53005_Cv1_4_SP 4/10/06 14:36 Page 1

WARM AND GLITTERING, ARISTOCRATIC AND INVITING… THE WESTIN PALACE, MADRID, A LUXURY COLLECTION HOTEL, CAPTURES HOST HOTELS & RESORTS THE ESSENCE OF THIS HISTORIC MEDITERRANEAN CITY. WHETHER YOU ARE SEARCHING FOR TURN-OF-THE-CENTURY GRANDEUR OR A MODERN WORLD-CLASS HOTEL, YOU WILL QUICKLY DISCOVER WHY THE PALACE IS CONSISTENTLY CONSIDERED AS ONE OF EUROPE’S TOP 2005 ANNUAL REPORT HOTEL DESTINATIONS. WE EXPECT OUR EUROPEAN JOINT VENTURE TO ACQUIRE THIS HOTEL IN THE SECOND QUARTER OF 2006. 53005_Cv1_4_SP 4/10/06 14:36 Page 2

INTERNATIONAL BRANDS AND MARKETS

upon the expected completion of the acquisition of the starwood portfolio in the second quarter of 2006, we will have ownership interests in 137 premium-branded hotels, in nine countries and over 50 markets.

[ABOVE] The centuries-old Westin Europa & Regina is an architectural landmark just steps from Piazza San Marco in Venice, Italy. Named to Conde Nast Traveler’s 2005 Gold List, the hotel offers guests a combination of traditional elegance and modern technology, while providing the same magnificent views of the Grand Canal that once inspired Monet. We expect our European joint venture to acquire this hotel in the second quarter of 2006.

HOST HOTELS & RESORTS

will be the premier hospitality real estate company. we will own high-quality lodging assets in prime urban, airport and resort / convention locations. creating value through aggressive asset management and disciplined capital allocation to generate superior performance, we will maximize shareholders’ returns through a combina- tion of dividends, growth in funds from operations and increases to net asset value per share.

EXISTING MARKETS (AS OF DECEMBER 31, 2005) MARKETS ACQUIRED AS PART OF THE STARWOOD ACQUISITION EUROPEAN JOINT VENTURE MARKETS 53005_EditX 4/10/06 13:39 Page 1

FINANCIAL HIGHLIGHTS

(unaudited, in millions, except per share data, hotel data, and stock price) 2005 2004 2003

OPERATING DATA Revenues $ 3,881 $ 3,574 $3,223 Operating profit 519 397 290 Net income (loss) 166 —14

DILUTED INCOME (LOSS) PER COMMON SHARE Income (loss) from continuing operations $.30 $ (.34) $(1.00) Diluted income (loss)(1) $.38 $ (.12) $ (.07) Diluted weighted average shares outstanding 355.5 337.3 281.0

BALANCE SHEET DATA Total assets $ 8,245 $ 8,421 $8,592 Debt(2) 5,370 5,523 5,486 Convertible preferred securities(2) — — 475 Equity 2,417 2,395 2,136

OTHER DATA Adjusted EBITDA(1) $ 918 $ 790 $ 709 Funds from operations per diluted share(1) 1.15 .77 .99 Stock price on December 31st 18.95 17.30 12.32

COMPARABLE HOTEL DATA(3) Number of properties 98 98 Number of rooms 48,785 48,785 & resorts hotels host 2005 1 Average daily rate $166.80 $154.96 Occupancy percentage 73.6% 72.4% RevPAR(4) $122.82 $112.21

(1) Certain transactions significantly affected Funds From Operations (FFO) per diluted share, Adjusted Earnings before Interest Expense, Income Taxes, Depreciation, Amortization and other items (Adjusted EBITDA) and income (loss) per share for all years presented. FFO per diluted share and Adjusted EBITDA are non-GAAP financial measures within the meaning of the rules of the Securities & Exchange Commission and, accordingly, these measures have been reconciled to comparable GAAP measures. For further discussion of FFO per diluted share, see Management’s Discussion and Analysis of Results of Operations and Financial Condition. For further discussion of Adjusted EBITDA, see our Form 8-K dated and filed February 23, 2006. (2) Effective January 1, 2004, we adopted a revision to Financial Interpretation No. 46 “Consolidation of Variable Interest Entities” (FIN 46R). As a result, we deconsolidated a wholly owned limited purpose trust subsidiary (the “Trust”) and recorded the $492 million Convertible Subordinated Debentures issued by the Trust as debt and eliminated the $475 million of Convertible Preferred Securities that were previously classified in the mezzanine section of our consolidated balance sheet prior to January 1, 2004. For further discussion see Management’s Discussion and Analysis of Results of Operations and Financial Condition. (3) We define our comparable hotels as full-service properties that are owned or leased by us and the operations of which are included in our consoli- dated results, whether as continuing operations or discontinued operations, for the entirety of the reporting periods being compared, and that have not sustained substantial property damage or undergone large-scale capital projects during the reporting periods being compared. (4) Room revenue per available room (“RevPAR”) represents the combination of average daily room rate charged and the average daily occupancy achieved, and is a commonly used indicator of hotel performance. RevPAR does not include food and beverage or other ancillary revenues generated by the property.

CONTENTS

To Our Stockholders ...... 2 Reports of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting and Management’s Board of Directors and Management Team ...... 20 Assessment and on the Consolidated Financial Statements ...... 70 Management’s Discussion and Analysis of Results of Management Certifications ...... 71 Operations and Financial Condition ...... 21 Selected Financial Data ...... 71 Forward-Looking Statements ...... 47

Financial Statements ...... 48 Host Marriott Portfolio ...... 72

Management’s Report ...... 69 Directors, Officers and Management Team ...... Inside Back Cover

Management’s Report on Internal Control Over Financial Reporting ...... 69 Corporate Information ...... Inside Back Cover 53005_EditX 4/10/0613:39Page2

2 host hotels & resorts 2005 ◆ ◆ ◆ ◆ wsôe h rk,New York forapproximatelySwissôtel TheDrake, $580million; theFort Lauderdale andthe Marina Marriott such asinthesales2006of ashotels, theproperties value of We have to unlocktheinherent pursuedopportunities theseventh Hyatt-managed inourportfolio; property lion, we purchased the834-room Hyatt Regency Washington 2005, onCapitol Hill for$274mil- On September 30, theEuropean hotels from Starwood; financingfortheacquisition of $560 millionof United Kingdom forfurthe andto asaplatform serve Poland andthe Italy, 2006to hotels theStarwood own inSpain, We ajointventure formed onMarch 24, themostinnovative andmanagementcompanies industry; brand inthelodging oneof with ourqualitative andquantitativ tion delivers of onall expect to closeontheremaining seven by properties and theproperties 28of we completed thepurchase of 2006, On April 10, Inc. Hotels &Resorts Worldwide, hotels from Starwood we entered to anagreement acquire of anoutstandingportfolio 2005, On November 14, andcashflow; cant increases margins inoperating helpingto drive signifi- full-year improvement 9.5%in2005wasthehighest since 1998, RevPAR increase of President and Chief Executive Officer Executive President andChief HITPE .NASSETTA CHRISTOPHER J. IHR .MARRIOTT RICHARD E. himno theBoard of Chairman OORSTOCKHOLDERS OUR TO plishments include: themorerecent significant accom- of Some the future. andstrengthened ourfinancialpositionfor ing portfolio fundamentalshave lodging enhanced ourlodg- ment of Ourfocusandthecontinued improve- capital allocation. asystematic anddisciplinedapproachand practicing to aggressively ourexisting portfolio managing focus, tegic theyear Throughout we maintainedourstra- industry. guish ourcompany player asaglobal inthelodging and executing initiatives helpdistin- onstrategic thatwill anddividends earnings increases results, inoperating delivering significant We hadanoutstanding2005, ◆ h n ftescn ure.This$3.8billionacquisi- thesecond quarter. the endof uoenepnin aswell as provide approximately r European expansion, e acquisition parameters andforgesanewpartnership 04i eryeeymaueo efrac.The performance. measure of 2004 innearlyevery resultsOur operating improved over significantly real where estate itexceeds valueinourportfolio the 53005_EditX 4/10/06 13:39 Page 3

