Host Marriott 2004 Annual Report - Host Hotels & Resorts, Inc

These forward contracts hedge the currency exposure of converting
Canadian dollars to U.S. dollars on a monthly basis to
cover debt service payments, including the final balloon payment.
These contracts were designated as cash flow hedges of
the debt service and balloon payment and were recorded at fair
value on the balance sheet with offsetting changes recorded in
accumulated other comprehensive income. During 2003, we
prepaid approximately $39 million of the loan and terminated
the foreign currency contracts equal to the prepayments for a
payment of approximately $8 million. As a result, substantially
all of the forward currency contracts were deemed ineffective for
accounting purposes and we recorded a loss on the contracts of
approximately $18 million in 2003, which is included in “Loss
on foreign currency and derivative contracts” in the accompanying
statements of operations. Subsequent to the prepayment
date, we record the increase or decrease in the fair value of the
outstanding forward currency contracts in net income (loss)
each period. In December 2004, we made an additional $34 million
prepayment on the loan and, in early 2005, we terminated
the foreign currency contracts equal to the prepayment for a
payment of approximately $8 million. The fair value of the
contracts on December 31, 2004 and 2003 was approximately
$(20) million and $(12) million, respectively. We also purchased
an interest rate cap for approximately $0.4 million which caps
the floating interest rate at 10.75% based on a notional amount
($48.3 million). The cap is a derivative that is marked to market
with any resulting gains or losses recorded in loss on foreign
currency and derivative contracts in the current period. The
fair value of the interest rate cap was zero and $0.1 million,
respectively, at December 31, 2004 and 2003.
On August 21, 2003, we entered into two, four-year
interest rate swap agreements, which mature October 2007,
effectively converting our Series G senior notes to floating-rate
debt. Under the swaps, we receive fixed-rate payments of
9.25% and we make floating-rate payments based on six-month
LIBOR plus 590 basis points (8.1% at December 31, 2004)
on a $242 million notional amount, which is approximately
equal to the current amount of outstanding Series G senior
notes. We have designated the interest rate swaps as fair value
hedges for both financial reporting and tax purposes and the
amounts paid or received under the swap agreements will be
recognized over the life of the agreements as an adjustment to
interest expense. Changes in the fair value of the swaps and
our Series G senior notes are reflected in the balance sheet
as offsetting changes and have no income statement effect.
The fair value of these interest rate swaps was $1 million and
$2 million at December 31, 2004 and 2003, respectively.
On December 20, 2001, we entered into a 5-year interest
rate swap agreement, which was effective on January 15, 2002
and matures in January 2007, effectively converting our Series I
senior notes to floating-rate debt. Under the swap, we receive
fixed-rate payments of 9.5% and pay floating-rate payments
based on one-month LIBOR plus 450 basis points (6.9% at
December 31, 2004) on a $450 million notional amount,
which is equal to the current amount of outstanding Series I
senior notes. We have designated the interest rate swap as a fair
value hedge for both financial reporting and tax purposes and
the amounts paid or received under the swap agreement will be
recognized over the life of the agreement as an adjustment to
interest expense. Changes in the fair value of the swap and the
Series I senior notes are reflected in the balance sheet as offsetting
changes and have no income statement effect. The fair
value of this interest rate swap at December 31, 2004 and
2003 was $18 million and $34 million, respectively.
In connection with the refinancing of the mortgage debt
secured by the JW Marriott, Washington, D.C. in September
2003, we purchased an interest rate cap with a notional
amount of $88 million, which caps the floating interest rate at
8.1% for the first two years of the loan. The cap represents a
derivative that is marked to market and the gains and losses
from changes in the market value of the cap are recorded in
loss on foreign currency and derivative contracts in the current
period. The fair value of the interest rate cap was zero at
December 31, 2004 and 2003.
AGGREGATE DEBT MATURITIES
Aggregate debt maturities at December 31, 2004 are
as follows (in millions) (1) :
2005 $ 70
2006 682
2007 873
2008 599
2009 753
Thereafter 2,532
5,509
Fair value adjustment for interest rate swaps 19
Discount on senior notes (14)
Capital lease obligations 9
(1)
$5,523
Aggregate debt maturities exclude the $20 million of mortgage debt related
to the Hartford Marriott Farmington that was classified as liabilities associated
with assets held for sale at December 31, 2004. The hotel was sold on
January 6, 2005.
INTEREST
Cash paid for interest, net of amounts capitalized, was $453 million
in 2004, $468 million in 2003 and $449 million in 2002.
During 2004, 2003 and 2002, we capitalized $3 million,
$2 million and $2 million of interest expense, respectively. We
recorded losses, which have been included in interest expense
on our consolidated statement of operations, during 2004 and
2003, of approximately $55 million and $33 million, respectively,
on the early extinguishment of debt, which includes prepayment
premiums and the acceleration of the related discounts
and deferred financing costs. Deferred financing costs, which
are included in other assets, amounted to $70 million and $82
million, net of accumulated amortization, as of December 31,
2004 and 2003, respectively. Amortization of deferred financing
costs totaled $16 million, $17 million, and $16 million in
2004, 2003 and 2002, respectively.
Amortization of property and equipment under capital leases
totaled $2 million, $3 million and $3 million in 2004, 2003 and
2002, respectively, and is included in depreciation and amortization
on the accompanying statements of operations.
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HOST MARRIOTT 2004