developments in Marriott’s business and affairs or financial condition could have a material adverse effect on us.

Approximately 68% of our hotels (as measured by 2019 revenues) are managed or franchised by Marriott International. We rely on Marriott’s personnel, expertise, technical resources and information systems, proprietary information, good faith and judgment to manage and maintain our hotel operations efficiently, effectively, profitably and in compliance with the terms, responsibilities and duties of our management agreements and all applicable laws and regulations. Any adverse developments in Marriott’s business and affairs or financial condition could impair its ability to manage our hotels and could have a material adverse effect on us. See, for example, “Cyber threats and the risk of data breaches or disruptions of our managers’ or our own information technology systems could materially adversely affect our business” for a discussion of the database security breach disclosed by Marriott and its possible effects on our business and hotel operations.

We are subject to risks associated with the employment of hotel personnel, particularly with hotels that employ unionized labor.

Our third-party managers are responsible for hiring, maintaining and managing the labor force at each of our hotels. We do not directly employ or manage employees at our consolidated hotels (other than employing, but not managing, directing or supervising, the employees at our three hotels in Brazil). However, we remain subject to many of the costs and risks generally associated with the hotel labor force, particularly at those hotels with unionized labor. From time to time, hotel operations may be disrupted because of strikes, lockouts, public demonstrations or other negative actions and publicity. We also may incur increased legal costs and indirect labor costs because of disputes involving our third-party managers and their labor force or other events. The resolution of labor disputes or re-negotiated labor contracts could lead to increased labor costs, a significant component of our hotel operating costs, either by increases in wages or benefits or by changes in work rules that raise hotel operating costs. As we are not the employer nor bound by any collective bargaining agreement, we do not negotiate with any labor organization, and it is the responsibility of each property’s manager to enter into such labor contracts. Our ability, if any, to have any meaningful impact on the outcome of these negotiations is restricted by and dependent on the individual management agreement covering a specific hotel and we may have little ability to control the outcome of these negotiations.

Our hotels have an ongoing need for renovations and potentially significant capital expenditures in order to remain competitive in the marketplace, to maintain brand standards or to comply with applicable laws or regulations. The timing and costs of such renovations or improvements may result in reduced operating performance during construction and may not improve the return on these investments.

We will need to make capital expenditures in order to remain competitive with other hotels, to maintain the economic value of our hotels and to comply with applicable laws and regulations. We also are required by our hotel management agreements, and may be required under future loan agreements, to make agreed upon capital expenditures to our hotels. In addition, the timing of these improvements can affect hotel performance, particularly if the improvements require closure of a significant number of rooms or other features of the hotels, such as ballrooms, meeting space and restaurants. These capital improvements reduce the availability of cash for other purposes and are subject to cost overruns and delays. In addition, because we depend on external sources of capital, we may not have the necessary funds to invest and, if we fail to maintain our hotels in accordance with brand standards set by our managers, they may terminate the management agreement. Moreover, we may not necessarily realize a significant, or any, improvement in the performance of the hotels at which we make these investments.

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A large proportion of our hotels are located in a limited number of large urban cities and, accordingly, we could be disproportionately harmed by adverse changes to these markets, a natural disaster or the threat of a terrorist attack.

Hotels in the following cities and markets represented approximately 71% of our 2019 revenues: New York, Washington, D.C., San Diego, San Francisco, Boston, Florida, Hawaii, Atlanta, and Los Angeles. An economic downturn, an increase in hotel supply in these cities and markets, a natural disaster, a terrorist attack or similar disaster in any one of these cities and markets likely would cause a decline in hotel demand and adversely affect occupancy rates, the financial performance of our hotels in these cities and markets and our overall results of operations. For example, in September 2017, our operations in Florida and Houston were impacted negatively by Hurricanes Irma and Harvey. In 2013, decreased U.S. government demand for hotel rooms (approximately 5% of our business) in markets such as Washington, D.C. had a negative impact on our results of operations.

The threat of terrorism also may negatively impact hotel occupancy and average daily rate, due to resulting disruptions in business and leisure travel patterns and concerns about travel safety. Hotels in major metropolitan areas, such as the major cities that represent our largest markets, may be particularly adversely affected due to concerns about travel safety. The possibility of future attacks may hamper business and leisure travel patterns and, accordingly, the performance of our business and our operations.

The ownership of hotels outside the United States will expose us to risks related to owning hotels in those international markets.

As of December 31, 2019, we own directly five hotels located outside the United States. We also are party to a joint venture that owns a non-controlling interest in seven hotels and an office building in India. Our international hotels accounted for approximately 2% of our 2019 revenues. We may have difficulty managing entry into new geographic markets where we have limited knowledge and understanding of the local economy, an absence of business relationships in the area, or unfamiliarity with local governmental and permitting procedures and regulations. There are risks inherent in conducting business outside the United States, which include:  

 

risks of non-compliance with varied and unfamiliar employment laws and practices;

 

tax laws, which may provide for corporate income or other taxes or tax rates that exceed those of the U.S. and which may provide that foreign earnings that are repatriated, directly or indirectly, are subject to dividend withholding tax requirements or other restrictions and which may affect our ability to repatriate non-U.S. earnings in a tax efficient manner;

 

compliance with and unexpected changes in regulatory requirements or monetary policy;

 

the willingness of domestic or international lenders to provide financing and changes in the availability, cost and terms of such financing;

 

rapid adverse changes in local, political, economic and market conditions;

 

the ability to obtain insurance coverage related to terrorist events;

 

changes of interest rates and/or currency exchange rates and hyperinflation or deflation and difficulties in hedging these risks;

 

regulations regarding the incurrence of indebtedness;

 

difficulties involved in managing an organization doing business in many different countries; and

 

difficulties in complying with U.S. rules governing REITs while operating outside the United States.

Any of these factors could affect adversely our ability to obtain all of the intended benefits of our international operations. If we do not effectively manage and successfully integrate the international hotels into our organization, our operating results and financial condition may be adversely affected.

We may acquire hotels in joint ventures with third parties that could result in conflicts.

We have made investments in joint ventures and are exploring further investment opportunities. We may, from time to time, invest as a co-venturer in other entities owning hotels instead of purchasing them directly. We also may sell interests in existing hotels to a third party as part of forming a joint venture with the third party. Investments in joint ventures may involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their share of required capital contributions. Co-venturers often share control over the operations of a joint venture. Actions by a co-venturer also could subject the hotels to additional risks as a result of the following and other unforeseen circumstances:

 

our co-venturer might have economic or business interests or goals that are inconsistent with our, or the joint venture’s, interests or goals; or

 

our co-venturer may be in a position to take action contrary to our instructions or requests, or contrary to our policies or objectives.

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For certain joint ventures, we might not be able to take action without the approval of our joint venture partners. Disputes between us and our partners or co-venturers may result in litigation or arbitration that would increase our expenses and may negatively impact hotel operations.

Although our joint ventures may generate positive cash flow, in some cases they may be unable to distribute cash flows to the joint venture partners due to tax laws or other restrictions on our ability to repatriate non-U.S. earnings in a tax efficient manner.  Additionally, in some cases our joint venture partners share control over distributions and may choose to retain capital in the joint venture rather than to distribute it. Because our ability to generate cash flow from our joint ventures depends in part on their ability to distribute capital to us, our failure to receive distributions from our joint ventures could reduce our cash flow return on these investments.

The growth of internet reservation channels could adversely affect our business.

A significant percentage of hotel rooms for individual or “transient” customers are booked through internet travel intermediaries. Search engines and peer-to-peer inventory sources also provide online travel services that compete with our hotels. If bookings shift to higher cost distribution channels, including these internet travel intermediaries, it could materially impact our revenues and profitability. Additionally, as intermediary bookings increase, they may be able to obtain higher commissions, reduced room rates or other significant contract concessions from the brands and hotel management companies managing and operating our hotels. Also, although internet travel intermediaries traditionally have competed to attract transient business rather than group and convention business, in recent years they have expanded their business to include marketing to large group and convention business. If that expansion continues, it could both divert group and convention business away from our hotels and increase our cost of sales for group and convention business. Consolidation of internet travel intermediaries, and the entry of major internet companies into the internet travel bookings business, also could divert bookings away from the websites of our hotel managers and increase our cost of sales.

Some potential losses are not covered by insurance.

We carry comprehensive insurance coverage for general liability, property, business interruption, cyber threats, terrorism and other risks with respect to all our hotels and other properties. In a limited number of instances, properties may instead be insured under the hotel manager’s policies. As of February 2020, all consolidated hotels currently are covered under the company’s insurance. These policies offer coverage features and insured limits that we believe are customary for similar types of properties. Generally, our “all-risk” property policies provide coverage that is available on a per-occurrence basis and that, for each occurrence, has an overall limit, as well as various sub-limits, on the amount of insurance proceeds we can receive. Sub-limits exist for certain types of claims, such as service interruption, debris removal, expediting costs, landscaping replacement and natural disasters such as earthquakes, floods and hurricanes, and may be subject to annual aggregate coverage limits. The dollar amounts of these sub-limits are significantly lower than the dollar amounts of the overall coverage limit. In this regard, hotels in certain of our markets, including California, Florida, Hawaii, Houston, New Orleans and Seattle, have in the past been and continue to be particularly susceptible to damage from natural disasters and the applicable sublimits are significantly lower than the total value of the hotels we own in states where natural disasters are possible. Recovery under the applicable policies also is subject to substantial deductibles and complex calculations of lost business income. There is no assurance that this insurance, where maintained, will fully fund the re-building or restoration of a hotel that is impacted by an earthquake, hurricane, or other natural disaster, or the income lost as a result of the damage. Our property insurance policies also provide that all of the claims from each of our properties resulting from a particular insurable event must be combined for purposes of evaluating whether the aggregate limits and sub-limits provided in our policies have been exceeded and, in the case where the manager of one of our hotels provides this coverage, any such claims will be combined with the claims of other owners participating in the manager’s program for the same purpose. Therefore, if an insurable event occurs that affects more than one of our hotels, the claims from each affected hotel will be added together to determine whether the aggregate limit or sub-limits, depending on the type of claim, have been reached. Each affected hotel only may receive a proportional share of the amount of insurance proceeds provided for under the policy if the total value of the loss exceeds the aggregate limits available. For example, if a hurricane were to cause widespread damage to Florida or up the East Coast, claims from each of our hotels would be aggregated against the policy limit or sub-limit and likely would exceed the applicable limit or sub-limit. We may incur losses in excess of insured limits and we may be even less likely to receive complete coverage for risks that affect multiple properties, such as earthquakes, hurricanes, or certain types of terrorism.

In addition, there are other risks, such as certain environmental hazards, that may be deemed to fall completely outside the general coverage limits of our policies or may be uninsurable or too expensive to justify coverage. We also may encounter challenges with an insurance provider regarding whether it will pay a particular claim that we believe to be covered under our policy. Should a loss in excess of insured limits or an uninsured loss occur, or should we be unsuccessful in obtaining coverage from an insurance carrier, we could lose all or a part of the capital we have invested in a hotel, as well as the anticipated future revenues from the hotel. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the hotel.

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Full insurance recovery for terrorist acts may not be possible.  

We generally obtain terrorism insurance to cover property damage caused by acts of terrorism under separate standalone policies of insurance as well as policies on U.S. hotels which currently are subject to U.S. federal government cost sharing as provided in the Terrorism Risk Insurance Program Reauthorization Act (“TRIP”), which has been extended through December 31, 2027. We also have terrorism insurance under our general liability program and in our program for directors’ and officers’ coverage. We may not be able to recover fully under our existing terrorism insurance policies for losses caused by some types of terrorist acts, and no U.S. legislation or regulations ensure that we will be able to obtain terrorism insurance in adequate amounts or at acceptable premium levels in the future.

In addition, insurance coverage for nuclear, biological, chemical and radiological (“NBCR”) perils is extremely limited. TRIP distinguishes between “direct insurers” (those which write policies directly insuring commercial businesses) and “reinsurers” (those which issue policies to direct insurers, absorbing some of the risk in the direct insurers’ policies). TRIP requires direct insurers to offer terrorism insurance, except for NBCR perils, and most direct insurers have been unwilling to provide NBCR coverage, even with government reimbursement. TRIP does not require reinsurers to provide any terrorism coverage. Any damage related to war and to NBCR incidents, therefore, is excluded under our policies covering our U.S. hotels. Moreover, our foreign hotels also are not covered against NBCR perils. We obtain a certain amount of property insurance coverage on our U.S. hotels for NBCR perils through our wholly-owned subsidiary that acts as our direct insurer against such perils to the extent of reimbursement under TRIP. The U.S. Treasury Department must certify an event as terrorism, or no coverage will be forthcoming under TRIP. We ultimately are responsible for any loss borne by our insurance subsidiary.

As a result of the above, there remains uncertainty regarding the adequacy and cost of terrorism coverage that will be available to protect our interests in the event of terrorist attacks that impact our hotels.    

Cyber threats and the risk of data breaches or disruptions of our managers’ or our own information technology systems could materially adversely affect our business.

Our third party hotel managers are dependent on information technology networks and systems, including the internet, to access, process, transmit and store proprietary and customer information. These complex networks include reservation systems, vacation exchange systems, hotel management systems, customer databases, call centers, administrative systems, and third party vendor systems. These systems require the collection and retention of large volumes of personally identifiable information of hotel guests, including credit card numbers and passport numbers. Our hotel managers may store and process such proprietary and customer information both on systems located at the hotels that we own and other hotels that they operate and manage, their corporate locations and at third-party owned facilities, including, for example, in a third-party hosted cloud environment. These information networks and systems have been and continue to be vulnerable to threats such as system, network or internet failures; computer hacking or business disruption; cyber-terrorism; viruses, worms or other malicious software programs; and employee error, negligence or fraud. These threats can be introduced in any number of ways, including through third parties accessing our hotel managers’ information networks and systems. The risks from these cyber threats are significant and, as discussed below, Marriott International experienced a material data security breach involving the acquired Starwood guest reservation database.