◆ We have enhanced our existing portfolio through investment in repositioning and return on investment proj- ects spending over $100 million on these high yield projects in 2005;

◆ We continued to recycle capital out of assets that are not in keeping with our long-term strategic goals in 2005, including the sale of five non-core assets and 85% of our interest in the Courtyard by Marriott joint venture for proceeds of over $240 million; and

◆ We continued to restructure our balance sheet in ways that have increased flexibility and, as a result, we are well on our way to achieving the strongest balance sheet in our history.

We believe these accomplishments exemplify the focused and disciplined approach to running our business that has made us the nation’s premier owner of lodging real estate. Consistent with our expectations, 2005 marked host hotels & resorts hotels host 2005 the second year of strong growth in what we expect to be a sustained recovery in the lodging industry. Our focus 3 on luxury and upper-upscale hotels has, over the long-term, provided superior returns to our stockholders through appreciation in net asset value and growth in earnings and dividends. We believe that the combination of continued strong demand growth and supply growth that remains at historically low levels, particularly in our segments and markets, will sustain the current powerful recovery in the lodging industry and produce results that are some of the best in our history. Based on these strong fundamentals, we believe we are at an attractive point in the lodging cycle to grow our business both in North America and, with the help of our newly-formed joint venture, Europe as well.

While we recently renamed the company Host Hotels & Resorts, Inc. to reflect the fundamental changes that we have undergone over the past 12 years, our vision, mission, values and strategy remain unchanged. Our evolu- tion from a domestic company with a single brand and an enterprise value of just over $3 billion to an emerging international company with multiple world-renowned brands and an enterprise value of over $17 billion has been dramatic. Yet, through it all, we have remained steadfast to our demanding best-in-class standards. These steps, the positive lodging fundamentals, and our unmatched portfolio and strong capital structure should result in meaningful growth in RevPAR, earnings and superior returns to our stockholders next year and beyond.

RICHARD E. MARRIOTT CHRISTOPHER J. NASSETTA Chairman of the Board President and Chief Executive Officer

APRIL 10, 2006 53005_EditX 4/10/0613:39Page4

4 host hotels & resorts 2005 investment criteria. aswell as tinue to invest inourexisting portfolio, isstrong andmore thansufficientto con- underourcredit facility, capacity available of cashand$575million including Ournear-term liquidity, Thecorrect alsomeanshaving ampleliquidity. capitalstructure favorable. debtwhenrates are capitalandtherepayment orrefinancing of improve coverages by theselective recycling of We continue will to to pursuefuture reduce opportunities leverage or ments have decreased over $100million. ourdebtbalance hasdecreased over $1billionandourannual interest pay- 2003through 2005, of beginning ourConvertible Subordinated Debentures into common shares since andotherfinancingactivities the version of 2006con- Including of thefirstquarter andimproved expanded financialflexibility interest coverage ratios. age, Our success ourbalance sheetover inrestructuring thepastseveral years hasresulted inreduced overall lever- portfolio. theStarwood theacquisition of folio andmostsignificantly, anaggressive capitalinvestment inourexisting program port- the Hyatt Regency Washington onCapitol Hill, includingthepurchase of initiatives; ourstrategic permitted ustocapital structure move onseveral forward of ourcommitment to astrong 2005, During company to sufficientflexibility beableto react with to market forces. providing while the debtandequity, to maintaintheappropriate effort balanceManagement of hasmadeevery ourcapitalstructure. have vision stewardship beentheprudent thisstrategic of The buildingblocksof ilg ntehato ononSnDeoadi ihncmotbewligdsac fteGsapDsrc,Farmers and market theGaslampDistrict, walkingdistanceof comfortable andiswithin San Diego downtown Village of intheheart iysCanlDsrc.Connected directly fo tothe353,000square city’s ChannelDistrict. [ABOVE] [RIGHT] UNWAVERING The spectacular twin towers of the 1,356-room San Diego Marriott Hote Marriott the1,356-room SanDiego towersof The spectaculartwin trcin.Tehtlfaue vr1000sur eto mee of Thehotelfeatures feet over100,000square attractions. atn t rmtcrfeto noteby the Tampa Marriott Wa ontothebay, itsdramatic reflection Casting Latin district, this property significantly enhances enhances Tampa’s significantly thisproperty destination. convention appealasa major district, Latin STRATEGIC FOCUS tTmaCneto etradcoet brCt,thehistor ot Tampa Convention to Center andclose Ybor City, take advantage of acquisition opportunities thatmeetour acquisition opportunities take advantage of igsaea ela 4-lpmrn,oeo California’s largest oneof spaceaswella446-slipmarina, ting capital improvements to increase designed profitability. whilepursuingselective costs, and minimize operating to aggressively manageourhotels to increase revenues byouroperators working with theportfolio the valueof We thenwork to enhance capitalappreciation. significant destinationsthathave andresort urban thepotential for assetsinprime plan to lodging acquire high-quality cuted onafocusedanddisciplinedlong-term strategic we have carefully exe- To achieve thesegoals, dividends. and appreciation inearnings inassetvaluesandgrowth total returns to superior ourstockholdersvide through which isto pro- our clearandunwavering focus, strategic Our success over thepast12years isadirect reflection of esd samjrfco ntescesu eeeomn ft of redevelopment factorinthesuccessful terside isamajor l & Marina are adjacent totheConvention Center arel &Marina andSeapor adjacent ic andvibrant other popular other . he t 53005_EditX 4/10/06 13:39 Page 5 53005_EditX 4/10/06 13:45 Page 6

THE FAIRMONT KEA LANI MAUI, HAWAII’S ONLY ALL-SUITE RESORT, RESTS GRACEFULLY ON POLO BEACH, ON THE SUNNY SOUTHWEST SHORES OF MAUI. THE NAME KEA LANI MEANS “HEAVENLY WHITE,” WHICH APPROPRIATELY DESCRIBES THE GLEAMING WHITE EXTERIOR OF THIS LAVISH RESORT. THIS TROPICAL PARADISE RESORT OFFERS A MYRIAD OF ISLAND ACTIVITIES, INCLUDING WINDSURFING OFF THE BEACH, RELAXING AT THE SPA OR AN INTIMATE DINNER ON YOUR PRIVATE LANAI. 53005_EditX 4/10/0613:39Page8

