HOST HOTELS & RESORTS, INC. Notes to Financial Information
Reporting Periods for Statement of Operations The results we report
in our consolidated statements of operations are based on results
of our hotels reported to us by our hotel managers. Our hotel
managers use different reporting periods. Marriott International,
Inc., or Marriott International, the manager of the majority of our
properties, uses a fiscal year ending on the Friday closest to
December 31 and reports twelve weeks of operations for the first
three quarters and sixteen or seventeen weeks for the fourth
quarter of the year for its Marriott-managed hotels. In contrast,
other managers of our hotels, such as Starwood and Hyatt, report
results on a monthly basis. Additionally, Host, as a REIT, is
required by tax laws to report results on a calendar year. As a
result, we elected to adopt the reporting periods used by Marriott
International except that our fiscal year always ends on December
31 to comply with REIT rules. Our first three quarters of
operations end on the same day as Marriott International but our
fourth quarter ends on December 31 and our full year results, as
reported in our statement of operations, always includes the same
number of days as the calendar year. Two consequences of the
reporting cycle we have adopted are: (1) quarterly start dates will
usually differ between years, except for the first quarter which
always commences on January 1, and (2) our first and fourth
quarters of operations and year-to-date operations may not include
the same number of days as reflected in prior years. For example,
the third quarter of 2006 ended on September 8, and the third
quarter of 2005 ended on September 9, though both quarters reflect
twelve weeks of operations. In contrast, the September 8, 2006
year-to-date operations included 251 days of operations, while the
September 9, 2005 year-to-date operations included 252 days of
operations. While the reporting calendar we adopted is more closely
aligned with the reporting calendar used by the manager of a
majority of our properties, one final consequence of our calendar
is we are unable to report the month of operations that ends after
our fiscal quarter-end until the following quarter because our
hotel managers using a monthly reporting period do not make mid-
month results available to us. Hence, the month of operation that
ends after our fiscal quarter-end is included in our quarterly
results of operations in the following quarter for those hotel
managers (covering approximately 40% of our full-service hotels).
As a result, our quarterly results of operations include results
from hotel managers reporting results on a monthly basis as
follows: first quarter (January, February), second quarter (March
to May), third quarter (June to August) and fourth quarter
(September to December). While this does not affect full-year
results, it does affect the reporting of quarterly results.
Reporting Periods for Hotel Operating Statistics and Comparable
Hotel Results In contrast to the reporting periods for our
consolidated statement of operations, our hotel operating
statistics (i.e., RevPAR, average daily rate and average occupancy)
and our comparable hotel results are always reported based on the
reporting cycle used by Marriott International for our Marriott-
managed hotels. This facilitates year-to-year comparisons, as each
reporting period will be comprised of the same number of days of
operations as in the prior year (except in the case of fourth
quarters comprised of seventeen weeks (such as fiscal year 2002)
versus sixteen weeks). This means, however, that the reporting
periods we use for hotel operating statistics and our comparable
hotels results may differ slightly from the reporting periods used
for our statements of operations for the first and fourth quarters
and the full year. Results from hotel managers reporting on a
monthly basis are included in our operating statistics and
comparable hotels results consistent with their reporting in our
consolidated statement of operations herein: -- Hotel results for
the third quarter of 2006 reflect 12 weeks of operations for the
period from June 17, 2006 to September 8, 2006 for our
Marriott-managed hotels and results from June 1, 2006 to August 31,
2006 for operations of all other hotels which report results on a
monthly basis. -- Hotel results for the third quarter of 2005
reflect 12 weeks of operations for the period from June 18, 2005 to
September 9, 2005 for our Marriott-managed hotels and results from
June 1, 2005 to August 31, 2005 for operations of all other hotels
which report results on a monthly basis. -- Hotel results for
year-to-date 2006 reflect 36 weeks for the period from December 31,