2018 Marriott Guest Reservation Database Security Breach. In November 2018, Marriott International disclosed its discovery of a data security breach involving the acquired Starwood guest reservation database. Marriott’s investigation determined that there was unauthorized access to the database, which contained guest information relating to reservations at Starwood properties, on or before September 10, 2018 and that there had been unauthorized access to the Starwood network since 2014. Marriott disclosed that an unauthorized party had copied and encrypted information and took steps towards removing it. Marriott believes it contains information on up to approximately 383 million guests who made a reservation at a Starwood property. As of this date, Marriott has been named as a defendant in approximately one hundred lawsuits arising out of the database breach and also has been named as a subject of investigations in progress by various Federal, state and foreign governmental authorities.

We rely on the security systems of our managers to protect proprietary and hotel customer information from these threats. Any compromise of our managers’ networks could result in a disruption to our managers’ operations, such as the disruption in fulfilling guest reservations, delayed bookings or sales, or lost guest reservations. Any of these events could, in turn, result in disruption of the operations of the hotels that we own that are managed by them, in increased costs and in potential litigation and liability. All our major hotel management companies and a majority of our third-party operators maintain insurance against cyber threats. However, these policies provide varying limits and may be subject to sub-limits for certain types of claims, and it is not expected that these policies will provide a total recovery of all potential losses. In addition, public disclosure, or loss of customer or proprietary information, such as disclosed by Marriott in November 2018, may result in damage to the manager’s reputation and a loss of confidence among hotel guests and result in reputational harm for the hotels owned by us and managed by them, which may have a material adverse effect on our business, financial condition and results of operations. Because of ongoing litigation and investigations by various state, Federal

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and foreign regulators, it is too early to determine the extent of the damage to Marriott’s reputation because of the Starwood database breach and the level to which hotel guests may opt to book with other hotel companies because of security concerns for their personally identifiable information. Because approximately 68% of our hotels (as measured by 2019 revenues) are managed or franchised by Marriott, any material adverse effects to Marriott’s ability to attract and retain hotel guests will have a material adverse effect on our future business, financial condition and results of operations.

In addition to the information technologies and systems of our managers used to operate our hotels, we have our own corporate technologies and systems that are used to access, store, transmit, and manage or support a variety of our business processes. There can be no assurance that the security measures we have taken to protect the contents of these systems will prevent failures, inadequacies or interruptions in system services or that system security will not be breached through physical or electronic break-ins, computer viruses, and attacks by hackers. Disruptions in service, system shutdowns and security breaches in the information technologies and systems we use, including unauthorized disclosure of confidential information, could have a material adverse effect on our business, our financial reporting and compliance, and subject us to liability claims or regulatory penalties, which amounts could be significant.  

We currently maintain cyber insurance, which includes coverage for third-party liability (damages and settlements to third parties) and first-party loss (costs incurred by us in response to a network security or privacy event). Third-party coverages include defense and damages for alleged libel and slander in electronic media, privacy breach liability and related fines and penalties assessed by regulators. First-party coverages include costs incurred by us in remediating a network security event, loss of income/extra expense due to loss of use of computer systems, costs of data recovery, and cyber extortion. This policy also includes excess coverage for most of our smaller, independent hotel operators, who generally carry lower coverage limits than our major operators, in the event that the insurance carried by these smaller, independent operators is insufficient to cover cyber related damages relating to hotel operations. However, as with the operator’s coverage, our policy is subject to limits and sub-limits for certain types of claims and we do not expect that this policy will cover all the losses that we could experience from these exposures.  

Litigation judgments or settlements could have a significant adverse effect on our financial condition.

We are involved in various legal proceedings in the ordinary course of business and are defending these claims vigorously; however, no assurances can be given as to the outcome of any pending legal proceedings. We believe, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on our financial condition, but might be material to our operating results for any period, depending, in part, upon the quantum of our operating results for such period. We also could become the subject of future claims by the operators of our hotels, individuals or companies who use our hotels, our investors, our joint venture partners or regulating entities and these claims could have a significant adverse effect on our financial condition and results of operations.

We depend on our key personnel.

We have approximately 175 employees and our continued success depends on the efforts and abilities of our executive officers and other key personnel. None of our key personnel have employment agreements and we do not maintain key person life insurance for any of our executive officers. These individuals are important to our business and strategy and to the extent that any of them departs and is not replaced with a qualified substitute, such person’s departure could have a significant adverse effect our operations and financial condition.

Exchange rate fluctuations could affect adversely our financial results.

Currency exchange rate fluctuations could affect our results of operations and financial position. We generate revenues and expenses in such foreign currencies as the Canadian dollar, the Brazilian real and the Indian rupee. Although we may enter into foreign exchange agreements with financial institutions and/or obtain local currency mortgage debt to reduce our exposure to fluctuations in the value of these and other foreign currencies, these transactions, if entered into, will not eliminate entirely that risk. To the extent that we are unable to match revenues received in foreign currencies with expenses paid in that same currency, exchange rate fluctuations could have a negative impact on our results of operations and financial condition. Additionally, because our consolidated financial results are reported in U.S. dollars, if we generate revenues or earnings in other currencies, the conversion of such amounts to U.S. dollars can result in an increase or decrease of the amount of our revenues or earnings because of exchange rate fluctuations.

Similarly, changes in the exchange rates of foreign currencies against the U.S. dollar can result in increases or decreases in demand at our U.S. hotels from international travelers coming to the United States. Because of the concentration of our hotels in major U.S. cities with large numbers of international travelers to the United States, we may have more exposure to fluctuations in international travel to the United States than other lodging companies without hotels located as heavily in these markets.

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Applicable REIT laws may restrict certain business activities.

As a REIT, each of Host Inc. and its subsidiary REIT is subject to various restrictions on the types of revenues it can earn, assets it can own and activities in which it can engage. Business activities that could be restricted by applicable REIT laws include, but are not limited to, developing alternative uses of real estate and the ownership of hotels that are not leased to a taxable REIT subsidiary (“TRS”), including the development and/or sale of timeshare or condominium units or the related land parcels. Due to these restrictions, we anticipate that we will continue to conduct certain business activities, including, but not limited to, those mentioned above, in one or more of our TRS. Our TRS are taxable as regular C corporations and are subject to federal, state, local, and, if applicable, foreign taxation on their taxable income.

Environmental problems are possible and can be costly.

Our hotels are subject to requirements and potential liabilities under various foreign and U.S. federal, state and local environmental laws, ordinances and regulations. Unidentified environmental liabilities could arise and have a material adverse effect on our financial condition and performance. Additionally, even after we have sold a hotel, we may be liable for environmental liabilities that occurred during our ownership. Federal, state and local laws and regulations relating to the protection of the environment may require a current or previous owner or operator of real estate to investigate and remediate hazardous or toxic substances or petroleum product releases at the property. The owner or operator may be required to pay a governmental entity or third parties for property damage, and for investigation and remediation costs incurred by the parties in connection with the contamination. These laws typically impose clean-up responsibility and liability without regard to whether the owner or operator knew of or caused the presence of the contaminants. Even if more than one person may have been responsible for the contamination, each person covered by the environmental laws may be held responsible for all the clean-up costs incurred. In addition, third parties may sue the owner or operator of a site for damages and costs resulting from environmental contamination emanating from that site. Environmental laws also govern the presence, maintenance and removal of toxic or hazardous substances. These laws require that owners or operators of buildings properly manage and maintain these substances and notify and train those who may come into contact with them and undertake special precautions. These laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to toxic or hazardous materials.

We face possible risks associated with natural disasters and the physical effects of climate change.

We are subject to the risks associated with natural disasters and the physical effects of climate change, which can include more frequent or severe storms, droughts, hurricanes and flooding, any of which could have a material adverse effect on our hotels, operations and business. Over time, our coastal markets are expected to experience increases in storm intensity and rising sea levels causing damage to our hotels. As a result, we could become subject to significant losses and/or repair costs that may or may not be fully covered by insurance. Other markets may experience prolonged variations in temperature or precipitation that may limit access to the water needed to operate our hotels or significantly increase energy costs, which may subject those hotels to additional regulatory burdens, such as limitations on water usage or stricter energy efficiency standards.  Climate change also may affect our business by increasing the cost of (or making unavailable) property insurance on terms we find acceptable in areas most vulnerable to such events, increasing operating costs at our hotels, such as the cost of water or energy, and requiring us to expend funds as we seek to repair and protect our hotels against such risks. There can be no assurance that climate change will not have a material adverse effect on our hotels, operations or business.

Compliance with other government regulations can be costly.

Our hotels are subject to various other forms of regulation, including Title III of the Americans with Disabilities Act (“ADA”), building codes and regulations pertaining to fire and life safety. Under the ADA, all public accommodations are required to meet certain federal rules related to access and use by disabled persons and we incur capital expenditures to make our hotels accessible. In addition, we have committed to provide, and certain local laws and contracts between our hotel managers and the hotel workers’ union require our hotels to provide, our managers’ employees with safety devices, sometimes known as “panic buttons.” We fund the capital necessary to ensure that employees at our hotels will be equipped with these safety devices. These and other laws and regulations may be changed from time-to-time, or new regulations adopted, resulting in additional costs of compliance, including potential litigation. A determination that we are not in compliance with these laws and regulations could result in a court order to bring the hotel into compliance, imposition of civil penalties in cases brought by the Justice Department, or an award of attorneys’ fees to private litigants. Compliance with these laws and regulations could require substantial capital expenditures. Any increased costs could have a material adverse effect on our business, financial condition or results of operations.

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In addition, the operations of our foreign hotels are subject to a variety of United States and international laws and regulations, including the United States Foreign Corrupt Practices Act (“FCPA”). We have policies and procedures designed to promote compliance with the FCPA and other anti-corruption laws, but we cannot assure that we will continue to be found to be operating in compliance with, or be able to detect violations of, any such laws or regulations. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our foreign hotels might be subject and the manner in which existing laws might be administered or interpreted.

Risks of Ownership of Host Inc.’s Common Stock

There are limitations on the acquisition of Host Inc. common stock and changes in control.

Host Inc.’s charter and by-laws, the partnership agreement of Host L.P., and the Maryland General Corporation Law (the “MGCL”) contain a number of provisions, the exercise or existence of which could delay, defer or prevent a transaction or a change in control that might involve a premium price for Host Inc.’s stockholders or Host L.P.’s unitholders, including the following:

 

Restrictions on transfer and ownership of Host Inc.’s stock. To maintain Host Inc.’s qualification as a REIT for federal income tax purposes, not more than 50% in value of Host Inc.’s outstanding shares of capital stock may be owned in the last half of the taxable year, directly or indirectly, by five or fewer individuals, which, as defined in the Code, may include certain entities. Accordingly, Host Inc.’s charter prohibits ownership, directly or by attribution, by any person or persons acting as a group, of more than 9.8% in value or number, whichever is more restrictive, of shares of Host Inc.’s outstanding common stock, preferred stock or any other class or series of stock, each considered as a separate class or series for this purpose. Together, these limitations are referred to as the “ownership limit.”

Stock acquired or held in violation of the ownership limit will be transferred automatically to a trust for the benefit of a designated charitable beneficiary, and the intended acquirer of the stock in violation of the ownership limit will not be entitled to any distributions thereon, to vote those shares of stock or to receive any proceeds from the subsequent sale of the stock in excess of the lesser of the price paid for the stock or the amount realized from the sale. A transfer of shares of Host Inc.’s stock to a person who, as a result of the transfer, violates the ownership limit may be void under certain circumstances, and, in any event, would deny that person any of the economic benefits of owning shares of Host Inc.’s stock in excess of the ownership limit. These restrictions will not apply if Host Inc.’s Board of Directors determines that it no longer is in Host Inc.’s best interests to continue to qualify as a REIT or that compliance with the restrictions on transfer and ownership no longer is required for Host Inc. to qualify as a REIT.

 

Removal of members of the Board of Directors. Host Inc.’s charter provides that, except for any directors who may be elected by holders of a class or series of shares of capital stock other than common stock, directors may be removed only for cause and by the affirmative vote of stockholders holding at least two-thirds of all the votes entitled to be cast in the election of directors. Vacancies on Host Inc.’s Board of Directors may be filled by the affirmative vote of the remaining directors, except that a vacancy resulting from an increase in the number of directors may be filled by a majority vote of the entire Board of Directors. Any vacancy resulting from the removal of a director by the stockholders may be filled by the affirmative vote of holders of at least two-thirds of the votes entitled to be cast in the election of directors.

 

Preferred shares; classification or reclassification of unissued shares of capital stock without stockholder approval. Host Inc.’s charter provides that the total number of shares of stock of all classes that Host Inc. has authority to issue is 1,100,000,000, consisting of 1,050,000,000 shares of common stock and 50,000,000 shares of preferred stock. Host Inc.’s Board of Directors has the authority, without a vote of stockholders, to classify or reclassify any unissued shares of stock into other classes or series of stock, and to establish the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms or conditions of redemption for each class or series. Because Host Inc.’s Board of Directors has this power, it may give the holders of any class or series of stock terms, preferences, powers and rights, including voting rights, senior to the rights of holders of existing stock.