8 host hotels & resorts 2005 Capitol Hill places you close to government and business centers, museums, memorials and other attractions. Delight inallthatth Delight attractions. andother memorials museums, andbusinesscenters, Capitol Hill togovernment placesyouclose aiietebsns i torhtl,we improvements expect to seefurther margins. inouroperating maximize thebusinessmixatourhotels, As we continue to despite costsating margins atarate greater such thaninflation. aslaborandutilitiesrising which hasresulted inincreases inoper- ourhotels orguestsatisfaction, of in ways thequality thatdonotimpact We ouroperators to reduce work closelywith costs costsoperating isalways savings andgenerate akey priority. Controlling aswell asimprovements infoodandbeverage sales. driven by increases significant inroom rates, inRevPAR asthegrowth wasprimarily We alsoexperienced improvement strong margin in2005, segments. businessrepresented by higher-rated toators increase theability room alsoincreasing rates while themixof We have seenamarked improvement indemandal costs reduced improved. andmargins to uncoverplan foreach property ways revenues canbeenhanced, We already have anddeveloped astrategic identifiedkey opportunities assetmanager. athird-party oversight of presents asthesehotels anexciting portfolio have theStarwood opportunity never benefited from the this regard, In ourportfolio. improve which will thelong-term andvalueof profitability of all synergies, and otheroperating oe fod—rmGadBd nal84saiu usrosadfn iig owrls nentad4,0 qaefe ffunc of feet and41,000square Internet towireless andfinedining, Grand guestrooms inall834spacious Beds hotel affords—from [RIGHT] [ABOVE] modern crown of a steel-and-mesh pyramid provides a magical glow 26st glow a magical asteel-and-mesh pyramid provides of crown modern xlr l u ainscptlofr rmti el eoae uuyhtli ahntn ..TheHyatt Regency Washington o D.C. Explore allourNation’s hotelin capitaloffers from renovated luxury Washington, thisnewly tniga ecni h hiighato etl,teWSatei rme etnto o h av rvlr The W Seattl the forthesavvy traveler. destination W Seattleisapremier Seattle, of heart Standing asabeaconinthethriving SUPERIOR ASSET MANAGEMENT and unique northwestern style. and uniquenorthwestern emnso u uies which hasprovided ouroper- ourbusiness, of l segments nacdrvnemngmn,reduced costs operating enhanced revenue management, which result in managers to implementthesestrategies, We our work closelywith nicated to ourmanagers. andefficienciesthatcanbecommu-ment opportunities valueenhance- similar hotels andidentifybestpractices, spective to benchmark auniqueability provides uswith Ourbroad per- ourportfolio. size andcomposition of premium andthe brands benefits from thediversity of ourassetmanagementteam upper-upscale properties, and luxury As of thelargestowner asset management. resultat ourhotels from will ouraggressive approach to Future increases inrevenues profits andoperating earned. itis Growth inrevenues andprofits isnotguaranteed, ories above the street reflecting thiscity’s reflecting above thestreet architecturaories sdwtw ahntn D.C. Washington, is downtown l history l history tion space. tion e’s n 53005_EditX 4/10/06 13:40 Page 9 53005_EditX 4/10/06 13:47 Page 10

RESEMBLING A GRAND MEDITERRANEAN VILLA, THIS LUXURIOUS 463-ROOM HOTEL IS SET AMIDST 20 BEACHFRONT ACRES ON FLORIDA’S SOUTHWEST COAST. THE RITZ-CARLTON, NAPLES HAS EARNED BOTH MOBIL FIVE-STAR AND AAA FIVE-DIAMOND RECOGNITION AS ONE OF THE COUNTRY’S TOP RESORTS. 53005_EditX 4/10/0613:40Page12 12 host hotels & resorts 2005 in 1912, it has been a favored meeting point in the Spanish capital ever since and is just minutes from the renowned ElPrado since andisjustminutesfrom therenowned an afavored pointintheSpanish capitalever ithasbeen meeting in 1912, [RIGHT] upscale urban and resort properties oper properties andresort upscale urban solidifiesourposi thecombined portfolio Together, brands. innovative andupper-upscale andare brands luxury aperfec theindustry’s and highest-performing Regis represent someof WandSt. Westin, namessuch asSheraton, brand Established themostinnovative companies industry. andbrand operating inthelodging one of Starwood, with isthecontinued andexpanding diversificationourrelationship important Equally brand ourportfolio within which we believe have strong prospects. growth Diego, domestic markets such asSeattleand anexpanded Boston presence andSan inothermarkets such asNew York, Theacquisition alsoprovides access to key United have Kingdom inwhich we will interest. a32%ownership Poland and the Spain, ajointventure we formed to thesixhotels own inItaly, future acquisitions inEurope, thefinancing of As part ourdomesticmarkets. outsideof growth the cycle lodging and, we believe are intheearlystagesof tofolio alsorepresents acquire auniqueopportunity high-q h etnPlc,Mdi,aLxr olcinHtl isamon aLuxury Collection Hotel, Madrid, The Westin Palace, mrcsarfndeeac,inspired bytheclassicalEmpir embraces arefined elegance, [ABOVE] UNMATCHED h etnPlc,Mln uuyCleto oe,represe aLuxury Collection Hotel, Milan, The Westin Palace, We ourEuropean expect venture toac joint endowed with a relaxant private Turkish bath—that will make your stay truly unforgettable. make yourstay truly will Turkish private arelaxant with endowed bath—that PORTFOLIO DIVERSIFICATION ated underworld-renowned brands. -tl n etrs28lxrosgetrosicuig1 uts w 10suites, guestrooms—including andfeatures 228luxurious e-style mn oeeac n uno-h-etr rner Commissioned byK grandeur. andturn-of-the-century toelegance ument ur oho hs oesi h eodqatro 2006. of quarter hotelsinthesecond these quire bothof growth prospects and limited near-term supply. The port- The prospectsgrowth andlimited near-term supply. diversegeographically strong indomesticmarkets with is portfolio theStarwood Similar to ourexisting hotels, presence. andglobal brand company bothinterms of isjustanotherstep diversified increating atruly world, companies thelargestlodging inthe vaulting usto oneof while the35hotels from Starwood, acquisitionbillion of Our$3.8 industry. namesinthehospitality nized brand themostrecog- undersomeof andisoperated America diverse North isgeographically within Our portfolio andupper-upscale hotels. luxury of unmatched portfolio we have assembledan strategically Over thepast12years, eoe we have foradditional anincreased opportunity refore, nts the perfect synthesis between st between synthesis nts theperfect aiyitrainlast,priual nErp,which inEurope, particularly international assets, uality opeett u xsigprfloo premium t complement of to ourexisting portfolio tion as the premier owner of luxury andupper- luxury tion asthepremier of owner for theacquisition andto create for aplatform l n ehooy Thehotel yle andtechnology. d Thyssen-Bornemisza Museums. d Thyssen-Bornemisza hich are ing AlfonsoXIII 53005_EditX 4/10/06 13:41 Page 13 53005_EditX 4/10/06 13:49 Page 14