2005 to September 8, 2006 for our Marriott-managed hotels and
results from January 1, 2006 to August 31, 2006 for operations of
all other hotels which report results on a monthly basis. -- Hotel
results for year-to-date 2005 reflect 36 weeks for the period from
January 1, 2005 to September 9, 2005 for our Marriott-managed
hotels and results from January 1, 2005 to August 31, 2005 for
operations of all other hotels which report results on a monthly
basis. Comparable Hotel Operating Statistics We present certain
operating statistics (i.e., RevPAR, average daily rate and average
occupancy) and operating results (revenues, expenses, adjusted
operating profit and adjusted operating profit margin) for the
periods included in this report on a comparable hotel basis. We
define our comparable hotels as full-service properties (i) that
are owned or leased by us and the operations of which are included
in our consolidated results, whether as continuing operations or
discontinued operations, for the entirety of the reporting periods
being compared, and (ii) that have not sustained substantial
property damage or business interruption or undergone large-scale
capital projects during the reporting periods being compared. Of
the 129 full-service hotels that we owned as of September 8, 2006,
96 hotels have been classified as comparable hotels. The operating
results of the following hotels that we owned as of September 8,
2006 are excluded from comparable hotel results for these periods:
-- the Newport Beach Marriott Hotel (major renovation started in
July 2004); -- the Mountain Shadows Resort and Golf Club (hotel
closed pending sale, which is expected to close in the fourth
quarter 2006); -- the Atlanta Marriott Marquis (major renovation
started in August 2005); -- the New Orleans Marriott (property
damage and business interruption from Hurricane Katrina in August
2005); -- the Hyatt Regency, Washington on Capitol Hill (acquired
in September 2005); -- Westin Kierland Resort & Spa (acquired
in September 2006); and -- the 27 consolidated hotels that we
acquired from Starwood on April 10, 2006. In addition, the
operating results of the 11 hotels we disposed of in 2006 and 2005
are also not included in comparable hotel results for the periods
presented herein. Moreover, because these statistics and operating
results are for our full-service hotel properties, they exclude
results for our non-hotel properties and leased limited-service
hotels. Non-GAAP Financial Measures Included in this press release
are certain "non-GAAP financial measures," which are measures of
our historical or future financial performance that are not
calculated and presented in accordance with GAAP, within the
meaning of applicable SEC rules. They are as follows: (i) FFO per
diluted share of Host, (ii) EBITDA of Host LP, (iii) Adjusted
EBITDA of Host LP and (iv) Comparable Hotel Operating Results of
Host. The following discussion defines these terms and presents why
we believe they are useful supplemental measures of our
performance. FFO per Diluted Share We present FFO per diluted share
as a non-GAAP measure of our performance in addition to our
earnings per share (calculated in accordance with GAAP). We
calculate FFO per diluted share for a given operating period as our
FFO (defined as set forth below) for such period divided by the
number of fully diluted shares outstanding during such period. The
National Association of Real Estate Investment Trusts (NAREIT)
defines FFO as net income (calculated in accordance with GAAP)
excluding gains (losses) from sales of real estate, the cumulative
effect of changes in accounting principles, real estate-related
depreciation and amortization and adjustments for unconsolidated
partnerships and joint ventures. We present FFO on a per share
basis after making adjustments for the effects of dilutive
securities and the payment of preferred stock dividends, in
accordance with NAREIT guidelines. We believe that FFO per diluted
share is a useful supplemental measure of our operating performance
and that the presentation of FFO per diluted share, when combined
with the primary GAAP presentation of earnings per share, provides
beneficial information to investors. By excluding the effect of
real estate depreciation, amortization and gains and losses from
sales of real estate, all of which are based on historical cost
accounting and which may be of lesser significance in evaluating
current performance, we believe such measures can facilitate
comparisons of operating performance between periods and with other
REITs, even though FFO per diluted share does not represent an
amount that accrues directly to holders of our common stock.