 

Certain provisions of Maryland law may limit the ability of a third-party to acquire control of Host Inc. Certain provisions of the MGCL may have the effect of inhibiting a third-party from acquiring Host Inc., including:

 

o

“business combination” provisions that, subject to limitations, prohibit certain business combinations between a corporation and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of the corporation’s then outstanding shares of voting stock or an affiliate or associate of the corporation who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding stock of the corporation) or an affiliate of any interested stockholder for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes two super-majority stockholder voting requirements on these combinations; and

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o

“control share” provisions that provide that holders of “control shares” of a corporation (defined as voting shares of stock that, if aggregated with all other shares of stock owned or controlled by the acquirer, would entitle the acquirer to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of issued and outstanding “control shares”) have no voting rights except to the extent approved by the stockholders by the affirmative vote of at least two-thirds of all of the votes entitled to be cast on the matter, excluding all interested shares.

Host Inc. is subject to the Maryland business combination statute. Our bylaws contain a provision exempting us from the control share provisions of the MGCL. There can be no assurance that this bylaw provision exempting us from the control share provisions will not be amended or eliminated at any time in the future.

 

Merger, consolidation, share exchange and transfer of Host Inc.’s assets. Under Maryland law and Host Inc.’s charter, subject to the terms of any outstanding class or series of capital stock, we can merge with or into another entity, convert, consolidate with one or more other entities, participate in a share exchange or transfer Host Inc.’s assets within the meaning of the MGCL if approved (1) by Host Inc.’s Board of Directors in the manner provided in the MGCL, and (2) by Host Inc.’s stockholders holding two-thirds of all the votes entitled to be cast on the matter, except that any merger of Host Inc. with or into a trust organized for the purpose of changing Host Inc.’s form of organization from a corporation to a trust requires only the approval of Host Inc.’s stockholders holding a majority of all votes entitled to be cast on the merger. Under the MGCL, specified mergers may be approved without a vote of stockholders and a share exchange only is required to be approved by the board of directors of a Maryland corporation if the corporation is the successor entity. Host Inc.’s voluntary dissolution also would require approval of stockholders holding two-thirds of all the votes entitled to be cast on the matter.

 

Certain charter amendments. Host Inc.’s charter contains provisions relating to restrictions on transfer and ownership of Host Inc.’s stock, fixing the size of the Board of Directors within the range set forth in the charter, removal of directors, the filling of vacancies, exculpation and indemnification of directors, calling special stockholder meetings and others, all of which may be amended only by a resolution adopted by the Board of Directors and approved by Host Inc.’s stockholders holding two-thirds of the votes entitled to be cast on the matter. Other charter amendments generally require approval of the Board and the affirmative vote of holders of a majority of the votes entitled to be cast on the matter. These provisions may make it more difficult to amend Host Inc.’s charter to alter the provisions described herein that could delay, defer or prevent a transaction or a change in control or the acquisition of Host Inc. common stock, without the approval of the Board of Directors.

Shares of Host Inc.’s common stock that are or become available for sale could affect the share price of Host Inc.’s common stock.

We have in the past issued and may in the future issue additional shares of common stock to raise the capital necessary to finance hotel acquisitions, fund capital expenditures, refinance debt or for other corporate purposes. Sales of a substantial number of shares of Host Inc.’s common stock, or the perception that sales could occur, could affect adversely prevailing market prices for Host Inc.’s common stock. In addition, limited partners of Host L.P. who redeem their units and receive, at Host Inc.’s election, shares of Host Inc. common stock will be able to sell those shares freely. As of December 31, 2019, there are approximately 7.5 million Host LP OP units outstanding that are owned by third parties and are redeemable, which represents approximately 1% of all outstanding OP units. Further, shares of Host Inc.’s common stock have been and will be issued or reserved for issuance from time to time under our employee benefit plans.

Our earnings and cash dividends will affect the market price of shares of Host Inc.’s common stock.

We believe that the market value of a REIT’s equity securities is based primarily upon the market’s perception of the REIT’s growth potential and its current and potential future cash dividends, whether from operations, sales, acquisitions, development or refinancing, and secondarily is based upon the value of the underlying assets. For that reason, shares of Host Inc.’s common stock may trade at prices that are higher or lower than its net asset value per share. To the extent that we retain operating cash flow for investment purposes, working capital reserves or other purposes, rather than paying dividends using such cash flow to stockholders, these retained funds, while increasing the value of our underlying assets, may impact negatively the market price of Host Inc.’s common stock. Our failure to meet the market’s expectation of future earnings and cash dividends likely would affect adversely the market price of Host Inc.’s common stock.

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Federal Income Tax Risks

Adverse tax consequences would occur if Host Inc. or its subsidiary REIT fails to qualify as a REIT.

We believe that Host Inc. has been organized and has operated in such a manner as to qualify as a REIT under the Code, commencing with its taxable year beginning January 1, 1999, and Host Inc. currently intends to continue to operate as a REIT during future years. In addition, Host Inc. owns, through Host L.P., one entity that also has elected to be treated as a REIT. As the requirements for qualification and taxation as a REIT are extremely complex and interpretations of the federal income tax laws governing qualification and taxation as a REIT are limited, no assurance can be provided that Host Inc. currently qualifies as a REIT or will continue to qualify as a REIT or that Host Inc.’s subsidiary REIT qualifies as a REIT or will continue to qualify as a REIT. If our subsidiary REIT were to fail to qualify as a REIT, it is possible that Host Inc. would fail to qualify as a REIT unless it (or the subsidiary REIT) could avail itself of certain relief provisions. If Host Inc. or its subsidiary REIT were to fail to qualify as a REIT, and any available relief provisions did not apply, the non-qualifying REIT would not be allowed to take a deduction for dividends paid to its stockholders in computing its taxable income, and it would be subject to federal and state corporate income tax on its taxable income. Any such corporate income tax liability could be substantial and would reduce the non-qualifying REIT’s cash available for, among other things, operations and dividends to its stockholders. In addition, if Host Inc. were to fail to qualify as a REIT, it would not be required to pay dividends to its stockholders. Moreover, unless entitled to statutory relief, the non-qualifying REIT could not qualify as a REIT for the four taxable years following the year during which REIT qualification was lost.

To qualify as a REIT, Host Inc. is required to satisfy the requirements of several asset and gross income tests. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which assets are not susceptible to a precise determination of fair market value, and for which we will not obtain independent appraisals. Our compliance with the REIT asset and gross income tests requirements also depends upon our ability to successfully manage the composition of our gross income and assets on an ongoing basis. Accordingly, there can be no assurance that the U.S. Internal Revenue Service (the “IRS”) will not contend that our hotel leases, interests in subsidiaries, or interests in the securities of other issuers will not cause a violation of the REIT gross income and asset tests requirements.

Any determination that Host Inc. or its subsidiary REIT does not qualify as a REIT will have a material adverse effect on our results of operations and could reduce materially the value of Host Inc.’s common stock. The additional corporate income tax liability of Host Inc. or the subsidiary REIT for the year, or years, in which it does not qualify as a REIT would reduce its cash flow available for investment, debt service or dividends to stockholders. Furthermore, the entity not qualifying as a REIT no longer would be required to pay dividends to its stockholders as a condition to REIT qualification, and any dividends paid to stockholders would be taxable as ordinary C corporation dividends to the extent of its current and accumulated earnings and profits. This means that, if Host Inc. were to fail to qualify as a REIT, Host Inc.’s stockholders currently taxed as individuals would be taxed on dividends at capital gain tax rates and Host Inc.’s corporate stockholders generally would be entitled to the dividends received deduction with respect to such dividends, subject in each case to applicable limitations under the Code. Host Inc.’s failure to qualify as a REIT also would cause an event of default under Host L.P.’s credit facility, which default could lead to an acceleration of the amounts due thereunder, which, in turn, would constitute an event of default under Host L.P.’s outstanding debt securities.

If our hotel managers do not qualify as “eligible independent contractors,” or if our hotels are not “qualified lodging facilities,” Host Inc. will fail to qualify as a REIT.

Each hotel with respect to which our TRS pays rent must be a “qualified lodging facility.” A “qualified lodging facility” is a hotel, motel, or other establishment more than one-half of the dwelling units in which are used on a transient basis, including customary amenities and facilities, provided that no wagering activities are conducted at or in connection with such facility by any person who is engaged in the business of accepting wagers and who legally is authorized to engage in such business at or in connection with such facility. We believe that all the hotels leased to our TRS are qualified lodging facilities. However, the REIT provisions of the Code provide only limited guidance for making determinations of whether a hotel is considered a qualified lodging facility, and there can be no assurance that our hotels will be so considered in all cases.

If our hotel managers do not qualify as “eligible independent contractors,” Host Inc. and our subsidiary REIT likely will fail to qualify as a REIT for federal income tax purposes. Each of the hotel management companies that enters into a management contract with our TRS must qualify as an “eligible independent contractor” under the REIT rules in order for the rent paid to Host Inc. and its subsidiary REIT by our TRS to be qualifying gross income for the REIT gross income tests requirements. Among other requirements, in order to qualify as an eligible independent contractor, a hotel manager cannot own more than 35% of our outstanding shares (by value) and no person or group of persons can own more than 35% of our outstanding shares and the ownership interests of the hotel manager, taking into account only owners of more than 5% of our shares and, with respect to ownership interests in such hotel managers that are publicly traded, only owners of more than 5% of such ownership interests. Complex ownership attribution rules apply for purposes of these 35% ownership thresholds. Although we monitor ownership of our shares by our hotel managers and their owners, and certain provisions of our charter are designed to prevent ownership of our shares in violation of these rules, there can be no assurance that these ownership limits will not be exceeded.

29


 

The size of our TRS is limited and our transactions with our TRS will cause us to be subject to a 100% excise tax on certain income or deductions if such transactions are not conducted on arm’s-length terms.

A REIT may own up to 100% of the equity interests of an entity that is a C corporation for federal income tax purposes if the entity is a TRS. A TRS may own assets and earn gross income that would not be considered as qualifying assets or as qualifying gross income if owned or earned directly by a REIT, including revenues from hotel operations. Both the REIT and its C corporation subsidiary must jointly elect to treat such C corporation subsidiary as a TRS. A C corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of its stock or securities automatically will be treated as a TRS. For taxable years beginning after December 31, 2017, no more than 20% (25% for taxable years beginning after July 30, 2008 and on or before December 31, 2017) of the value of a REIT’s assets may consist of stock or securities of one or more TRS. Beginning in 2018, a TRS may be eligible to elect out of new interest expense limitation rules enacted in December 2017 by the Tax Cuts and Jobs Act.

Our TRS will pay federal corporate income tax and applicable state and local corporate income tax and, if applicable, foreign corporate income tax on its taxable income. The Tax Cuts and Jobs Act reduces the U.S. statutory corporate income tax rate from a maximum rate of 35% to a flat rate of 21% effective January 1, 2018. The after-tax net income of our TRS will be available for distribution to us as a taxable dividend to the extent of its earnings and profits, but it is not required to be so distributed. We believe that the aggregate value of the stock and securities of our TRS has been and will continue to be less than 20% (25% for taxable years beginning after July 30, 2008 and on or before December 31, 2017) of the value of our total assets (including our TRS stock and securities). Furthermore, we monitor the value of our investments in our TRS for the purpose of ensuring compliance with TRS ownership limitations. There can be no assurance, however, that we will be able to comply with the 20% (25% for taxable years beginning after July 30, 2008 and on or before December 31, 2017) value limitation discussed above.

Rent paid to Host Inc. and its subsidiary REIT by our TRS cannot be based on its net income or profits for such rents to qualify as “rent from real property.” We receive “percentage rent” from our TRS that is calculated based on the gross revenues of the hotels subject to leases - not based on net income or profits of such hotels. If the IRS determines that the rent paid pursuant to our leases with our TRS are excessive, the deductibility thereof by the TRS may be challenged, and we could be subject to a 100% excise tax on “re-determined rent” or “re-determined deductions” to the extent that such rent exceeds an arm’s-length amount. We believe that our rent and other transactions between our REITs and their TRS are based on arm’s-length amounts and reflect normal business practices, but there can be no assurance that the IRS will agree with our belief.

Despite the REIT status of each of Host Inc. and its subsidiary REIT, we remain subject to various taxes.

Notwithstanding Host Inc.’s status as a REIT, Host Inc. and certain of its subsidiaries (including our subsidiary REIT) are subject to federal, state, local and foreign corporate taxes on their net income, gross receipts, net worth, and property, in certain cases. Host L.P. is obligated under its partnership agreement to pay all such taxes (and any related interest and penalties) incurred by Host Inc.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

The maximum tax rate applicable to “qualified dividend income” payable by U.S. stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, generally are not eligible for these reduced rates. Under the Tax Cuts and Jobs Act, however, U.S. stockholders that are individuals, trusts and estates generally may deduct up to 20% of the ordinary dividends (e.g., dividends not designated as capital gain dividends or as qualified dividend income) received from a REIT for taxable years beginning after December 31, 2017 and before January 1, 2026. Although this deduction reduces the effective tax rate applicable to certain dividends paid by REITs (generally a reduction to 29.6% assuming the stockholder is subject to the maximum individual income tax rate of 37%), such tax rate still is higher than the tax rate applicable to C corporation dividends that constitute qualified dividend income. Accordingly, investors who are individuals, trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT C corporations that pay dividends, which could adversely affect the value of the shares of REITs.

Legislative or other actions affecting REITs could have a negative effect on us.

