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

Operating Costs and Expenses. Operating costs and expenses
increased $244 million, or 8.2%, to $3.2 billion. The operating
costs and expenses include the costs of three properties acquired
in 2004, totaling approximately $48 million, and exclude the costs
for properties we sold or that are classified as held for sale, the
results of which are included in discontinued operations.
Property-level expenses, which account for 98% of our total
operating costs and expenses, increased $237 million, or 8.1%, to
approximately $3.2 billion. Comparable hotel expenses increased
$127 million, or 5.1%, to $2.6 billion. The increase in operating
costs and expenses is due to additional costs associated with an
increase in occupancy at our hotels and an increase in wage,
benefit, utility and sales and marketing costs, all of which we
believe will continue to increase at a rate greater than inflation.
Operating costs and expenses also include base and incentive
management fees, which are earned based on the operating performance
of our individual hotels. Due to the difficult operating
environment over the past three years, less than half of our hotels
reached the necessary thresholds in 2004 that would require us
to incur incentive management fees to our managers. In 2004
and 2003, incentive management fees totaled $38 million and
$36 million, respectively. We expect the number of hotels reaching
these thresholds and the incentive fees earned to further
increase in 2005.
Corporate and Other Expenses. Corporate and other expenses
primarily consist of employee salaries and bonuses and other
costs such as employee stock-based compensation expense,
corporate insurance, audit fees, building rent and system costs.
During 2004, the $7 million increase is primarily due to an
increase in stock compensation expense, as a result of the
significant appreciation in our stock price since December 31,
2003 and an increase in the number of shares that may be issued
that are subject to performance criteria established by the
Compensation Policy Committee of the Board of Directors.
Interest Expense. During 2004, interest expense decreased
$5 million. Interest expense for 2004 includes $32 million of
interest which was previously classified as dividends on
Convertible Preferred Securities (see discussion of “Liquidity
and Capital Resources—Financial Condition”). Interest expense
also includes $55 million and $31 million of call premiums and
accelerated deferred financing costs and original issue discounts
that were associated with debt prepayments made in 2004 and
2003, respectively. After excluding these items, interest expense
decreased approximately $60 million due to the significant
amount of debt repayments and refinancings that have occurred
in 2003 and 2004. See “Liquidity and Capital Resources—Cash
Requirements—Debt Repayments and Refinancings.”
Net Gains on Property Transactions. Net gains on property
transactions are due primarily to the recognition of deferred
gains. In 1994, we sold a portfolio of Fairfield Inns by Marriott
and received a note receivable in partial payment. Subsequently,
we recorded a loss on the note due to a decline in the operations
of the hotels. During 2004, the owner filed for bankruptcy and
several properties were sold. We recognized a previously
deferred gain of approximately $12 million based on the
amount of the proceeds we received.
Loss on Foreign Currency and Derivative Contracts. During
2004, the loss on foreign currency and derivative contracts is
primarily due to the approximate $7 million loss from the foreign
currency exchange contracts related to mortgage debt that was
secured by three of our Canadian hotels for the majority of 2004
as the U.S. dollar continued to decline in relation to the Canadian
dollar. These contracts were deemed ineffective for hedge
accounting purposes in 2003, which resulted in an $18 million
loss at that time. See “Liquidity and Capital Resources—Debt
and Effect of Financial Covenants—Mortgage Debt Covenants”
for further discussion.
Minority Interest Expense. Minority interest expense
consists of our minority partners’ share of the income or loss
in consolidated hotel partnerships and the approximate
6% ownership in Host LP.
Equity in Earnings (Losses) of Affiliates. Equity in earnings
(losses) of affiliates consists of our portion of the earnings
(losses) of two partnerships in which we own non-controlling
interests. The decrease in the loss can be attributed to a decrease
in the net loss of CBM Joint Venture LLC in 2004 and an
increase in the income from our investment in Tiburon Golf
Ventures, L.P. See “Investments in Affiliates” for a discussion
of these partnerships.
Discontinued Operations. Discontinued operations consist of
nine hotels sold in 2004, eight hotels sold in 2003, one hotel
sold in 2002, the gain on the disposition and business interruption
proceeds for the New York Marriott World Trade Center
hotel in 2003 and 2002 and four properties classified as held
for sale as of December 31, 2004, all of which were sold in
January 2005. In accordance with SFAS 144 “Accounting for
the Impairment or Disposal of Long-Lived Assets” or SFAS
144, the results of operations for these properties in the current
year and prior periods are reflected in discontinued operations.
For 2004, the nine hotels sold generated net proceeds of
approximately $246 million with a net gain on disposition
of approximately $52 million. Our revenues for the 21 properties
sold in 2003 and 2004 or classified as held for sale at
December 31, 2004 and the final disposition of insurance
proceeds for the New York Marriott World Trade Center hotel
were $133 million for 2004 and $442 million for 2003.
Income before taxes for the same periods was $12 million
and $191 million, respectively.
2003 COMPARED TO 2002
Hotel Sales. Hotel sales declined $68 million, or 2.0%, to
approximately $3.2 billion. Hotel sales for 2003 include
approximately $10 million for one hotel acquired in 2003 and
exclude sales for the properties we have sold in 2004 and 2003
or classified as held for sale in 2004, which have been reclassified
to discontinued operations. See “Discontinued Operations”
below. We discuss operating results for our hotels on a comparable
basis, and as of December 31, 2003, 112 of our 117 fullservice
hotels owned on that date were classified as comparable
for 2003 and 2002. For 2003, our comparable hotel RevPAR of
$96.85 was down 4.2% from 2002, reflecting a decline in average
room rate of 1.9% and a decrease in occupancy of 1.6 percentage
points, primarily due to reduced transient demand for
both business and leisure travel. Beginning in the fourth quarter,
demand began to improve relative to the first three quarters of
2003, with less than one-half a percent decrease in room rate
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HOST MARRIOTT 2004