LOCATED ON HAWAII’S ROMANTIC AND MYSTICAL ISLAND OF MAUI, THE LUXURIOUS 806-ROOM HYATT REGENCY MAUI RESORT AND SPA OVERLOOKS 1,800 FEET OF SPARKLING WHITE SAND BEACH. A UNIQUELY ISLAND EXPERIENCE WITH TROPICAL WATERFALLS AND BRILLIANT FOLIAGE, GUESTS CAN BE PAMPERED AT THE WORLD-CLASS SPA OR EXPERIENCE THE ENERGY OF A HAWAIIAN LUAU, BUILDING MEMORIES THAT LAST A LIFETIME. 53005_EditX 4/10/0613:41Page16 16 host hotels & resorts 2005 term strategic goals, or fail to meet our on-going investment criteria, provided we can obtain satisfactory pricing. provided we canobtainsatisfactory orfailto meetouron-goinginvestment criteria, goals, term strategic non-core assets thatare ourlong- notinkeeping with we continue to disposeof In additionto thesesales, value. we believe we have created significant portfolio, theStarwood sales andredeploying thecapitalinto thepurchase of thatfarexceedadditional development opportunities theva provided thepurchasers with approximately $345million, which resulted incombined gainof New York, Drake, theFort Lauderdale andtheSwissôtel Marina Marriott The Two recent assetsales, and create shareholder value. thereal estate develop timeshare unitsonabeachfront lotadjacent parking to ourhotel to maximize thevalueof non-income producing assetssuch asattheHyatt Regency Maui, Capital allocationalsomeansrealizing thesubstantialreal estate increase cashflowswill andshareholder value. that investment portfolio for theStarwood opportunities continue andwill to review, We have already identified, $275 millioninrepositioning andROI projects in2006aswe accelerate to drive ourefforts incashflow. growth We anewrestaurant planoninvesting concept andupdated meetingspace. approximately renovated guestrooms, and redesigned suites, 20newluxury aspa, which included theadditionof approximately $65million, a cost of Beach Hotel Marriott theNewport &Spaat we completed therenovation andrepositioning of December 2005, in For example, competitive highly standards. inthemarketplace high-quality andmeetourown condition, investment ourhighest andensure thatourhotels yields are physical insuperior These projects provide someof world-class spasandexhibit halls. restaurants andmeetingspace to thedevelopment of guestrooms, tioning of Theseinvestments inscope range from thecomplete reposi- tioning andreturn oninvestment (ROI) projects. most ambitiouscapitalexpenditure which in plansinourhistory CAPITAL ALLOCATIONVALUE AND ENHANCEMENT property in central Florida. The 2,000-room hotel can satisfy even the most discerning travelers searching for themostdiscerning even The2,000-room hotel cansatisfy Florida. incentral property STRATEGIC [RIGHT] [ABOVE] h pe akBy h eetyrnvtdLbyBr bv,i utasalpr fthe$65million of isjustasmallpart above, The recently renovated Lobby Bar, the Upper Bay. Back the best in accommodations and recreational options close to the major Orlando attractions. Orlando tothemajor close options andrecreational the bestinaccommodations One of the Nation’s great convention hotels, the Orlando theOrlando World isalandmark Center Marriott theNation’s hotels, convention great One of A sanctuary of quiet comfort, the Newport Beach theNewport Beach comfort, quiet of A sanctuary renovation recently completed atthishotel. recently completed renovation uig20,w aesgiiatpors noeo the progress we madesignificant ononeof 2005, During our best-in-classstandard. hotel inadifficulttourban duplicate locationthatmeets an theclassicexample of ment andtheNational Mall, govern- Nation’s walkfrom capitol theseatof justashort the hotel of The islocated intheheart thisstrategy. of isarecent example 2005, inOctober of Washington D.C., theHyatt Regency Washington onCapitol Hill in of purchase The best-in-class standards remains unchanged. and upper-upscale thatmeetourdemanding, properties luxury term stockholder of valuethrough theownership strategically Our goalof u ftepoete shtl.By executing onthese ashotels. theproperties lue of Marriott Hotel Marriott &Spa isnestledoverlooking au neeti u otoi,aswell asunlocking value inherent inourportfolio, where we are to actively pursuinganopportunity cluded spendingover $100milliononreposi- allocating capitalto create long- 53005_EditX 4/10/06 13:41 Page 17 53005_EditX 4/10/06 13:59 Page 18

THE NEWPORT BEACH MARRIOTT HOTEL & SPA OFFERS COASTAL LIVING WITH A SLEEK, MODERN STYLE. RECENTLY RENOVATED, THE HOTEL FEATURES 532 GUESTROOMS, MORE THAN 40,000 SQUARE FEET OF EVENT SPACE AND THE ALL NEW PURE BLU SPA. 53005_EditX 4/10/0613:42Page20 20 host hotels & resorts 2005 [BACK ROW,LEFTTORIGHT] [FRONT ROW,LEFTTORIGHT] [FRONT ROW,LEFTTORIGHT] [BACK ROW,LEFTTORIGHT] Matthew L. Richardson, Pamela K. Wagoner, Larry K. Harvey, Gregory J. Larson, Jeffrey S. Clark Clark Jeffrey S. Larson, J. Gregory Harvey, K. Larry Wagoner, Pamela K. Richardson, Matthew L. ae .Rslo lzbt .Ado hitpe .Nset,W dadWle,Minaz Abji Edward Walter, W. Nassetta, J. Christopher Abdoo, Elizabeth A. Risoleo, James F. BOARD OF DIRECTORS MANAGEMENT TEAM uihA cae hitpe .Nset,RcadE arot oetM Baylis Robert M. Marriott, Richard E. Nassetta, J. Christopher McHale, Judith A. eec .Gle,AnMLuhi oooo,Jh .Mre Jr., Morse, John B. Ann McLaughlin Korologos, Golden, Terence C. 53005_FinancialsX2 4/10/06 15:35 Page 21

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The following discussion should be read in conjunction with Starwood Acquisition the consolidated financial statements and related notes On November 14, 2005, we announced that we had signed a included elsewhere in this report. This discussion contains for- definitive merger agreement as amended March 24, 2006 to ward-looking statements about our business. These statements acquire 35 luxury and upper-upscale hotels from Starwood for are based on current expectations and assumptions that are approximately $3.8 billion. The portfolio consists of 25 domes- subject to risks and uncertainties. Actual results could differ tic and 10 international properties and a total of 16,455 rooms materially because of factors discussed in “Forward Looking managed under the Westin®, Sheraton®, W Hotels®, The Statements” and “Risk Factors” contained in this report. Luxury Collection® and St. Regis® brands (collectively, the “Starwood Portfolio”). As part of the acquisition, we expect RECENT EVENTS AS OF APRIL 7, 2006 to assume approximately $109 million of debt and to issue Between December 2005 and February 10, 2006, we issued approximately $2.3 billion of equity (133,529,412 common 30.8 million shares of Host common stock upon conversion shares at the exchange price of $17.00 per share) to Starwood of $473 million principal amount of our Convertible stockholders. The remainder of the purchase price will be paid Subordinated Debentures and corresponding Convertible in cash. On April 5, 2006, our stockholders approved the Preferred Securities. The securities were convertible at the issuance of common stock for this transaction with over 99% option of the holder into shares of Host common stock at the of the votes cast in favor of the issuance. In connection with the rate of 3.2537 shares per $50 liquidation amount of Convertible completion of the Starwood acquisition, we intend to change Preferred Security (equivalent to a conversion price of $15.367 our name to Host Hotels & Resorts, Inc. and to change the New per share of the Company’s common stock). As of March 31, York Stock Exchange symbol that our common stock is traded 2006, $2 million of subordinated debentures and corresponding under to “HST.”