New legislation, treasury regulations, administrative interpretations or court decisions could change significantly the tax laws with respect to an entity’s qualification as a REIT or the federal income tax consequences of its REIT qualification. If Host Inc. or its subsidiary REIT were to fail to qualify as a REIT, and any available relief provisions did not apply, the non-qualifying REIT would not be allowed to take a deduction for dividends paid to its stockholders in computing its taxable income, and it would be subject to federal and state corporate income tax on its taxable income at regular corporate income tax rates. Moreover, unless entitled to statutory relief, the non-qualifying REIT could not qualify as a REIT for the four taxable years following the year during which REIT qualification was lost.

30


 

The Tax Cuts and Jobs Act has significantly changed the U.S. federal income taxation of U.S. businesses and their owners, including REITs and their stockholders. Changes made by the Tax Cuts and Jobs Act that could affect us and our stockholders include:

 

temporarily reducing individual U.S. federal income tax rates on ordinary income; the highest individual U.S. federal income tax rate has been reduced from 39.6% to 37% for taxable years beginning after December 31, 2017 and before January 1, 2026;

 

permanently eliminating the progressive corporate income tax rate structure, which previously imposed a maximum corporate tax rate of 35%, and replacing it with a flat corporate tax rate of 21% for tax years beginning after December 31, 2017;

 

permitting a deduction for certain pass-through business income, including dividends received by our stockholders from us that are not designated by us as capital gain dividends or as qualified dividend income, which will allow individuals, trusts, and estates to deduct up to 20% of such amounts for taxable years beginning after December 31, 2017 and before January 1, 2026;

 

reducing the highest rate of withholding with respect to our distributions to non-U.S. stockholders that are treated as attributable to gains from the sale or exchange of U.S. real property interests from 35% to 21%;

 

limiting our deduction for net operating losses arising in taxable years beginning after December 31, 2017 to 80% of our REIT taxable income (prior to the application of the dividends paid deduction);

 

generally limiting the deduction for net business interest expense in excess of 30% of a business’s “adjusted taxable income,” except for taxpayers that engage in certain real estate businesses (including most equity REITs) and that elect out of this rule (provided that such electing taxpayers must use an alternative depreciation system with longer depreciation periods); and

 

eliminating the corporate alternative minimum tax.

Many of these changes are effective immediately, without any transition periods or grandfathering for existing transactions. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the Treasury and IRS, any of which could lessen or increase the impact of the legislation. Proposed regulations have been issued with respect to many of these law changes, but the regulations, once finalized, could be much different from those proposed. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities. While some of the changes made by the Tax Cuts and Jobs Act may adversely affect the Company in one or more reporting periods and prospectively, other changes may be beneficial.

Risks Relating to Redemption of OP Units

A holder who offers its OP units for redemption may have adverse tax consequences.

A limited partner who elects to redeem its OP units will be treated for federal and state income tax purposes as having sold the OP units. The sale of these OP units is a taxable event and the limited partner will be treated as realizing an amount equal to the sum of (1) the value of the common stock or cash it receives, and (2) the amount of the qualified nonrecourse liabilities of Host L.P. allocated to the redeemed OP units. The gain or loss recognized by the limited partner is measured by the difference between the amount realized thereby and the tax basis in the OP units redeemed (which tax basis includes the amount of the qualified nonrecourse liabilities of Host L.P. allocated to the redeemed OP units). It is possible that the amount of gain and/or the tax liability related thereto that the limited partner recognizes and pays could exceed the value of the common stock or cash received.

Differences between an investment in shares of Host Inc. common stock and Host L.P. OP units may affect redeemed limited partners.

If a limited partner elects to redeem its OP units, we will determine whether such limited partner receives cash or shares of Host Inc.’s common stock in exchange for the OP units. Although an investment in shares of Host Inc.’s common stock is substantially similar to an investment in Host L.P. OP units, there are some differences.  These differences include form of organization, management structure, voting rights, liquidity and federal and state income taxation, some of which differences may be material to investors.

31


 

Item 1B.

Unresolved Staff Comments

We have received no written comments regarding our periodic or current reports from the staff of the Securities and Exchange Commission that remain unresolved.

Item 2.

Properties

See Part 1 Item 1. “Business—Our Consolidated Hotel Portfolio” above for a discussion of our hotels.

Item 3.

We are involved in various legal proceedings in the ordinary course of business including, but not limited to, disputes involving hotel-level contracts, employment litigation, compliance with laws such as the Americans with Disabilities Act, tax disputes and other general matters. We are defending these claims vigorously; however, no assurances can be given as to the outcome of any pending legal proceedings. We believe, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on our financial condition, but might be material to our operating results for any period, depending, in part, upon the operating results for such period. We record a liability when a loss is considered probable and the amount can be reasonably estimated.

Item 4.

Mine Safety Disclosures

None.

 

 

32


 

INFORMATION ABOUT OUR EXECUTIVE OFFICERS

In the following table, we set forth certain information regarding those persons currently serving as executive officers of Host Inc. as of February 20, 2020. As a partnership, Host L.P. does not have executive officers.

 

Name and Title

 

Age

 

Business Experience Prior to Becoming an

Executive Officer of Host Inc.

 

 

 

 

 

Richard E. Marriott

Chairman of the Board

 

81

 

Richard E. Marriott joined our company in 1965 and has served in various executive capacities. In 1979, Mr. Marriott was elected to the Board of Directors. In 1984, he was elected Executive Vice President and in 1986, he was elected Vice Chairman of the Board of Directors. In 1993, Mr. Marriott was elected Chairman of the Board.

 

 

 

 

 

James F. Risoleo

President, Chief Executive Officer

and Director

 

64

 

James F. Risoleo joined our company in 1996 as Senior Vice President for Acquisitions. He has served in various capacities with the company, including Executive Vice President and Chief Investment Officer, Managing Director of the company's European and West Coast investment activities, and culminating in his service as President and Chief Executive Officer beginning in January 2017.

 

 

 

 

 

Brian G. Macnamara

Senior Vice President,

Principal Financial Officer, Treasurer and Corporate Controller

 

 

60

 

Brian G. Macnamara joined our company in February 1996, was promoted to Vice President, Assistant Corporate Controller in February 2007, and was elected Senior Vice President, Corporate Controller in September 2007. As of January 1, 2020, he is serving as Principal Financial Officer until the company appoints a new Chief Financial Officer.

 

 

 

 

 

Julie P. Aslaksen

Executive Vice President,

General Counsel and Secretary

 

45

 

Julie P. Aslaksen joined our company in November 2019 as Executive Vice President, General Counsel and Secretary.  Prior to joining our company, Ms. Aslaksen served as Vice President and General Counsel at General Dynamics Information Technology (GDIT), a global information technology services company from 2017 to 2019.  Prior to her role at GDIT, Ms. Aslaksen spent 14 years with General Dynamics Corporation, where she most recently served as Staff Vice President, Deputy General Counsel and Assistant Secretary.

 

 

 

 

 

Joanne G. Hamilton

Executive Vice President,

Human Resources and Corporate Responsibility

 

62

 

Joanne G. Hamilton joined our company as Executive Vice President, Human Resources in January 2010. Prior to joining our company, she was the Chief Human Resource Officer for Beers & Cutler, an accounting and consulting firm based in Vienna, Virginia from 2007 to 2010.

 

 

 

 

 

Michael E. Lentz

Executive Vice President

Development, Design & Construction

 

56

 

Michael E. Lentz joined our company in March 2016 as Managing Director, Global Development, Design and Construction. In February 2019, he was promoted to Executive Vice President, Development, Design and Construction. Prior to joining us, Mr. Lentz was Senior Vice President of Global Development for Las Vegas Sands Corp. from 2011 to 2016 and before that was with Walt Disney Imagineering for 20 years, culminating in his service as Vice President of Project Development.

 

 

 

 

 

Nathan S. Tyrrell

Executive Vice President,

Chief Investment Officer

 

47

 

Nathan S. Tyrrell joined our finance department in 2005.  He became Treasurer in February 2010. In 2015, he was named Managing Director of investment activities for the East Coast and in 2017 he was named Executive Vice President, Chief Investment Officer.

 

 

 

 

 

Sourav Ghosh

Executive Vice President,

Strategy & Analytics

 

43

 

Sourav Ghosh joined our company in 2009 as Vice President of Business Intelligence. In 2017, he became the head of Strategy & Analytics at the company and in February 2020, he was promoted to Executive Vice President, Strategy and Analytics.

 

 

33


 

PART II

 

Item 5.

Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities for Host Inc.

Host Inc.’s common stock is listed on the New York Stock Exchange and trades under the symbol “HST.”

As of February 20, 2020, there were 17,593 holders of record of Host Inc.’s common stock. However, because many of the shares of our common stock are held by brokers and other institutions on behalf of stockholders, we believe that there are considerably more beneficial owners of our common stock than record holders. As of February 20, 2020, there were 1,202 limited partners (in addition to Host Inc.). OP units are redeemable for cash, or, at our election, for Host Inc. common stock.

Stockholder Return Performance

The following graph compares the five-year cumulative total stockholder return on the common stock of Host Inc. against the cumulative total returns of the Standard & Poor’s Corporation Composite 500 Index and the National Association of Real Estate Investment Trust (“NAREIT”) Lodging Index. The graph assumes an initial investment of $100 in the common stock of Host Inc. and in each of the indexes, and also assumes the reinvestment of dividends.

Comparison of Five-Year Cumulative Stockholder Returns 2014 – 2019

 

  

  

2014

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

Host Hotels & Resorts, Inc.

$

100.00

 

 

$

67.50

 

 

$

87.33

 

 

$

96.01

 

 

$

84.09

 

 

$

98.09

 

NAREIT Lodging Index

$

100.00

 

 

$

75.58

 

 

$

93.98

 

 

$

100.71

 

 

$

87.80

 

 

$

101.55

 

S&P 500 Index

$

100.00

 

 

$

101.38

 

 

$

113.51

 

 

$

138.29

 

 

$

132.23

 

 

$

173.86

 

 

 

This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing of Host Inc. or Host L.P. (or any of their respective subsidiaries) under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.

34


 

Fourth Quarter 2019 Host Inc. Purchases of Equity Securities

On February 22, 2017, Host Inc. announced a program to repurchase up to $500 million of common stock and on August 5, 2019, we announced an increase in the repurchase program from $500 million to $1 billion. The common stock may be purchased from time to time depending upon market conditions, and repurchases may be made in the open market or through private transactions or by other means, including principal transactions with various financial institutions, like accelerated share repurchases, forwards, options and similar transactions, and through one or more trading plans designed to comply with Rule 10b5-1 under the Securities Act of 1934, as amended. The program does not obligate us to repurchase any specific number of shares or any specific dollar amount and may be suspended at any time at our discretion.

Period

 

Total Number of

Host Inc. Common Shares Purchased

 

 

Average Price Paid

per Common Share*

 

 

Total Number of Common Shares Purchased as Part of Publicly Announced Plans or Programs

 

 

Maximum Number (or Approximate Dollar Value) of Common Shares that May Yet Be Purchased Under the Plans or Programs

(in millions)

 

October 1, 2019 – October 31, 2019

 

 

807,495

 

 

$

16.79

 

 

 

807,495

 

 

$

586

 

November 1, 2019 – November 30, 2019

 

 

1,742,557

 

 

$

17.21

 

 

 

1,742,557

 

 

$

556

 

December 1, 2019– December 31, 2019

 

 

2,159,051

 

 

$

17.76

 

 

 

2,159,051

 

 

$

518

 

Total

 

 

4,709,103

 

 

$

17.39

 

 

 

4,709,103

 

 

$

518

 

_____________

*

Prices shown are exclusive of commissions paid.

Item 5.

Market for Registrant’s Common OP Units, Related Unitholder Matters and Issuer Purchases of Equity Securities for Host L.P.

There is no established public trading market for our OP units and transfers of OP units are restricted by the terms of Host L.P.’s partnership agreement. The number of holders of record of Host L.P.’s common OP units on February 20, 2020 was 1,202. The number of outstanding common OP units as of February 20, 2020 was 698,514,143 of which 691,037,305 were owned by Host Inc.

Fourth Quarter 2019 Host L.P. Purchases of Equity Securities

Period

 

Total Number of

Common OP Units Purchased

 

 

Average Price

Paid Per

Common OP Unit

 

Total Number of

Common OP Units

Purchased as Part of

Publicly Announced

Plans or Programs

 

 

Maximum number (or Approximate Dollar Value)

of Units that

May Yet Be Purchased

Under the Plans or Programs

(in millions)

 

October 1, 2019 – October 31, 2019

 

 

835,610

 

 

1.021494 shares of Host Inc. Common Stock

 

 

 

 

 

 

November 1, 2019 – November 30, 2019

 

 

1,836,897

 

 

1.021494 shares of Host Inc. Common Stock

 

 

 

 

 

 

December 1, 2019– December 31, 2019

 

 

2,209,289

 

 

1.021494 shares of Host Inc. Common Stock

 

 

 

 

 

 

Total

 

 

4,881,796

 

 

 

 

 

 

 

 

 

 

 

*

Reflects 10,759; 56,886; and 3,832 common OP units offered for redemption by limited partners in exchange for shares of Host Inc.’s common stock for the months of October, November and December, respectively, and 824,851; 1,780,011; and 2,205,457 common OP units for the months of October, November and December, respectively, redeemed to fund the repurchase by Host Inc. of the shares of common stock listed above as part of its publicly announced share repurchase program.

 

 

35


 

Item 6.

Selected Financial Data (Host Hotels & Resorts, Inc.)