Historical cost accounting for real estate assets implicitly
assumes that the value of real estate assets diminishes predictably
over time. As noted by NAREIT in its April 2002 "White Paper on
Funds From Operations," since real estate values have historically
risen or fallen with market conditions, many industry investors
have considered presentation of operating results for real estate
companies that use historical cost accounting to be insufficient by
themselves. For these reasons, NAREIT adopted the definition of FFO
in order to promote an industry-wide measure of REIT operating
performance. EBITDA Earnings before Interest Expense, Income Taxes,
Depreciation and Amortization (EBITDA) is a commonly used measure
of performance in many industries. Management believes EBITDA
provides useful information to investors regarding our results of
operations because it helps us and our investors evaluate the
ongoing operating performance of our properties and facilitates
comparisons between us and other lodging REITs, hotel owners who
are not REITs and other capital-intensive companies. Management
uses EBITDA to evaluate property-level results and as one measure
in determining the value of acquisitions and dispositions and, like
FFO per diluted share, it is widely used by management in the
annual budget process. Adjusted EBITDA As of October 10, 2006, Host
owns approximately 96% of the partnership interest of Host LP and
is its sole general partner. We conduct all of our operations
through Host LP, and Host LP is the obligor on our senior notes and
on our credit facility. Historically, management has adjusted
EBITDA when evaluating our performance because we believe that the
exclusion of certain additional recurring and non-recurring items
described below provides useful supplemental information to
investors regarding our ongoing operating performance and that the
presentation of Adjusted EBITDA, when combined with the primary
GAAP presentation of net income, is beneficial to an investor's
complete understanding of our operating performance. In addition,
the Adjusted EBITDA of Host LP is presented because we believe it
is a relevant measure in calculating certain credit ratios, since
Host LP is the owner of all of our hotels and is the obligor on our
debt noted above. We adjust EBITDA for the following items, which
may occur in any period, and refer to this measure as Adjusted
EBITDA: -- Gains and Losses on Dispositions -- We exclude the
effect of gains and losses recorded on the disposition of assets in
our consolidated statement of operations because we believe that
including them in EBITDA is not consistent with reflecting the
ongoing performance of our remaining assets. In addition, material
gains or losses from the depreciated value of the disposed assets
could be less important to investors given that the depreciated
asset often does not reflect the market value of real estate assets
(as noted above for FFO). -- Consolidated Partnership Adjustments
-- We exclude the minority interest in the income or loss of our
consolidated partnerships as presented in our consolidated
statement of operations because we believe that including these
amounts in EBITDA does not reflect the effect of the minority
interest position on our performance because these amounts include
our minority partners' pro-rata portion of depreciation,
amortization and interest expense. However, we believe that the
cash distributions paid to minority partners are a more relevant
measure of the effect of our minority partners' interest on our
performance, and we have deducted these cash distributions from
Adjusted EBITDA. -- Equity Investment Adjustments -- We exclude the
equity in earnings (losses) of unconsolidated investments in
partnerships and joint ventures as presented in our consolidated
statement of operations because our percentage interest in the
earnings (losses) does not reflect the impact of our minority
interest position on our performance and these amounts include our
pro-rata portion of depreciation, amortization and interest
expense. However, we believe that cash distributions we receive are
a more relevant measure of the performance of our investment and,
therefore, we include the cash distributed to us from these
investments in the calculation of Adjusted EBITDA. -- Cumulative
effect of a change in accounting principle -- Infrequently, the
Financial Accounting Standards Board (FASB) promulgates new
accounting standards that require the consolidated statement of
operations to reflect the cumulative effect of a change in
accounting principle. We exclude these one-time adjustments because
they do not reflect our actual performance for that period. --
Impairment Losses -- We exclude the effect of impairment losses
recorded because we believe that including them in EBITDA is not
consistent with reflecting the ongoing performance of our remaining
assets. In addition, we believe that impairment charges are similar
to gains (losses) on dispositions and depreciation expense, both of
which are also excluded from EBITDA. Limitations on the Use of FFO
per Diluted Share, EBITDA and Adjusted EBITDA We calculate FFO per
diluted share in accordance with standards established by NAREIT,
which may not be comparable to measures calculated by other