preferred securities remain outstanding and the right to convert We anticipate that the initial closing on all but seven inter- 2005 those securities into Host common stock has expired. We national properties will occur on or about April 10, 2006. The intend to redeem these securities in the second quarter of 2006. acquisition is subject to certain closing conditions and also sub- On January 10, 2006, we issued mortgage debt in the ject to a number of terms and conditions that could delay or amount of $135 million Canadian Dollars ($116 million US prevent the closing of the acquisitions, or result in modifica- Dollars based on the exchange rate on the date of issuance) tions, such as the exclusion of particular hotels due to the fail- with a fixed interest rate of 5.195%. The mortgage debt is ure to obtain required consents or certain other developments. host hotels & resorts secured by four of our Canadian properties and matures on The Starwood Portfolio is comprised of luxury and upper- 21 March 1, 2011. On January 13, 2006, a portion of the proceeds upscale hotels located primarily in urban, convention or resort were used to repay the $20 million outstanding balance under destinations with an average size of approximately 500 rooms our credit facility. including five city-center hotels with over 750 rooms. The portfo- 3 On March 29, 2006, we issued $800 million of 6 ⁄4% Series P lio is geographically diverse both domestically and internationally, senior notes due 2016. We intend to utilize the proceeds to fund with most assets located in markets with strong growth profiles a portion of the Starwood acquisition, redeem $136 million of our and limited near-term supply. The portfolio includes 10 interna- 7 7 ⁄8% Series B senior notes and for general corporate purposes. tional properties, which will expand our geographic distribution In 2006, we sold five properties (the Swissôtel The Drake, into new markets outside of the United States. Six hotels repre- New York; the Fort Lauderdale Marina Marriott; the Albany senting 15% of the portfolio (by revenue) are located in Europe. Marriott; the Marriott at Research Triangle Park; and the Additional hotels are located in Fiji and in Chile. As a result of the Chicago Marriott Deerfield Suites) for total proceeds of acquisition, our percentage of revenues from international hotels approximately $700 million and a total estimated gain in excess will increase from approximately 3% to approximately 4%. We of $380 million. We expect to use the proceeds from the sales to believe that many of these international markets are in the early partially fund the acquisition of the Starwood Portfolio and for stages of lodging recovery, offering the opportunity for additional other corporate purposes. growth outside of the domestic lodging cycle. In addition, we will We recently negotiated amendments to various management increase our presence in key domestic markets such as New York, agreements with Marriott International and agreed, among Boston, San Diego and Seattle as a result of this acquisition. other matters, to waive performance termination tests through We are also expanding an important relationship with the end of fiscal year 2009, to modify certain extension tests Starwood, and thereby diversifying our brand representation. which condition the manager’s ability to renew the management The portfolio consists of 17 Sheraton®, 13 Westins®, two W® agreements, and to extend certain contracts for ten additional hotels, one St. Regis® hotel, one The Luxury Collection® hotel years. As part of this negotiation, Marriott International in turn and one additional unbranded hotel. With the addition of these agreed to make a cash payment to us, to reduce an existing cap hotels, 54% of our portfolio (by revenue) will consist of on the costs and expenses related to chain services that are pro- Marriott-branded hotels, while Westin-branded hotels will rep- vided on a centralized basis, as well as to establish a cap on cer- resent 9%, up from 1% prior to the acquisition, and Sheraton tain other costs, to provide us with an incentive to increase our and W-branded hotels will represent 12% and 2%, respectively. capital expenditures at the hotels through 2008, to waive certain Currently, we do not own any Sheraton or W-branded hotels. deferred management fees, and to modify the incentive manage- In addition, we expect to work with Starwood to add value to ment fee on certain contracts. In addition, we agreed to use a the portfolio through aggressive asset management and believe portion of Marriott International’s cash payment for brand that our expanded relationship will foster additional growth reinvestment projects at various hotels in our portfolio. opportunities for both companies in the future. 53005_FinancialsX2 4/10/0615:35Page22 22 host hotels & resorts 2005 hrtnFj eotNd ii281 267 Fiji 379 Fiji Nadi Chile Nadi The Westin Europa &Regina Santiago Hotel Collection aLuxury Milan, The Westin Palace, The Westin Island Denarau Resort &Spa Sheraton FijiResort Sheraton Warsaw Hotel & Towers Sheraton SkylineHotel &Conference Centre Sheraton SantiagoHotel andConvention Center Hotel Collection aLuxury Madrid, The Westin Palace, a rsoa oe,aLxr olcinHtlSnig hl 139 152 Chile 232 216 206 247 259 426 USA 346 370 374 Santiago USA DC 263 USA (1) USA 430 USA 390 448 TX USA USA 389 456 Washington 688 AZ RI Hotel Collection aLuxury San Cristobal Tower, MA USA USA USA WA FL 891 573 USA Houston MA MA USA NJ Needham Warwick Tucson USA USA 1,216 512 DC 560 USA 740 USA USA Seattle Tampa CO Sheraton Roma Hotel &Conference Center CA Waltham Parsippany CT Braintree WI Hotels USA International OH 1,044 USA Washington NY 1,746 WA Costa Mesa USA Capitol Hill Suites Denver IN USA USA Stamford USA Sheraton Providence Hotel Airport Brookfield Cincinnati New York Sheraton Tucson Hotel &Suites Houston Regis Hotel, St. MA USA Sheraton Needham Hotel CA IN CA Indianapolis Sheraton Suites Tampa Airport D.C. Seattle USA Washington, The WestinGrand, The Westin Waltham-Boston Rancho Mirage CA Sheraton Parsippany Hotel Indianapolis Sheraton Braintree Hotel Los Angeles Boston NY Sheraton Milwaukee Brookfield Hotel The Westin SouthCoast Plaza W Seattle SanDiego The Westin Tabor Center Sheraton Stamford Hotel New York The WestinCincinnati The Westin Mission Hills Resort &Spa Sheraton Indianapolis Hotels andSuites The WestinIndianapolis New York W The WestinLos Angeles Airport The WestinSeattle Sheraton SanDiegoHotel &Marina Sheraton Boston Hotel Sheraton New York Hotel &Towers HotelsDomestic xsigast fapproximately $670million(includingthe existing assetsof (i)assetsalesof cash andproceeds from acombination of through available thepurchase forthetransactions price tion of oneyear. of extensions, excluding hasaterm, facility loan Thebridge transactions. the thepurchase of price of cient to fundthecashportion which issuffi- upto $1.39billion, in anaggregate amountof LLC Bridge America andMerrill Lynch CapitalCorporation of Bank Deutsche Bank AG Cayman Islands Branch, L.P., Partners, locatedbrands inover 50markets innine countries. approximatelywith 70,000rooms thatare 17 affiliated with We andupper-upscale hotels 137luxury own will public REIT. andthesixth-largest companiesthe largestlodging intheU.S. We by beowned anticipate will thattheseproperties Total Hotels Total—International Hotels Total—Domestic We expect to finance permanently the$1.39billioncashpor- We have received commitments from GoldmanSachs Credit to we expect beoneof theacquisition, Upon completion of (1) (1) (1) (1) theEuropean jointventure after theinitialclosing. (1) (1) IYSAECUTYROOMS COUNTRY STATE CITY eieIay185 228 350 468 634 Italy 350 Italy Poland United Kingdom Spain Italy Venice Milan Warsaw Hayes Madrid Rome om fhotels Portfolio: includedintheStarwood rooms of used to repay loanfacility. thebridge proceeds therefrom may be financingtransactions, permanent theassetsalesand theclosingof Depending uponthetimingof to thecapitalcontributions thejointventure. of ing ourportion including newdebtto beissuedby thejointventure butexclud- financing, obtainingapproximatelywhile of $560million interests theequity inthejointventure approximately 32%of regardingparties such ajointventure retain inwhich we will third 2006with We entered into onMarch anagreement 24, ness to repay any remaining draws loanfacility. onthebridge indebted- acquired and(iii)theissuance orotherincurrence of joint venture interests related to thesixEuropean assetsto be (ii)salesof Suites atResearch andthe Marriott Triangle Park), Deerfield Chicago Marriott the Albany Marriott, Marriott, theFort Lauderdale Marina New York, Swissôtel TheDrake, The following table sets forth thelocationandnumber of tablesetsforth The following 16,455 13,174 3,281 53005_FinancialsX2 4/10/06 15:35 Page 23