The following table presents certain selected historical financial data which has been derived from audited consolidated financial statements of Host Hotels & Resorts, Inc. for the five years ended December 31, 2019 and should be read in conjunction with the consolidated financial statements and related notes and Part II Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”:

 

 

 

Calendar year

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

(in millions, except per share amounts)

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

5,469

 

 

$

5,524

 

 

$

5,387

 

 

$

5,430

 

 

$

5,350

 

Net income

 

 

932

 

 

 

1,151

 

 

 

571

 

 

 

771

 

 

 

565

 

Net income attributable to Host Hotels &

     Resorts, Inc.

 

 

920

 

 

 

1,087

 

 

 

564

 

 

 

762

 

 

 

558

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

 

1.26

 

 

 

1.47

 

 

 

.76

 

 

 

1.03

 

 

 

.74

 

Diluted earnings per common share

 

 

1.26

 

 

 

1.47

 

 

 

.76

 

 

 

1.02

 

 

 

.74

 

Dividends declared per common share

 

 

.85

 

 

 

.85

 

 

 

.85

 

 

 

.85

 

 

 

.80

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

12,305

 

 

$

12,090

 

 

$

11,693

 

 

$

11,408

 

 

$

11,656

 

Debt

 

 

3,794

 

 

 

3,837

 

 

 

3,954

 

 

 

3,649

 

 

 

3,867

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 6.

Selected Financial Data (Host Hotels & Resorts, L.P.)

The following table presents certain selected historical financial data which has been derived from audited consolidated financial statements of Host Hotels & Resorts, L.P. for the five years ended December 31, 2019 and should be read in conjunction with the consolidated financial statements and related notes and Part II Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”:

 

 

 

Calendar year

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

(in millions, except per unit amounts)

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

5,469

 

 

$

5,524

 

 

$

5,387

 

 

$

5,430

 

 

$

5,350

 

Net income

 

 

932

 

 

 

1,151

 

 

 

571

 

 

 

771

 

 

 

565

 

Net income attributable to Host Hotels &

     Resorts, L.P.

 

 

930

 

 

 

1,099

 

 

 

571

 

 

 

771

 

 

 

565

 

Earnings per common unit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common unit

 

 

1.29

 

 

 

1.50

 

 

 

.78

 

 

 

1.05

 

 

 

.76

 

Diluted earnings per common unit

 

 

1.29

 

 

 

1.50

 

 

 

.78

 

 

 

1.05

 

 

 

.76

 

Distributions declared per common unit

 

 

.868

 

 

 

.868

 

 

 

.868

 

 

 

.868

 

 

 

.817

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

12,305

 

 

$

12,090

 

 

$

11,693

 

 

$

11,408

 

 

$

11,656

 

Debt

 

 

3,794

 

 

 

3,837

 

 

 

3,954

 

 

 

3,649

 

 

 

3,867

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36


 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. This discussion focuses on our financial condition and results of operations for the year ended December 31, 2019 as compared to the year ended December 31, 2018. For a discussion and analysis of the year ended December 31, 2018, compared to the same period in 2017 please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II Item 7 of our Annual Report on Form 10‑K for the year ended December 31, 2018, filed with the SEC on February 26, 2019.

Overview

Host Inc. operates as a self-managed and self-administered REIT that owns hotels and conducts operations through Host L.P., of which Host Inc. is the sole general partner and of which it holds approximately 99% of its common OP units as of December 31, 2019. The remainder of Host L.P.’s common OP units are owned by various unaffiliated limited partners. Host Inc. has the exclusive and complete responsibility for Host L.P.’s day-to-day management and control.

Host Inc. is the largest lodging REIT in NAREIT’s composite index and one of the largest owners of luxury and upper upscale hotels. As of February 20, 2020, we own 80 hotels in the United States, Canada and Brazil and have minority ownership interests in an additional 10 hotels through joint ventures in the United States and in India. These hotels are operated primarily under brand names that are among the most respected and widely recognized in the lodging industry. Most of our hotels are located in central business districts of major cities, near airports and in resort/conference destinations.  

Our customers fall into three broad groups: transient business, group business and contract business, which accounted for approximately 61%, 35%, and 4%, respectively, of our 2019 room sales. Transient business broadly represents individual business or leisure travelers. Business travelers make up the majority of transient demand at our hotels. Therefore, we will be significantly more affected by trends in business travel than by trends in leisure demand. For a discussion of our customer categories, see “ – Our Customers”.

Understanding Our Performance

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

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

 

 

 

% of 2019
Revenues

 

 

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

 

63%

 

 

 

 

 

 

 

Food and beverage revenues. Food & beverage revenues consist of revenues from group functions, which may include banquet revenues and audio and visual revenues, as well as outlet revenues from the restaurants and lounges at our hotels.

 

30%

 

 

 

 

 

 

 

Other revenues. Occupancy, the nature of the hotel (e.g., resort) and its price point are the main drivers of other ancillary revenues, such as attrition and cancellation fees, resort and destination fees, parking, golf courses, spas, entertainment and other guest services. This category also includes other rental revenues.

 

7%

 

37


 

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

 

 

 

% of 2019
Operating
Costs and
Expenses

 

 

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

 

19%

 

 

 

 

 

 

 

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

 

24%

 

 

 

 

 

 

 

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

 

28%

 

 

 

 

 

 

 

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

 

5%

 

 

 

 

 

 

 

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

 

8%

 

 

 

 

 

 

 

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

 

14%

 

The expense components listed above are based on those presented in our consolidated statements of operations. It also is worth noting that wage and benefit costs are spread among various line items. Taken separately, these costs represent approximately 58% of our rooms, food and beverage, and other departmental and support expenses.

Key Performance Indicators. The following key performance indicators commonly are used in the hospitality industry and we believe provide useful information to management and investors in order to compare our performance with the performance of other REITS:

 

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

 

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

 

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

 

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

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

38


 

In discussing our operating results, we present RevPAR and certain other financial data on a comparable hotel basis. Comparable hotels are those hotels that we have owned for the entirety of the reporting periods being compared and which operations have been included in our consolidated results. Beginning January 1, 2020, comparable hotels will also include hotels immediately upon acquisition, on a pro forma basis, which will include operating results for periods prior to our ownership, based on actual results obtained from the manager. Comparable hotels do not include the results of properties acquired or sold, or that incurred business interruption due to significant property damage or large scale capital improvements. We also present RevPAR separately for our comparable consolidated domestic and international (both on a nominal and constant dollar basis) hotels. We provide RevPAR results in constant currency due to the consolidated hotels that we own in Canada and Brazil and the effect that exchange rates have on our reporting. We use constant currency because we believe it is useful to investors as it provides clarity on how the hotels are performing in their local markets. For all other measures (net income, operating profit, EBITDA, FFO, etc.), our discussion refers to nominal US$, which is consistent with the presentation of our financial statements under U.S. generally accepted accounting principles (“GAAP”).

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

 

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

 

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

 

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

Summary of 2019 Operating Results

The following table reflects certain line items from our audited consolidated statements of operations and the significant operating statistics for the two years ended December 31, 2019 (in millions, except per share and hotel statistics):

Historical Income Statement Data:

 

 

 

2019

 

 

2018

 

 

Change

 

Total revenues

 

$

5,469

 

 

$

5,524

 

 

 

(1.0

)%

Net income

 

 

932

 

 

 

1,151

 

 

 

(19.0

)%

Operating profit

 

 

799

 

 

 

530

 

 

 

50.8

%

Operating profit margin under GAAP

 

 

14.6

%

 

 

9.6

%

 

 

500

bps

EBITDAre

 

$

1,538

 

 

$

1,562

 

 

 

(1.5

)%

Adjusted EBITDAre

 

$

1,534

 

 

$

1,562

 

 

 

(1.8

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

1.26

 

 

$

1.47

 

 

 

(14.3

)%

NAREIT FFO per diluted share

 

 

1.70

 

 

 

1.77

 

 

 

(4.0

)%

Adjusted FFO per diluted share

 

 

1.78

 

 

 

1.77

 

 

 

0.6

%

39


 

Comparable Hotel Data:

 

 

 

2019 Comparable Hotels (1)

 

 

 

2019

 

 

2018

 

 

Change

 

Comparable hotel revenues

 

$

4,397

 

 

$

4,356

 

 

 

0.9

%

Comparable hotel EBITDA

 

 

1,275

 

 

 

1,266

 

 

 

0.7

%

Comparable hotel EBITDA margin

 

 

29.0

%

 

 

29.05

%

 

 

(5

bps)

Change in comparable hotel Total RevPAR - Constant US$ (2)

 

 

1.0

%

 

 

 

 

 

 

 

 

Change in comparable hotel RevPAR - Constant US$ (2)

 

 

(0.6

)%

 

 

 

 

 

 

 

 

Change in comparable hotel RevPAR - Nominal US$ (2)

 

 

(0.7

)%

 

 

 

 

 

 

 

 

___________

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Comparable hotel operating statistics for 2019 and 2018 are based on 72 comparable hotels as of December 31, 2019 .

(2)

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

Revenues

Total revenues declined $55 million, or 1.0%, compared to 2018, as the net effect of our acquisitions and dispositions led to a reduction of $116 million in revenues, or 2.1%, for the year, which was only partially offset by improvements in our comparable hotel performance. Comparable hotel revenues increased $41 million, or 0.9%, driven by growth in food and beverage (“F&B”) and other revenues. By contrast, comparable hotel rooms revenues declined as RevPAR at our comparable hotels decreased 0.6% compared to 2018, on a constant US$ basis, due to an 80 basis point decline in occupancy to 78.9%, partially offset by a slight increase in ADR. Comparable Total RevPAR, which also includes food and beverage and other revenues, increased 1.0% year-to-date on a constant US$ basis as comparable hotel food and beverage revenues increased 1.7%, driven by strong banquet and audio/visual sales. Our comparable hotel other revenues growth of 15.3% was driven by an increase in attrition and cancellation fees and resort and destination fees (see “Statement of Operations Results and Trends”).

The strongest markets for 2019 were Phoenix and Florida Gulf Coast, which had comparable hotel Total RevPAR increases of 8.7% and 7.4%, respectively. In Phoenix, the improvement in Total RevPAR was due to transient growth of 8.4% and an increase in food and beverage revenues of 4.1%. In particular, Total RevPAR at The Phoenician improved by 20.5%, as the hotel reopened two restaurants after completing renovations during the year and benefited from strong leisure demand. In Florida Gulf Coast, group performance increased by 14.1%, which drove the 9.2% increase in food and beverage revenues. The Don CeSar and the Ritz-Carlton Golf Resort also benefited from recently completed renovations. The Atlanta, Denver, and Washington, D.C. (Central Business District “CBD”) markets also outperformed the portfolio, with comparable hotel Total RevPAR increases of 5.0%, 4.8%, and 3.2%, respectively. In Atlanta, the improvements were the result of the Super Bowl in February 2019 and an increase in transient occupancy, most notably at The Whitley, Atlanta Buckhead which completed room renovations earlier this year. In Denver and Washington, D.C. (CBD), the improvements were due to stronger group contributions which helped drive a 13.2% and 5.3% increase in food and beverage revenues, respectively. Our Denver hotels benefited from an increase in ADR of 4.3%. These strong performances were offset by comparable hotel Total RevPAR declines at our Seattle and New York hotels of 6.7% and 5.2%, respectively. The decline in Seattle was driven by new supply and fewer city-wide events, which resulted in a decline in group revenue of 26.1%. The decline in New York was due to continued increases in supply and relative weak demand in the Times Square submarket.

On a constant US$ basis, Total RevPAR at our comparable consolidated hotels in Canada and Brazil increased 5.8% in 2019, primarily due to an increase in occupancy of 1,270 basis points at our hotels in Brazil, as well as an increase in food and beverage revenues of 21.1% at those hotels.

Operating Profit

Operating profit margins (calculated based on GAAP operating profit as a percentage of GAAP revenues) increased 500 basis points for 2019, largely due to a decrease in depreciation expense resulting from $260 million of impairment expense recorded in 2018. Margins also were positively impacted by highly profitable other revenues growth from cancellation, attrition, resort and destination fees. Operating profit margins under GAAP also are affected significantly by several items, including dispositions, depreciation expense and corporate expenses. Our comparable hotel EBITDA margins, which exclude these items, declined 5 basis points to 29.0%. Downward pressure on margins was due to the decline in comparable hotel RevPAR and increasing labor costs due to tightening labor markets, which was partially offset by the operating guarantees provided by Marriott related to the Marriott transformational capital program discussed below and realized benefits from the Marriott and Starwood merger, including lower allocated costs for required programs and services, reduced charge-out rate for loyalty program expenses and lower group travel agent commissions.

40


 

Net Income, Adjusted EBITDAre and Adjusted FFO per Diluted Share

Net income for Host Inc. decreased $219 million in 2019 to $932 million primarily due to a $562 million decrease in other gains/(losses), partially offset by a decrease of $246 million of impairment expense in 2019. The net effect of our acquisitions and dispositions increased net income by $54 million, while the sale of our interest in the Euro JV in 2018 reduced net income by $14 million. These results led to a decrease in diluted earnings per common share for Host Inc. of 14.3% to $1.26. Adjusted EBITDAre, which excludes, among other items, gain on sale of assets and impairment expense, decreased $28 million to $1,534 million. An increase in Adjusted EBITDAre from our comparable hotels was offset by the net effect of our acquisitions and dispositions of consolidated hotels which reduced Adjusted EBITDAre by $18 million.  Additionally, the sale of our interest in the Euro JV in 2018 reduced Adjusted EBITDAre by $45 million in 2019. Adjusted FFO per diluted share, which excludes gain on sale of assets and other real estate transactions, including depreciation and impairment, increased $0.01, or 0.6%, in 2019, as the reduction in Adjusted EBITDAre was offset by a reduction in interest expense (excluding debt extinguishment costs) and a decline in the weighted average shares outstanding as a result of the execution of our stock repurchase plan.

