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 second quarter of 2006 ended on June 16, and the second quarter
of 2005 ended on June 17, though both quarters reflect twelve weeks
of operations. In contrast, the June 16, 2006 year-to-date
operations included 167 days of operations, while the June 17, 2005
year-to-date operations included 168 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 hotel 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 second quarter of 2006 reflect 12 weeks of
operations for the period from March 25, 2006 to June 16, 2006 for
our Marriott-managed hotels and results from March 1, 2006 to May
31, 2006 for operations of all other hotels which report results on
a monthly basis. * Hotel results for the second quarter of 2005
reflect 12 weeks of operations for the period from March 26, 2005
to June 17, 2005 for our Marriott-managed hotels and results from
March 1, 2005 to May 31, 2005 for operations of all other hotels
which report results on a monthly basis. * Hotel results for
year-to-date 2006 reflect 24 weeks for the period from December 31,
2005 to June 16, 2006 for our Marriott-managed hotels and results
from January 1, 2006 to May 31, 2006 for operations of all other
hotels which report results on a monthly basis. * Hotel results for
year-to-date 2005 reflect 24 weeks for the period from January 1,
2005 to June 17, 2005 for our Marriott-managed hotels and results
from January 1, 2005 to May 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 June 16, 2006, 97 hotels have been classified
as comparable hotels. The operating results of the following hotels
that we owned as of June 16, 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 (hotel to be sold pending completion of significant
contingencies, which have not been resolved as of June 16, 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);
and * the 27 consolidated hotels that we acquired from Starwood on
April 10, 2006. In addition, the operating results of the ten
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 July 18, 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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