companies who do not use the NAREIT definition of FFO or calculate
FFO per diluted share in accordance with NAREIT guidance. In
addition, although FFO per diluted share is a useful measure when
comparing our results to other REITs, it may not be helpful to
investors when comparing us to non-REITs. EBITDA and Adjusted
EBITDA, as presented, may also not be comparable to measures
calculated by other companies. This information should not be
considered as an alternative to net income, operating profit, cash
from operations or any other operating performance measure
calculated in accordance with GAAP. Cash expenditures for various
long-term assets (such as renewal and replacement capital
expenditures), interest expense (for EBITDA and Adjusted EBITDA
purposes only) and other items have been and will be incurred and
are not reflected in the EBITDA, Adjusted EBITDA and FFO per
diluted share presentations. Management compensates for these
limitations by separately considering the impact of these excluded
items to the extent they are material to operating decisions or
assessments of our operating performance. Our consolidated
statement of operations and cash flows include interest expense,
capital expenditures, and other excluded items, all of which should
be considered when evaluating our performance, as well as the
usefulness of our non-GAAP financial measures. Additionally, FFO
per diluted share, EBITDA and Adjusted EBITDA should not be
considered as a measure of our liquidity or indicative of funds
available to fund our cash needs, including our ability to make
cash distributions. In addition, FFO per diluted share does not
measure, and should not be used as a measure of, amounts that
accrue directly to stockholders' benefit. Comparable Hotel
Operating Results We present certain operating results for our
full-service hotels, such as hotel revenues, expenses and adjusted
operating profit (and the related margin), on a comparable hotel,
or "same store," basis as supplemental information for investors.
Our comparable hotel results present operating results for
full-service hotels owned during the entirety of the periods being
compared without giving effect to any acquisitions or dispositions,
significant property damage or large scale capital improvements
incurred during these periods. We present these comparable hotel
operating results by eliminating corporate-level costs and expenses
related to our capital structure, as well as depreciation and
amortization. We eliminate corporate- level costs and expenses to
arrive at property-level results because we believe property-level
results provide investors with supplemental information into the
ongoing operating performance of our hotels. We eliminate
depreciation and amortization because, even though depreciation and
amortization are property-level expenses, these non-cash expenses,
which are based on historical cost accounting for real estate
assets, implicitly assume that the value of real estate assets
diminishes predictably over time. As noted earlier, because real
estate values have historically risen or fallen with market
conditions, many industry investors have considered presentation of
operating results for real estate companies that use historical
cost accounting to be insufficient by themselves. As a result of
the elimination of corporate-level costs and expenses and
depreciation and amortization, the comparable hotel operating
results we present do not represent our total revenues, expenses,
operating profit or operating profit margin and should not be used
to evaluate our performance as a whole. Management compensates for
these limitations by separately considering the impact of these
excluded items to the extent they are material to operating
decisions or assessments of our operating performance. Our
consolidated statements of operations include such amounts, all of
which should be considered by investors when evaluating our
performance. We present these hotel operating results on a
comparable hotel basis because we believe that doing so provides
investors and management with useful information for evaluating the
period-to-period performance of our hotels and facilitates
comparisons with other hotel REITs and hotel owners. In particular,
these measures assist management and investors in distinguishing
whether increases or decreases in revenues and/or expenses are due
to growth or decline of operations at comparable hotels (which
represent the vast majority of our portfolio) or from other
factors, such as the effect of acquisitions or dispositions. While
management believes that presentation of comparable hotel results
is a "same store" supplemental measure that provides useful
information in evaluating our ongoing performance, this measure is
not used to allocate resources or to assess the operating
performance of each of these hotels, as these decisions are based
on data for individual hotels and are not based on comparable hotel
results. For these reasons, we believe that comparable hotel
operating results, when combined with the presentation of GAAP
operating profit, revenues and expenses, provide useful information
to investors and management. DATASOURCE: Host Hotels & Resorts,
Inc.
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