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

2020 Outlook

2020 will prove a challenging year for the lodging industry due to a number of economic, political, and global issues. Consensus forecasts anticipate real GDP growth of 1.9%, implying slower economic momentum. Consumer confidence and labor markets remain strong, which have the potential to bolster the leisure travel segment. However, business investment growth, which historically has been highly correlated to RevPAR growth for upper-upscale properties in major markets, continues to decelerate. Additionally, the strong labor market will drive increases in wages and benefits that will challenge operators to maintain margins. These conflicting economic indicators, combined with election year uncertainty and continued trade instability, will weigh on growth potential in the lodging industry this year. In addition, the coronavirus outbreak in China and other countries is expected to have an economic and travel impact in the U.S., particularly for gateway cities such as New York and San Francisco, though the timing and severity of the effect is uncertain.

The long economic growth cycle in the U.S. also has encouraged development of new supply, which is forecast to be above the long-term average for 2020. Although growth in the upper upscale segment is expected to remain modest, some of our markets, such as New York and Boston, will continue to see above-average supply growth, which has made it more challenging for our operators to maintain high levels of occupancy and to grow average rates. Therefore, constrained lodging demand and targeted supply growth are expected to limit overall RevPAR growth for our portfolio for 2020.

We expect that these broad industry and individual market trends will result in comparable RevPAR growth on a constant dollar basis of between 0.0% and 1.0% for the full year 2020. We expect the slight increase in RevPAR to be driven by increased group revenues, as our portfolio is expected to benefit from a more favorable citywide convention calendar, leading to continued F&B growth. We expect leisure travel to support transient revenues, as loyalty program redemptions remain strong, while business travel is expected to remain subdued. In addition, we anticipate above-inflationary growth in hotel-level operating expenses, driven by expected wage and benefit increases of approximately 5%, which will result in lower operating margins. Year-over-year comparisons also will be affected by changes in our portfolio due to acquisitions and dispositions.

Effective January 1, 2020, we will adjust our definition of comparable hotels to include recent acquisitions on a pro forma basis assuming they have comparable operating environments. Operating results for acquisitions in the current and prior year will be reflected for full calendar years, to include results for periods prior to our ownership. We believe this will provide investors a better understanding of underlying growth trends for our current portfolio. As such, the forecast above has been adjusted to include results for the 1 Hotel South Beach acquired in 2019.

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

41


 

Strategic Initiatives

For 2020, we intend to continue our disciplined approach to capital allocation to strengthen our portfolio and deliver stockholder value through multiple levers. These levers may include, over time, acquiring hotels, investing in our portfolio, buying back stock (depending on market conditions) or returning capital through a meaningful quarterly dividend. We intend to take advantage of our strong capital position and overall scale to acquire upper-upscale and luxury properties, through single asset or portfolio acquisitions, that we believe have sustainable competitive advantages to drive long-term value. At the same time, we will opportunistically sell hotels when market conditions permit, including the pursuit of exiting our remaining international markets to focus on our domestic portfolio. We also continue to critically analyze our portfolio to seek to take advantage of the inherent value of our real estate for its highest and best use.

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

Dispositions. We completed the sale of 14 hotels in 2019 for net proceeds of approximately $1,192 million. These sales primarily represented the disposition of relatively lower Total RevPAR properties and/or properties that had near-term capital expenditures needs.

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

Additionally, in August 2019, we amended and restated our credit facility agreement, expanding the revolver capacity from $1 billion to $1.5 billion, extending the maturity dates of both the revolver and outstanding term loans, and decreasing interest rates by 10 basis points compared to the previous facility. During the year, we had net repayments of $56 million under the revolver portion of our credit facility.

We believe that our ability to maintain an investment grade balance sheet and well-laddered maturity schedule is an important factor in our investment strategy. Through our transactions in 2019, we were able to lower our weighted average interest rate to 3.8% at December 31, 2019, compared to 4.4% at December 31, 2018, and extended our weighted average debt maturity to 5.4 years. We have a debt balance of $3.8 billion and a balanced maturity schedule wherein not more than 26% of our outstanding debt, representing 5% of our U.S. GAAP gross asset value, is due in any given year. We have no significant debt maturities until 2023.

For a detailed discussion, see “—Liquidity and Capital Resources.” For a detailed discussion of our significant debt activities, see Part II Item 8 “Financial Statements and Supplementary Data – Note 5.  Debt” in the Notes to Consolidated Financial Statements.

Capital Projects. We continue to pursue opportunities to enhance asset value through select capital improvements, including projects that are designed to increase the eco-efficiency of our hotels, incorporate elements of sustainable design and replace aging equipment and systems with more efficient technology. During 2019, we spent approximately $558 million on capital expenditures, of which $336 million represented return on investment (“ROI”) capital expenditures and $222 million represented renewal and replacement projects.

In collaboration with Marriott, we initiated a transformational capital program in 2018 on 17 properties that is expected to occur over a four-year period. We believe these investments will make these hotels more competitive in their respective markets and will enhance long-term performance through increases in RevPAR and market yield index. To accelerate this process, we agreed to invest amounts in excess of the FF&E reserves required under our management agreements, or approximately an average of $175 million per year, which amounts are included in the forecast range of 2020 capital expenditures reflected below. In exchange, Marriott has provided additional priority returns on the agreed upon investments and operating profit guarantees of $84 million, before reductions for incentive management fees, over the four years to offset expected business disruption.

42


 

Of the 17 properties included in the program, we have substantially completed the projects at the Coronado Island Marriott Resort & Spa, New York Marriott Downtown, San Francisco Marriott Marquis, and Santa Clara Marriott and work is underway at an additional six properties. Approximately 43% of the total estimated costs of the transformational capital program have been spent as of December 31, 2019. In 2020, we expect to substantially complete additional projects at the JW Marriott Atlanta Buckhead, Minneapolis Marriott City Center and San Antonio Marriott Rivercenter.

In 2020, we also have several projects scheduled to be completed or initiated that seek to add value to our existing portfolio over time. These include:

 

AC by Marriott Scottsdale North – using an underutilized parking lot alongside The Westin Kierland Resort & Spa, we have begun developing a 165-room select-service hotel that will be branded as an AC by Marriott and is expected to open in the second quarter of 2020;

 

Additional villas at the Andaz Maui at Wailea Resort – development and construction of 19 additional two-bedroom, luxury villas at the Andaz Maui is underway and expected to be completed in 2021; and

 

Expansions at the Orlando World Center Marriott – development and construction of a 2.3-acre waterpark and a 60,000 gross square-foot meeting space expansion is expected to commence in the second quarter of 2020 and be completed in the first half of 2021 and 2022, respectively.

For 2020, we expect capital expenditures of $550 million to $650 million, which includes approximately $180 million to $200 million for the Marriott transformation program discussed above. This total spend consists of $310 million to $360 million of ROI projects and $240 million to $290 million of renewal and replacement projects.

Share Repurchases and Dividends. On August 5, 2019, Host Inc.’s Board of Directors authorized an increase in its share repurchase program from $500 million to $1 billion. In 2019, we repurchased 27.8 million shares at an average price of $17.37 per share, exclusive of commissions, for a total of $482 million. Of these repurchases, 4.7 million shares at an average price of $17.39 per share, exclusive of commissions, were made in the fourth quarter of 2019 for a total of $82 million. At December 31, 2019, we had $518 million available for repurchase under the program. Subsequent to year end, we purchased an additional 7.5 million shares at an average price of $16.90 per share, exclusive of commissions, for a total of $127 million through February 22, 2020, pursuant to our trading plan designed to comply with Rule 10b5-1 under the Securities Exchange Act. Following these transactions, we have $391 million available for repurchase under the program.

During 2019, Host Inc.’s Board of Directors declared dividends of $0.85 per share with respect to Host Inc.’s common stock. Accordingly, Host L.P. made distributions of $0.8682699 per unit with respect to its common OP units for 2019. On February 19, the Board of Directors authorized a regular quarterly cash dividend of $.20 per share on its common stock. The dividend will be paid on April 15, 2020 to stockholders of record on March 31, 2020. The amount of any future dividends will be determined by Host Inc.’s Board of Directors.

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

43


 

Results of Operations

The following table reflects certain line items from our audited consolidated statements of operations for the two years ended December 31, 2019 (in millions, except percentages):

 

 

 

2019

 

 

2018

 

 

Change

 

Total revenues

 

$

5,469

 

 

$

5,524

 

 

 

(1.0

)%

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Property-level costs (1)

 

 

4,568

 

 

 

4,897

 

 

 

(6.7

)

Corporate and other expenses

 

 

107

 

 

 

104

 

 

 

2.9

 

Gain on insurance and business interruption settlements

 

 

5

 

 

 

7

 

 

 

(28.6

)

Operating profit

 

 

799

 

 

 

530

 

 

 

50.8

 

Interest expense

 

 

222

 

 

 

176

 

 

 

26.1

 

Other gains/(losses)

 

 

340

 

 

 

902

 

 

 

(62.3

)

Provision for income taxes

 

 

30

 

 

 

150

 

 

 

(80.0

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Host Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to non-controlling interests

 

 

12

 

 

 

64

 

 

 

(81.3

)

Net income attributable to Host Inc.

 

 

920

 

 

 

1,087

 

 

 

(15.4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Host L.P.:

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to non-controlling interests

 

 

2

 

 

 

52

 

 

 

(96.2

)

Net income attributable to Host L.P.

 

 

930

 

 

 

1,099

 

 

 

(15.4

)

___________

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

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

Statement of Operations Results and Trends

For 2019 and 2018, the results of hotels acquired or sold during the comparable periods impacted year-over-year comparisons. Our operations were affected by the disposition of 14 hotels in 2019 and four hotels in 2018, as well as the sale of the New York Marriott Marquis retail and theater commercial units and related signage areas of the hotel in 2018 (“Marriott Marquis Retail”). These dispositions were offset by the acquisition of four hotels during this timeframe: the 1 Hotel South Beach in February 2019 and the Andaz Maui at Wailea Resort, Grand Hyatt San Francisco, and Hyatt Regency Coconut Point Resort and Spa acquired in March 2018. The table below presents the net (reduction)/increase of revenues and earnings due to the results of hotels acquired or sold during the comparable periods, collectively the “Property Transactions” (in millions):

 

 

 

2019

 

 

2018

 

 

Net (reduction)/increase

 

Total Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions

 

$

363

 

 

$

171

 

 

$

192

 

Dispositions

 

 

244

 

 

 

552

 

 

 

(308

)

Total Revenues

 

$

607

 

 

$

723

 

 

$

(116

)

Net income (excluding gain on sale):

 

 

 

 

 

 

 

 

 

Acquisitions

 

$

59

 

 

$

21

 

 

$

38

 

Dispositions

 

 

43

 

 

 

27

 

 

 

16

 

Net income (excluding gain on sale)

 

$

102

 

 

$

48

 

 

$

54

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

44


 

The following table presents revenues in accordance with GAAP and includes both comparable and non-comparable hotels for the two years ended December 31, 2019 (in millions, except percentages):

 

 

 

2019

 

 

2018

 

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Rooms

 

$

3,431

 

 

$

3,547

 

 

 

(3.3

)%

Food and beverage

 

 

1,647

 

 

 

1,616

 

 

 

1.9

 

Other

 

 

391

 

 

 

361

 

 

 

8.3

 

Total revenues

 

$

5,469

 

 

$

5,524

 

 

 

(1.0

)

Rooms. Total rooms revenues decreased $116 million, or 3.3%, in 2019. The net effect of our Property Transactions was a decrease in rooms revenues of $104 million, or 2.9%, in 2019. The decline in rooms revenues also reflects a decrease at our comparable hotels of $19 million, or 0.7%, in 2019, driven by a decline in occupancy.

Food and beverage. Total F&B revenues increased $31 million, or 1.9%, in 2019. For our comparable hotels, F&B revenues increased $22 million, or 1.7%, as banquet and audio/visual revenues increased 2.5% driven by improved revenue contribution per group room night. The net effect of our Property Transactions was an increase of $1 million, or 0.1%, in 2019.

Other revenues. Total other revenues increased $30 million, or 8.3%, in 2019. For our comparable hotels, other revenues increased $38 million, or 15.3%, primarily due to an increase in attrition and cancelation fees, resort and destination fees and golf and spa revenue. The net effect of our Property Transactions decreased other revenues $13 million, or 3.7%, in 2019.

Property-level Operating Expenses

The following table presents consolidated property-level operating expenses in accordance with GAAP and includes both comparable and non-comparable hotels for the two years ended December 31, 2019 (in millions, except percentages):

 

 

 

2019

 

 

2018

 

 

Change

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Rooms

 

$

873

 

 

$

918

 

 

 

(4.9

)%

Food and beverage

 

 

1,120

 

 

 

1,103

 

 

 

1.5

 

Other departmental and

     support expenses

 

 

1,295

 

 

 

1,302

 

 

 

(0.5

)

Management fees

 

 

239

 

 

 

243

 

 

 

(1.6

)

Other property-level

     expenses

 

 

365

 

 

 

387

 

 

 

(5.7

)

Depreciation and

     amortization

 

 

676

 

 

 

944

 

 

 

(28.4

)

Total property-level

     operating expenses

 

$

4,568

 

 

$

4,897

 

 

 

(6.7

)

Our operating costs and expenses, which consist of both fixed and variable components, are affected by several factors. Rooms expenses are affected mainly by occupancy, which drives costs related to items such as housekeeping, reservation systems, room supplies, laundry services and front desk costs. Food and beverage expenses correlate closely with food and beverage revenues and are affected by occupancy and the mix of business between banquet and audio-visual and outlet sales. However, the most significant expense for the rooms, food and beverage, and other departmental and support expenses, is wages and employee benefits, which comprise approximately 58% of these expenses in any year. During 2019, these expenses increased approximately 2.9% due to higher hourly wage rate and benefit cost increases. The increase in wages and benefits accelerated during the second half of the year, reflecting tight labor markets, a trend we expect to continue for 2020. Other property-level expenses consist of property taxes, which are highly dependent on local taxing authorities, and property and general liability insurance, and do not necessarily change based on changes in revenues at our hotels.