OVERVIEW ■ Corporate: This is the benchmark rate which a hotel pub- Structure and Business lishes and offers to the general public. It is typically the second highest category, and is for travelers that do not As of March 1, 2006, we own 103 full-service luxury and upper- have access to negotiate or discount rates. upscale hotel properties and we are the largest hotel Real Estate Investment Trust, or REIT, in the National Association of Real ■ Special Corporate: This is a negotiated rate offered to Estate Investment Trust’s composite index. A REIT is a legal companies and organizations that provide significant lev- entity that holds real estate interests and, through payments of els of room night demand to the hotel. These rates are dividends to stockholders, is permitted to reduce or avoid fed- typically negotiated annually, at a discount to the antici- eral income taxes at the corporate level. Host operates as a self- pated corporate rate. managed and self-administered REIT and owns approximately ■ Discount: This encompasses all discount programs, such 95% of the partnership interests of Host Marriott, L.P., (Host as AAA and AARP discounts, government per diem, LP, or the Operating Partnership). rooms booked through internet distribution and whole- Our hotels are operated under brand names that are among sale channels, frequent guest program redemptions, and the most respected and widely recognized in the lodging indus- promotional rates and packages offered by a hotel. try—including Marriott®, Ritz-Carlton®, Hyatt®, Four Group demand represents clusters of guestrooms booked Seasons®, Fairmont®, Hilton® and Westin®. Approximately together, usually with a minimum of 10 rooms. Examples 85% of our hotels (as measured by sales) are currently managed include a company training session or a social event such as a by Marriott International or its affiliates and branded under the family reunion. Group business is segmented into the following Marriott or Ritz-Carlton brand names. The majority of our three key sub-categories: properties are located in central business districts of major ■ Association: Group business related to national and cities, near airports and in resort/conference destinations. The regional association meetings and conventions. target profile for our portfolio includes luxury and upper- upscale full-service properties in urban and resort/conference ■ Corporate: Group business related to corporate meetings destinations that benefit from significant barriers to entry by (e.g., product launches, training programs, contract nego- competitors. Though hotels meeting this target profile will still tiations, and presentations). 2005 be subject to competitive pressures, we believe this will allow us ■ Other: Group business predominately related to social, mil- to maintain room rate and occupancy premiums over our com- itary, education, religious, fraternity and youth and ama- petitors. We also seek to maximize the value of our portfolio teur sports teams, otherwise known as SMERF business. through aggressive asset management by assisting the managers The final segment is contract demand, which refers to of our hotels in maximizing property operations and by com- blocks of rooms sold to a specific company for an extended

pleting strategic capital improvements. period of time at significantly discounted rates. Contract rates host hotels & resorts The majority of our customers fall into three broad groups: are usually utilized by hotels that are located in markets that are 23 transient business, group business, and contract business, experiencing consistently low levels of demand. Airline crews approximately 57%, 41% and 2%, respectively, of our business are typical generators of contract demand for our hotels. in 2005. Similar to the majority of the lodging industry, we fur- Our hotels are operated by third-party managers under ther categorize business within these segments based on charac- long-term agreements under which they typically earn base and teristics they have in common as follows: incentive management fees related to the revenues and prof- Transient demand broadly represents individual business or itability of each individual hotel. We provide operating funds, leisure travelers and is divided into four key sub-categories: or working capital, which the managers use to operate the premium, corporate, special corporate and discount. Overall, property, including purchasing inventory and paying wages, business travelers make up approximately 80% of transient utilities, property taxes and other expenses. We generally receive demand at our hotels, with leisure travelers making up the a cash distribution, which reflects hotel-level sales less property- remainder. Therefore, our business will be more significantly level operating expenses (excluding depreciation), from our affected by trends in business travel versus leisure demand: hotel managers each four week or monthly accounting period, ■ Premium: Sometimes referred to as “rack rate,” typically depending on the manager. consists of rooms booked close to arrival during high Hotel revenue is approximately 97% of our total revenue. demand periods and is the highest rate category available. The following table presents the components of our hotel rev- Room rates will fluctuate depending on anticipated enue as a percentage of our total revenue: demand levels (e.g. seasonality, weekday vs. weekend stays).

