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, 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 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 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 fourth quarter results
for 2006 reflect 114 days of operations, while our fourth quarter
results for 2005 reflect 113 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 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 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 fourth quarter of 2006 reflect 16 weeks of
operations for the period from September 9, 2006 to December 29,
2006 for our Marriott-managed hotels and results from September 1,
2006 to December 31, 2006 for operations of all other hotels which
report results on a monthly basis. -- Hotel results for the fourth
quarter of 2005 reflect 16 weeks of operations for the period from
September 10, 2005 to December 30, 2005 for our Marriott-managed
hotels and results from September 1, 2005 to December 31, 2005 for
operations of all other hotels which report results on a monthly
basis. -- Hotel results for full year 2006 reflect 52 weeks of
operations for the period from December 31, 2006 to December 29,
2006 for our Marriott- managed hotels and results from January 1,
2006 to December 31, 2006 for operations of all other hotels which
report results on a monthly basis. -- Hotel results for full year
2005 reflect 52 weeks of operations for the period from January 1,
2005 to December 30, 2005 for our Marriott- managed hotels and 365
days of operations for the period from January 1, 2005 to December
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 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 128 hotels that we owned as of December 31, 2006, 95 hotels
have been classified as comparable hotels. The operating results of
the following hotels that we owned as of December 31, 2006 are
excluded from comparable hotel results for these periods: --
Marriott Mountain Shadows Resort and Golf Club (closed September
2004 and sold in the first quarter of 2007); -- The Westin Kierland
Resort & Spa (acquired in September 2006); -- The 27 hotels
acquired from Starwood on April 10, 2006 that we currently
consolidate as of December 31, 2006 (three of which were sold in
the first quarter of 2007); -- Newport Beach Marriott Hotel &
Spa (major renovation completed December 2005); -- Hyatt Regency
Washington on Capitol Hill, Washington, D.C. (acquired in September
2005); -- Atlanta Marriott Marquis (major renovation started in
August 2005); and -- New Orleans Marriott (property damage and
business interruption from Hurricane Katrina in August 2005). In
addition, the operating results of the 12 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 hotel properties, they exclude
results for our non-hotel properties and other real estate
investments. 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 February 20, 2006,
Host owns approximately 96.5% 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 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 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.
Copyright