45


 

Rooms. Rooms expenses decreased $45 million, or 4.9%, during 2019. The net effect of our Property Transactions decreased rooms expenses by $43 million, or 4.6%. The decline in rooms expenses at our comparable properties of $4 million, or 0.7%, reflects the decrease in occupancy offset by higher wages and benefits expenses.

Food and beverage. The increase in F&B expenses of $17 million, or 1.5%, in 2019, reflects the year-over-year increase of $18 million, or 2.1%, in comparable F&B expenses and an increase of $5 million, or 5.5% of F&B expenses at our non-comparable renovation hotels. F&B wages and benefits growth was offset by improved productivity, costs of goods sold as a percent of revenues and controllable operating expenses. The net effect of our Property Transactions decreased F&B expenses by $7 million, or 0.6%.

Other departmental and support expenses. Other departmental and support expenses decreased $7 million, or 0.5% in 2019. On a comparable hotel basis, other departmental and support expenses increased $31 million, or 3.0%. The increase primarily reflects increases in wages and benefits costs. The net effect of our Property Transactions decreased other departmental expenses by $36 million, or 2.7%.

Management fees. Total management fees decreased $4 million, or 1.6%, in 2019. At our comparable hotels, base management fees, which are calculated as a percentage of total revenues, were flat. Incentive management fees, generally which are based on the amount of operating profit at each property after we receive a priority return on our investment, increased $1 million, or 1.0%, at our comparable hotels. The net effect of our Property Transactions decreased management fees by $7 million, or 1.9%.

Other property-level expenses. These expenses generally do not vary significantly based on occupancy and include expenses such as property taxes and insurance. Other property-level expenses decreased $22 million, or 5.7%, in 2019. Other property-level expenses at our comparable hotels decreased $13 million, or 4.5%. The decrease reflects the receipt of operating profit guarantees from Marriott under the transformational capital program, in addition to benefits from synergies of the Marriott merger with Starwood Hotels. The net effect of our Property Transactions decreased other property-level expenses by $6 million, or 1.5%.

Depreciation and amortization. Depreciation and amortization expense decreased $268 million, or 28.4%, to $676 million, as a result of impairment expenses of $260 million recorded in 2018.

Other Income and Expenses

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

 

 

 

Year ended December 31,

 

 

 

2019

 

 

2018

 

General and administrative costs

 

$

92

 

 

$

90

 

Non-cash stock-based compensation expense

 

 

15

 

 

 

14

 

       Total

 

$

107

 

 

$

104

 

General and administrative costs primarily consist of wages and benefits, travel, corporate insurance, legal fees, audit fees, building rent and systems costs. In both 2019 and 2018, corporate and other expenses include costs associated with a significant transformation of our corporate information systems platform, the implementation of which was completed in the second quarter of 2019.

Gain on insurance and business interruption settlements. In 2019, we received $27 million of property insurance proceeds related to Hurricane Irma, that occurred in 2017, resulting in a gain of $4 million. In 2018, we received $7 million of business interruption insurance proceeds related to Hurricane Irma.

Interest income. Interest income increased $17 million, or 113.3%, in 2019 due to a higher cash balance throughout the year and an increase in interest rates.

46


 

Interest expense. Interest expense increased $46 million, or 26.1%, in 2019 as compared to 2018, due to prepayment premiums on the repayment of the Series Z and Series B Senior Notes and the accelerated recognition of interest expense associated with refinancing these senior notes and our credit facility. However, the increase was partially offset by a lower overall weighted average interest rate due to the refinancings. The following table presents certain components of interest expense (in millions):

 

 

 

Year ended December 31,

 

 

 

2019

 

 

2018

 

Cash interest expense(1)

 

$

159

 

 

$

169

 

Cash incremental interest expense (1)(2)

 

 

1

 

 

 

 

Non-cash interest expense

 

 

6

 

 

 

7

 

Cash debt extinguishment costs(1)

 

 

50

 

 

 

 

Non-cash debt extinguishment costs

 

 

6

 

 

 

 

Total interest expense

 

$

222

 

 

$

176

 

___________

 

 

 

 

 

 

 

 

(1)

Total cash interest expense paid was $219 million and $171 million in 2019 and 2018, respectively, which includes an increase (decrease) due to the change in accrued interest of $9 million and $2 million for 2019 and 2018, respectively.

(2)

Incremental interest reflects the cash interest expense for refinanced debt subsequent to the issuance of the new financing and prior to the repayment of the refinanced debt.

Other gains/(losses). The following table presents the gains recognized on the sale of assets and other (in millions):

 

 

Year ended December 31,

 

 

 

2019

 

 

2018

 

Atlanta Marriott Suites Midtown, Costa Mesa Marriott, Scottsdale Marriott at McDowell Mountains, and Scottsdale Marriott Old Town

 

$

151

 

 

$

 

The Westin Indianapolis

 

 

33

 

 

 

 

Courtyard Chicago Downtown/River North and Residence Inn Arlington Pentagon City

 

 

98

 

 

 

 

The Westin Mission Hills and Newport Beach Marriott Bayview

 

 

60

 

 

 

 

Euro JV

 

 

 

 

 

238

 

New York Marriott Marquis Retail

 

 

 

 

 

386

 

JW Marriott Hotel Mexico City

 

 

 

 

 

163

 

Key Bridge Marriott

 

 

 

 

 

119

 

Maui Timeshare land (1)

 

 

1

 

 

 

1

 

Other

 

 

(3

)

 

 

(5

)

 

 

$

340

 

 

$

902

 

___________

 

 

 

 

 

 

 

 

 

(1)

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

Benefit (provision) for income taxes. We lease substantially all our properties to consolidated subsidiaries designated as TRS for federal income tax purposes. The difference between hotel-level operating cash flow and the aggregate rent paid to Host L.P. by the TRS represents taxable income or loss, on which we record an income tax provision or benefit. The 2019 income tax provision related to hotel operations at our TRS was approximately equal to the 2018 income tax provision related to hotel operations. The 2018 income tax provision also included approximately $109 million of Mexico corporate income tax related to the sale of the JW Marriott Mexico City hotel and U.S. and state corporate income tax on capital gains generated by certain of our 2018 dispositions.

Comparable Hotel Sales Overview

While management evaluates the performance of each individual hotel against its competitive set in a given market, we also evaluate our overall portfolio operating results by geographic location and by mix of business (i.e. transient, group or contract). As of December 31, 2019, 72 of our 80 owned hotels have been classified as comparable hotels. See “Comparable Hotel Operating Statistics” for a complete description of our comparable hotels.

47


 

2019 Compared to 2018

Comparable Hotel Sales by Location.

The following table sets forth performance information for our comparable hotels by location as of December 31, 2019 and 2018:

Comparable Hotels by Location in Constant US$(1)

 

As of December 31, 2019

 

 

Year ended December 31, 2019

 

 

Year ended December 31, 2018

 

 

 

 

 

 

 

 

 

Location

No. of

Properties

 

 

No. of

Rooms

 

 

Average

Room Rate

 

 

Average

Occupancy

Percentage

 

 

RevPAR

 

 

Total RevPAR

 

 

Average

Room Rate

 

 

Average

Occupancy

Percentage

 

 

RevPAR

 

 

Total RevPAR

 

 

Percent

Change in

RevPAR

 

 

Percent

Change in

Total RevPAR

 

Maui/Oahu

 

3

 

 

 

1,682

 

 

$

375.46

 

 

 

88.2

%

 

$

331.08

 

 

$

502.37

 

 

$

361.68

 

 

 

90.3

%

 

$

326.71

 

 

$

493.57

 

 

 

1.3

%

 

 

1.8

%

Jacksonville

 

1

 

 

 

446

 

 

 

372.94

 

 

 

73.5

 

 

 

274.07

 

 

 

613.80

 

 

 

364.02

 

 

 

74.0

 

 

 

269.32

 

 

 

601.08

 

 

 

1.8

 

 

 

2.1

 

New York

 

3

 

 

 

4,259

 

 

 

286.36

 

 

 

84.8

 

 

 

242.96

 

 

 

359.92

 

 

 

295.37

 

 

 

87.5

 

 

 

258.44

 

 

 

379.73

 

 

 

(6.0

)

 

 

(5.2

)

Phoenix

 

3

 

 

 

1,654

 

 

 

292.50

 

 

 

71.9

 

 

 

210.32

 

 

 

476.62

 

 

 

275.28

 

 

 

72.2

 

 

 

198.75

 

 

 

438.50

 

 

 

5.8

 

 

 

8.7

 

Washington, D.C. (CBD)

 

5

 

 

 

3,238

 

 

 

245.82

 

 

 

81.5

 

 

 

200.27

 

 

 

288.52

 

 

 

245.96

 

 

 

80.4

 

 

 

197.70

 

 

 

279.59

 

 

 

1.3

 

 

 

3.2

 

San Diego

 

3

 

 

 

3,288

 

 

 

249.41

 

 

 

79.4

 

 

 

198.02

 

 

 

360.49

 

 

 

247.94

 

 

 

82.4

 

 

 

204.31

 

 

 

353.53

 

 

 

(3.1

)

 

 

2.0

 

Florida Gulf Coast

 

3

 

 

 

940

 

 

 

266.42

 

 

 

74.1

 

 

 

197.37

 

 

 

365.12

 

 

 

260.27

 

 

 

71.3

 

 

 

185.67

 

 

 

339.90

 

 

 

6.3

 

 

 

7.4

 

Los Angeles

 

4

 

 

 

1,726

 

 

 

228.14

 

 

 

86.5

 

 

 

197.26

 

 

 

294.81

 

 

 

228.36

 

 

 

87.8

 

 

 

200.45

 

 

 

296.47

 

 

 

(1.6

)

 

 

(0.6

)

Boston

 

3

 

 

 

2,715

 

 

 

237.24

 

 

 

81.7

 

 

 

193.83

 

 

 

268.74

 

 

 

239.17

 

 

 

81.3

 

 

 

194.41

 

 

 

263.15

 

 

 

(0.3

)

 

 

2.1

 

San Francisco/San Jose

 

5

 

 

 

2,360

 

 

 

238.69

 

 

 

78.9

 

 

 

188.31

 

 

 

259.04

 

 

 

229.16

 

 

 

82.6

 

 

 

189.38

 

 

 

260.50

 

 

 

(0.6

)

 

 

(0.6

)

Philadelphia

 

2

 

 

 

810

 

 

 

217.01

 

 

 

85.7

 

 

 

185.91

 

 

 

305.37

 

 

 

209.57

 

 

 

85.0

 

 

 

178.20

 

 

 

298.53

 

 

 

4.3

 

 

 

2.3

 

Seattle

 

2

 

 

 

1,315

 

 

 

225.12

 

 

 

82.4

 

 

 

185.50

 

 

 

250.12

 

 

 

240.44

 

 

 

83.5

 

 

 

200.65

 

 

 

268.07

 

 

 

(7.6

)

 

 

(6.7

)

Chicago

 

4

 

 

 

1,816

 

 

 

207.67

 

 

 

76.2

 

 

 

158.19

 

 

 

222.83

 

 

 

213.77

 

 

 

78.4

 

 

 

167.70

 

 

 

228.22

 

 

 

(5.7

)

 

 

(2.4

)

Orange County

 

2

 

 

 

925

 

 

 

195.76

 

 

 

79.1

 

 

 

154.82

 

 

 

258.78

 

 

 

196.84

 

 

 

79.6

 

 

 

156.66

 

 

 

256.14

 

 

 

(1.2

)

 

 

1.0

 

Atlanta

 

4

 

 

 

1,682

 

 

 

190.59

 

 

 

79.8

 

 

 

152.11

 

 

 

241.34

 

 

 

187.23

 

 

 

77.2

 

 

 

144.60

 

 

 

229.76

 

 

 

5.2

 

 

 

5.0

 

New Orleans

 

1

 

 

 

1,333

 

 

 

187.65

 

 

 

79.0

 

 

 

148.30

 

 

 

216.97

 

 

 

181.73

 

 

 

80.1

 

 

 

145.64

 

 

 

210.62

 

 

 

1.8

 

 

 

3.0

 

Northern Virginia

 

3

 

 

 

1,252

 

 

 

208.94

 

 

 

70.9

 

 

 

148.19

 

 

 

255.14

 

 

 

203.28

 

 

 

72.4

 

 

 

147.10

 

 

 

260.69

 

 

 

0.7

 

 

 

(2.1

)

San Antonio

 

1

 

 

 

512

 

 

 

188.01

 

 

 

77.1

 

 

 

144.93

 

 

 

197.57

 

 

 

193.98

 

 

 

75.3

 

 

 

146.16

 

 

 

196.74

 

 

 

(0.8

)

 

 

0.4

 

Miami

 

2

 

 

 

843

 

 

 

161.84

 

 

 

80.0

 

 

 

129.50

 

 

 