% OF 2005 REVENUES

Rooms revenue. Occupancy and average daily room rate are the major drivers of rooms revenue. The business mix of the hotel (group versus transient and premium versus discount business) is the key driver of room rates. 60% Food and beverage revenue. Occupancy and the type of customer staying at the hotel are the major drivers of food and beverage revenue (i.e., group business typically generates more food and beverage business through catering functions when compared to transient business, which may or may not utilize the hotel’s restaurants). 30% Other revenue. Occupancy, the nature of the property (i.e., resort, etc.) and its price point are the main drivers of other ancillary revenue, such as parking, golf course, spa, telephone, entertainment and other guest services. 7% 53005_FinancialsX2 4/10/0615:35Page24 24 host hotels & resorts 2005 Depreciation and amortization expense. andamortization Depreciation expenses. Other property-level Management fees. expense. Hotel departmental Food andbeverage expense. Rooms expense. ryscmeiiest euetemauea nidctro a We usethemeasure asanindicator of erty’s competitive set. each property’s RevPAR inrelation to theRevPAR forthatprop- RevPAR The index reflects penetration index. penetration wouldrates have agreater on ourprofitability. impact RevPAR increases room dueto higher when occupancy rises, increases profit whileoperating typically For thisreason, costs. would notresult intheseadditionalroom-related however, rates, RevPAR increases room dueto higher costs). room amenity utilitiesand mental costs (includinghousekeeping services, aswell asadditionalincre- such asfoodandbeverage, revenues, hotel would leadto increases inrooms revenues andancillary increases inoccupancy ata For example, by average room rate. profitmental operating thandochanges driven predominately different implicationsonoverall revenue levels aswell asincre- comparable hotels. we what consider to beour discussionof for further Statistics” See “Comparable Hotel Operating our comparable hotels. and hotels individual between periods to evaluate theresults of We alsouseRevPAR core revenues formany hotels. indicator of considered itisgenerally theleading revenues, these ancillary RevPAR Although doesnotinclude bygenerated theproperty. orotherguestservices telephone, food andbeverage orparking, RevPAR doesnotincluderevenues from occupancy achieved. theaverage dailyroom charged rate andtheaverage daily of RevPAR isdefinedastheproduct to evaluatehotel operations. isacommonly thehotel usedmeasure industry within RevPAR, or Revenue available per room, ourbusiness. formance of We have several key indicators thatwe useto evaluate theper- Key Performance Indicators ourcost structure. componentbenefits themostsignificant of makingwagesand ourtotal expenses, approximately 50%of taken separately thesecosts represent however, ious lineitems, notingthatwageandbenefitcostsworth are spread amongvar- It isalso operations. presented inourconsolidated statement of ourhotel expenses asape operating components of in tandem with changes inrevenuesin tandemwith atourhotels. theseexpenses are relatively inflexible change anddonotnecessarily Many of insurance. equipment rent andproperty our managementagreements. Incentive are managementfeesgenerally paid contracts. repairs andminormaintenance costs. andutility salesandmarketing, aswell aslaborandothercosts administrativeassociated departments, with andotherguestservices, entertainment telephones, spas, courses, golf such asparking, which correlates foodandbeverage revenue. closelywith foodandbeverage expense, are themajordrivers of catered are generally more functions profitable thanoutletsales) customer staying atthehotel (i.e., of the type andamenitiesthatare provided. service aswell asthelevel of and wages, Thesecosts canincrease basedonincreases insalaries rooms expense. Occupancy isthemajordriver of desk costs. ae nteaqiiinaddsoiino hotel proper based ontheacquisition anddispositionof A related revenue measure forourhotels istheRevPAR RevPAR changes driven predominately by occupancy have The expense components listed above are basedonthose tablepresents Thefollowing the ourtotal costs operating andexpenses. Hotel expenses are operating approximately 98%of These costs include housekeeping, reservation systems, room supplies, laundry services andfront services laundry room supplies, systems, reservation These costs includehousekeeping, aemngmn esaecmue sapretg fgross revenue inourmanagement assetforth Base managementfeesare computed asapercentage of hs xesspiaiyicuefo,bvrg n ao ot.Occupancy and andlaborcosts. beverage includefood, These expenses primarily These expenses include labor and other costs associated with the other ancillary revenuesThese expenses includelaborandothercosts theotherancillary associated with hs xesscnitpiaiyo eladproa rprytxs ground rent, taxes, real andpersonalproperty of These expenses consist primarily This isanon-cashexpense thatisrelatively inflexible andchanges primarily cnaeo ourtotal costs operating andexpenses: rcentage of isadtelvlo post-acquisition capitalexpenditures. ties andthelevel of when operating profitswhen operating exceed threshold levels established in and earnings per unit. per and earnings profit operating performance measures such astotal revenues, orGAAP, America, acceptedgenerally intheUnited States of investors assupplementalmeasures to accounting principles thenon-GAAPmeasures shouldbeconsidered by Each of discussion. forfurther perDiluted Share” Measures—FFO See “Non-GAAP Financial company-wide profitability. of FFOperdiluted share asasupplementalmeasure other things, among We alsouse, discussion. for further Results” Operating Hotel See “Non-GAAP Financial Measures—Comparable ourcomparable hotels. the adjustedprofit operating foreach of adjusted profit operating thatwe discussisanaggregation of Thecomparable hotel profitability. property-level individual andisasupplementalmeasureresults of before debtservice Hotel profit adjusted operating measures property-level hotels. ourcomparable which isusedto theprofitability of evaluate and adjusted profit operating which isanon-GAAPmeasure, Another key profitability indicator we useishotel revenue. total profit which isoperating asapercentage of ing margin, and/ormanagers. other owners hotel’s competitive setmay from differmaterially thoseusedby fordetermining a andourmethodology however, subjective, Competitive setdeterminations are highly not economy hotels. orupper-upscale hotelsother luxury initscompetitive setbut include hotel might luxury a Additionally, convention center. set thatincludesotherhotels located incloseproximity to the hotel located nearaconvention center have might acompetitive a For example, provided attheproperty. service as thelevel of aswell Factors thatwe proximity, consider includegeographic this calculationisthedetermination of component Onecritical in itscompetitiveunderperforming set. index belowetration 100would beanindicator thatahotel is premium inrelation to itscomp exceeding 100would indicate thatahotel maintainsaRevPAR ARevPAR index penetration thesameasitscompetitors. age, onaver- 100would indicate thatahotel’s RevPAR is, index of aRevPAR penetration For example, property’s market share. We changes by assessprofitability inouroperat- measuring ttv e,whileaRevPAR pen- etitive set, a hotel’s competitive set. % OF2005OPERATING COSTS AND EXPENSES COSTS AND 30% 26% 17% 11% 9% 5% 53005_FinancialsX2 4/10/0615:35Page25 otnadLsAgls Theunioncontracts inSanFrancisco Boston andLos Angeles. Toronto, Chicago, Hawaii, includingNew York, expire in2006, exceedsthat significantly inflation. to increase in2006atarate total costs andexpenses in2005, our which were approximately 1%of we expect insurance costs, thisyear, dueto thelarge-scaledevastation hurricanes result of a as Additionally, ourrevenues. only approximately 3.6%of thesecosts although represent increase by over 10%in2006, We costs utility to expect toexpect continue inthenearterm. atrend thatwe also increased atarate greater thaninflation, which utilitiesandsalesmarketing, benefits, wages, primarily by costs, certain however, continue to beaffected, margins Operating atrend we expect to continue. inflation, rate increases exceeded atourhotels significantly therate of andRevPARmargin growth. which shouldpositively affect tion hotels asmarkets strengthen, demand to continue to improve atourlargeconven- operations We expect increasing ket positionandimproving performance. enhancingtheircompetitive mar- theintention of Orlando with initiated majorprojects atourconvention hotels in Atlanta and We haveBoston andto alsorecently alesserextent SanFrancisco. thesemarkets including improving market strength inseveral of but we of are to seesigns beginning continue to lagtheportfolio, Ourlargehotels situated inweaker markets Washington D.C. such asNew Yorkconvention and City hotels markets, incertain our we saw improvement significant of intheoperations 2005, In rooms. more substantiallevels given of agreater capacity demandinamarket toand theneedfortransient recover to is dueto thelongerbookinglead-timeforlargegroup business primarily This recovery. inperformance intheearlystagesof try alsolagtheindus- they however, downturn; anindustry stages of Convention hotels have histor which are markets. located inmajorurban of themajority hotels, includingourconvention ourlargehotels, by theresults of respectively. 