178.68

 

 

 

160.37

 

 

 

80.4

 

 

 

128.90

 

 

 

178.75

 

 

 

0.5

 

 

 

 

Houston

 

4

 

 

 

1,716

 

 

 

177.93

 

 

 

72.0

 

 

 

128.14

 

 

 

185.48

 

 

 

176.25

 

 

 

72.3

 

 

 

127.50

 

 

 

188.90

 

 

 

0.5

 

 

 

(1.8

)

Denver

 

3

 

 

 

1,340

 

 

 

173.47

 

 

 

72.9

 

 

 

126.48

 

 

 

190.45

 

 

 

166.34

 

 

 

75.1

 

 

 

124.93

 

 

 

181.69

 

 

 

1.2

 

 

 

4.8

 

Orlando

 

1

 

 

 

2,004

 

 

 

184.12

 

 

 

67.9

 

 

 

125.02

 

 

 

302.71

 

 

 

184.98

 

 

 

70.4

 

 

 

130.17

 

 

 

297.31

 

 

 

(4.0

)

 

 

1.8

 

Other

 

5

 

 

 

1,924

 

 

 

173.54

 

 

 

80.9

 

 

 

140.44

 

 

 

202.58

 

 

 

169.08

 

 

 

79.8

 

 

 

134.88

 

 

 

197.83

 

 

 

4.1

 

 

 

2.4

 

Domestic

 

67

 

 

 

39,780

 

 

 

235.37

 

 

 

79.2

 

 

 

186.42

 

 

 

296.89

 

 

 

234.34

 

 

 

80.2

 

 

 

187.93

 

 

 

294.25

 

 

 

(0.8

)

 

 

0.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

International

 

5

 

 

 

1,499

 

 

 

153.01

 

 

 

70.9

 

 

 

108.44

 

 

 

160.74

 

 

 

152.76

 

 

 

66.2

 

 

 

101.19

 

 

 

151.91

 

 

 

7.2

 

 

 

5.8

 

All Locations -

Constant US$

 

72

 

 

 

41,279

 

 

 

232.68

 

 

 

78.9

 

 

 

183.59

 

 

 

291.94

 

 

 

231.88

 

 

 

79.7

 

 

 

184.78

 

 

 

289.08

 

 

 

(0.6

)

 

 

1.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comparable Hotels in Nominal US$

 

 

As of December 31, 2019

 

 

Year ended December 31, 2019

 

 

Year ended December 31, 2018

 

 

 

 

 

 

 

 

 

 

No. of

Properties

 

 

No. of

Rooms

 

 

Average

Room Rate

 

 

Average

Occupancy

Percentage

 

 

RevPAR

 

 

Total RevPAR

 

 

Average

Room Rate

 

 

Average

Occupancy

Percentage

 

 

RevPAR

 

 

Total RevPAR

 

 

Percent

Change in

RevPAR

 

 

Percent

Change in

Total RevPAR

 

International

 

5

 

 

 

1,499

 

 

$

153.01

 

 

 

70.9

%

 

$

108.44

 

 

$

160.74

 

 

$

158.60

 

 

 

66.2

%

 

$

105.06

 

 

$

157.44

 

 

 

3.2

%

 

 

2.1

%

Domestic

 

67

 

 

 

39,780

 

 

 

235.37

 

 

 

79.2

 

 

 

186.42

 

 

 

296.89

 

 

 

234.34

 

 

 

80.2

 

 

 

187.93

 

 

 

294.25

 

 

 

(0.8

)

 

 

0.9

 

All Locations

 

72

 

 

 

41,279

 

 

 

232.68

 

 

 

78.9

 

 

 

183.59

 

 

 

291.94

 

 

 

232.06

 

 

 

79.7

 

 

 

184.92

 

 

 

289.28

 

 

 

(0.7

)

 

 

0.9

 

 

 

(1)

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

Hotel Sales by Business Mix.

The majority of our customers fall into three broad categories:  transient, group and contract business. The information below is derived from business mix results from 72 comparable hotels for which 2019 and 2018 business mix information is available. In 2019, overall revenue results for our comparable hotels was driven by increases in transient and contract revenue, partially offset by a decrease in group revenue. Transient revenues increased 0.8% compared to the prior year, with room nights up 1.3% and average rate decreased 0.5% as properties attempted to replace the group volume loss through aggressive pricing. Business transient travel revenues for 2019 decreased 6.7% due to a 6.2% decrease in occupancy and a 0.6% decrease in average rate. Contract business revenues increased 1.9% for the year, reflecting an average rate increase of 5.2% while room nights sold decreased 3.1%. Group revenues decreased 3.3% as demand was down 4.3% driven by weaker citywide conventions and a decline in association business.

48


 

Liquidity and Capital Resources

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

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

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

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

Cash Requirements. We use cash for acquisitions, capital expenditures, debt payments, operating costs, and corporate and other expenses, as well as for dividends and distributions to stockholders and Host L.P. limited partners and stock and OP unit repurchases. As a REIT, Host Inc. is required to pay dividends to its stockholders in an amount equal to at least 90% of its taxable income, excluding net capital gain, on an annual basis. Our primary sources of cash include cash from operations, proceeds from the sale of assets, borrowings under our credit facility and debt and equity issuances. We have no significant debt maturities until 2023.  

Capital Resources. As of December 31, 2019, we had $1,573 million of cash and cash equivalents, $176 million in our FF&E escrow reserve and $1.5 billion of available capacity remaining under the revolver portion of the credit facility. We depend primarily on external sources of capital to finance future growth, including acquisitions. As a result, the liquidity and debt capacity provided by our credit facility and the ability to issue senior unsecured debt are key components of our capital structure. Our financial flexibility (including our ability to incur debt, pay dividends, make distributions and make investments) is contingent on our ability to maintain compliance with the financial covenants of our credit facility and senior notes, which include, among other things, the allowable amounts of leverage, interest coverage and fixed charges.

If, at any time, we determine that market conditions are favorable, after considering our liquidity requirements, we may cause Host L.P. to issue senior notes or debentures exchangeable for shares of Host Inc. common stock. Given the total amount of our debt and our maturity schedule, we will continue to redeem or refinance senior notes from time to time, taking advantage of favorable market conditions. In July 2019, Host Inc.’s Board of Directors authorized repurchases of up to $1.0 billion of senior notes other than in accordance with their respective terms, of which the entire amount remains available under this authority. We may purchase senior notes for cash through open market purchases, privately negotiated transactions, a tender offer or, in some cases, through the early redemption of such securities pursuant to their terms. Repurchases of debt will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. Any refinancing or retirement before the maturity date will affect earnings and NAREIT FFO per diluted share as a result of the payment of any applicable call premiums and the accelerated expensing of previously deferred and capitalized financing costs. In addition, while we intend to use any available cash predominantly for acquisitions or other investments in our hotel portfolio, to the extent that we do not identify appropriate investments, we may decide in the future to use available cash for other purposes, including share repurchases, subject to market conditions. Accordingly, considering our priorities in managing our capital structure and liquidity profile and given prevailing conditions and relative pricing in the capital markets, we may, at any time, subject to applicable securities laws, be considering, or be in discussions with respect to, the repurchase or issuance of exchangeable debentures and/or senior notes or the repurchase or sale of our common stock. Any such transactions may, subject to applicable securities laws, occur simultaneously.

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Two programs currently are in place relating to repurchases and/or sales of common stock. On May 25, 2018, we entered into a two-year distribution agreement with J.P. Morgan Securities LLC, BNY Mellon Capital Markets, LLC, Deutsche Bank Securities Inc., Goldman Sachs & Co. LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Morgan Stanley & Co. LLC, as sales agents, through which we may issue and sell, from time to time, shares of common stock having a combined aggregate offering price of up to $500 million. The sales will be made in “at the market” offerings under SEC rules, including sales made directly on the NYSE. We may sell shares of common stock under this program from time to time based on market conditions, although we are not under an obligation to sell any shares. No shares were sold during 2019 or 2018 and the program expires in May 2020. Additionally, in February 2017, Host Inc.’s Board of Directors authorized a program to repurchase up to $500 million of Host Inc. common stock, and on August 5, 2019, authorized an increase in the program to $1 billion. The common stock may be purchased from time to time depending upon market conditions and may be purchased in the open market or through private transactions or by other means, including principal transactions with various financial institutions, like accelerated share repurchases, forwards, options, and similar transactions and through one or more trading plans designed to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. The plan does not obligate us to repurchase any specific number or any specific dollar amount of shares and may be suspended at any time at our discretion. For details of our repurchases under this program, see “—Strategic Initiatives” above. No repurchases were made in 2018.

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

Sources and Uses of Cash. In 2019, our primary sources of cash included cash from operations, proceeds from asset sales, and proceeds from the issuance of debt. Our primary uses of cash during the year consisted of acquisitions, capital expenditures, operating costs, debt repayments, repurchases of common stock and distributions to equity holders. We anticipate that our sources and uses of cash will be similar during 2020.

Cash Provided by Operations. Our cash provided by operations for 2019 decreased $50 million to $1,250 million compared to 2018 due primarily to the payments of 2018 U.S. federal and state corporate income tax in the first quarter of 2019 related to the gains generated by the sale of certain assets on which we elected to pay taxes rather than distribute to our stockholders.

Cash Provided by/Used in Investing Activities. Approximately $58 million of cash was provided by investing activities during 2019 compared to $100 million provided in 2018. In addition to the acquisition and disposition activity detailed in the charts below, we spent approximately $558 million on capital expenditures, compared to $474 million in 2018. This includes certain internal costs and interest expense associated with our capital expenditures projects that have been capitalized in accordance with GAAP. These capitalized costs were $12 million, $11 million and $8 million for 2019, 2018, and 2017, respectively.

The following tables summarize significant acquisitions, dispositions and return of investments in affiliates from January 1, 2018 through February 20, 2020 (in millions):

 

Transaction Date

 

Description of Transaction

 

 

 

Investment(1)

 

Acquisitions

 

 

 

 

 

 

 

 

 

February

2019

 

Acquisition of 1 Hotel South Beach

 

 

 

$

(610

)

March

2018

 

Acquisition of Portfolio of 3 Hyatt Hotels

 

 

 

 

(1,000

)

 

 

 

Total acquisitions

 

 

 

$

(1,610

)

___________

 

 

 

 

 

 

 

 

 

(1)

Effective January 1, 2018, we adopted Accounting Standards Update No. 2018-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. As a result, the acquisitions above were considered asset acquisitions and we capitalized $2 million of acquisition costs in 2019 and $17 million in 2018, which are not included in the above chart.

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Transaction Date

 

Description of Transaction

 

Net Proceeds (1)

 

 

Sales Price

 

Dispositions/Return of Investment

 

 

 

 

 

 

 

 

January

2020

 

Proceeds from loan issued to Chicago Marriott Suites O'Hare purchaser(2)

 

$

28

 

 

$

 

October

2019

 

Disposition of Sheraton San Diego Hotel & Marina and Hyatt Regency Cambridge

 

 

296

 

 

 

297

 

August

2019

 

Disposition of Atlanta Marriott Suites Midtown, Costa Mesa Marriott, Scottsdale Marriott at McDowell Mountains, and Scottsdale Marriott Old Town

 

 

247

 

 

 

256

 

August

2019

 

Disposition of The Westin Indianapolis

 

 

116

 

 

 

120

 

August

2019

 

Disposition of Chicago Marriott Suites O'Hare(2)

 

 

7

 

 

 

39

 

July

2019

 

Disposition of Courtyard Chicago Downtown/River North and Residence Inn Arlington Pentagon City

 

 

141

 

 

 

150

 

June

2019

 

Disposition of Washington Dulles Airport Marriott

 

 

9

 

 

 

11

 

April and June

2019

 

Disposition of The Westin Mission Hills and Newport Beach Marriott Bayview

 

 

100

 

 

 

107

 

January

2019

 

Disposition of The Westin New York Grand Central

 

 

276

 

 

 

302

 

December

2018

 

Disposition of our approximate 33% interest in the Euro JV (3)

 

 

496

 

 

 

496

 

September

2018

 

Disposition of JW Marriott Hotel Mexico City (4)

 

 

180

 

 

 

183

 

September

2018

 

Disposition of New York Marriott Marquis Retail

 

 

429

 

 

 

442

 

September

2018

 

Disposition of W New York Union Square

 

 

159

 

 

 

171

 

May

2018

 

Disposition of W New York on Lexington Avenue

 

 

181

 

 

 

190

 

January

2018

 

Disposition of Key Bridge Marriott

 

 

181

 

 

 

190

 

 

 

 

Total

 

$

2,846

 

 

 

 

 

___________

 

 

 

 

 

 

 

 

 

 

 

 

(1)

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

(2)

In connection with the sale of the Chicago Marriott Suites O’Hare, we extended a $28 million bridge loan to the purchaser. The disposition proceeds shown are net of the bridge loan. The loan was repaid in January 2020.

(3)

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

(4)

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

 

Cash Used in Financing Activities. Net cash used in financing activities was $1,315 million for 2019, as compared to $748 million in 2018. Cash used in financing activities in 2019 primarily consisted of the repurchase of common stock, repayment of senior notes and our credit facility, including prepayment premiums, and dividend payments, while cash provided by financing activities included the issuance of the Series H Senior Notes. In 2018, cash used in financing activities primarily included repayments on our credit facility and dividend payments, while there was no cash provided by financing activities in 2018.

The following table summarizes significant issuances, net of deferred financing costs and issuance discounts, that have been completed from January 1, 2018 through February 20, 2020 (in millions):

 

Transaction Date

 

 

Description of Transaction