1.9% in2006and2007, markets isexpected to increase by approximately 1.4%and U.S. andupper-upscale hotelluxury inthetop supplygrowth 25 Basedondataprovided Econometrics, by Lodging hotels. service hotels orexpanding existing full- building newfull-service approval anddevelopment lead-timesassociated with permit, relatively easierto forecast dueto thandemandgrowth thelong is supplygrowth alwaysAlthough to subject uncertainty, hotels to continue to below forthenext two to three years. for fullyear 2006. comparable hotel RevPAR to increase approximately 7%to 10% we expect thesetrends, As aresult of ourbusiness. ments of hotels seg- andthestrengthening inthegroup andtransient andupper-upscale newluxury low inthesupplyof growth growth, orGDP, strong United States Gross DomesticProduct, such as positive trends, anumber of isaresult This of pancy. by increases inoccu- to alesserextent, and, average room rates, hotels driven for2005were increases by primarily significant in Improvements inRevPAR atourcomparable compared to 2004. RevPAR forourcomparable hotels increased 9.5%as For 2005, Outlook nadto,several markets have that unioncontracts In addition, astheaverage room improved margins Operating in2005, affected isalsosignificantly ourportfolio The performance of andupper-upscale luxury We of thesupplygrowth expect ically outperformed intheearly ically outperformed ket share hasoccurred because: We believe thatthisdeclineinmar- ourhotels. business mixof ourmanagersto optimizewith themarket positioningand comparable aswe hotels continued declinedslightly to work RevPAR forour current hotel portfolio. Portfoliofor theStarwood isroughly comparable to the Theexpected RevPAR ourportfolio. room replacement cost of aswell asanincrease intheaverage per RevPAR andmargins, these assetsshouldcontribute to improvements inoverall Over time, potential growth thanthosewehigher have sold. we believe, and, margins higher acquired have RevPAR, higher Theassetswe have markets. andsecondary insuburban marily assetspri- individual andhave disposedof islimited, typically development large-scalelodging where further destinations, and upper-upscale andresort/convention inurban properties we have acquired luxury individual Over thepasttwo years, recycling assets. aswe of continueing margins ourstrategy improvementfurther margins. inouroperating which shouldresult in revenue, catering inparticular increase, we expect foodandbeverage revenue to continue to grow, As theeconomy continues to 0.9percentage points. increase of afoodandbeverage margin with hotelsrable was5.6%, foodandbeverage revenue atourcompa- growth 2005, During our2005revenues. which represented 30%of age operations, operations. our 2006results of have thesenegotiationswill effecton amaterial the outcome of we donotbelieve although predict theiroutcome atthistime, and/orhotel anditisdifficulttogroup bookings operations in disruptions these negotiationscould includetemporary Otherpotential affectsof tive pressure to pay market wages. competi- becauseof includingatnon-unionhotels, generally, in laborcosts are likely to increase laborcosts inthesemarkets Any increases and/or changes inwork thatincrease rules costs). benefits potential increases inlaborcosts (by increased wages, thesenegotiationscould be Oneoutcome of expired in2004. trends and low supply trends in the lodging industry discussed trends andlow industry supplytrends inthelodging we believe ourRevPAR improve. index will penetration businessstrengthens, groupcorporate transient andcorporate uig20,theaverage RevPAR index for our penetration 2005, During We alsoexpect to seeimprovements inRevPAR andoperat- are margins alsoaffectedOperating by ourfoodandbever- hl ebleetecmiaino improving demand While we believe thecombination of as inparticular, demandcontinuesAs lodging to grow and, ■ ■ ■ achieve andbusinessmix. optimalgroup bookings timeto which require of longerperiods 1,000 rooms, includingnineconvention greater hotels than with folio, largehotels inourport- we have number of asignificant 2004; of increase to significantly begin untilthesecond half andupper-upscale didnot segment business intheluxury ourcompetitors andthat sient customers thanmany of enues by generated tran- group andcorporate corporate theirrev- our hotelshave generally percentage ahigher of ourRevPAR premium. rowing of (through renovation orothermeans)resulting inanar- ranked hotels have improved theircompetitive position In several markets lower- RevPARingful premiums. two positionsintheircompetitive setandachieve mean- ourhotels occupy thenumber oneornumber many of 25 host hotels & resorts 2005 53005_FinancialsX2 4/10/0615:35Page26 26 host hotels & resorts 2005 Net income (loss) (3) (2) (1) Comparable hotel statistics operating Revenues STATISTICSPERCENTAGES) AND EXCEPT OPERATING (IN MILLIONS, overpriorities thenext several years includethefollowing: ourkey management Based onforecasted conditions, operating Management’s Priorities costs margins. operating anddecliningoperating higher may result inlower revenues“Forward-Looking Statements,” or inthesection setforth aswell astherisks theabove, Allof terns. anticipated intheeconomy growth andchanges intravel pat- slower than but notlimited to, including, reasons, number of hotel continue revenues will atourproperties forany orearnings there canbenoassurances thatany increases in 2006 and2007, here forimprovements creates theopportunity inourbusiness Operating costsOperating andexpenses: Income (loss)from continuing operations Interest expense profitOperating N/M=Not Meaningful Se 2004. December 31, is basedon103comparable hotels asof Comparable hotel statisticsfor2005and2004are operating basedon lesscorporate andotherexpenses andthegaino operations Amount represents costs operating andexpenses perourstatements of Gain oninsurance settlement Comparable average room rate Comparable hotel RevPAR Corporate andotherexpensesCorporate Total hotel sales Property-level expenses Comparable average occupancy ■ ■ ■ ■ ■ ■ ■ than five years. noless of anaverage schedule with maturity maturity senior notes indenture andseekto maintainabalanced 3.0xorgreater underour to-interest coverage of ratio to achieve anEBITDA- over time, to reduce ourleverage, and profile orto repay debt; acquire ourtarget with more properties closelyaligned non-core hotels to to usetheproceeds from thesaleof resort/conference locations; and includinghotels inurban to entry, barriers high with to andupper-upscale acquire hotels luxury inlocations condominium units; utilized space to alternate usessuch astimeshare or aproperty’s under- assets by converting of allorpart existing to explore to maximize the valueof opportunities efficientheatingandcooling systems; such asenergy ture, convention theinfrastruc- ormeetingspace orupgrading facility, fitness buildingaspa, rooms, ing thenumber of Potential investments atourhotels could includeincreas- our assetsandpursuerepositioning/ROI opportunities. to invest to maintain capitalinourexisting portfolio costs;minimize operating to ourmanagersto work increase with revenues and program; those hotels into ourassetmanagement of the integration Portfolio theStarwood and complete theacquisition of (1) (2) : $166.80 $122.82 3,770 $ 73.6% 0520 04T 0320 2003TO 2002 2003 2004TO 2003 2004 2005 3,304 e “Comparable Hotel Operating Statistics” for further details. for further e “Comparable Hotel Statistics” Operating 166 138 443 519 67 (9) 8cmaal oesa fDcme 1 05 Thepercent cha 2005. December 31, 98 comparable hotels asof 149 .%NA2.9% 7.3% N/A N/A 7.6% 9.5% $154.96 $112.21 ,6 .%$31111.4% 3,111 $ 8.7% 3,467 $ 24 . t.NA2.9pts N/A 1.2pts. 72.4% ,1 . ,7 8.2 2,876 6.1 3,113 statements of operations and operations statements of tablereflectsThe following line items certain from ouraudited RESULTS OFOPERATIONS next several years. over thesepriorities the of orany, to continue to execute onall, continue thatthesetrends beable will orthatwe will however, There canbenoassurances, thesepriorities. of in furtherance step Portfolio theStarwood important isavery acquisition of We alsobelieve thatthe capitalmarkets. ditions intheU.S. aswell asstrong con- noted above, trends inthehotel industry thepositive takingadvantage of in2005, management priorities and to preserve capital. therelatively environment weak operating our assessmentof tures onsuch development projects in2002and2003basedon we hadlimited ourexpendi- By contrast, the next several years. tional $300millionto $500milliononsuch investments over We expect to spendanaddi- repositioning andROI projects. we spentapproximately $107millionin2005on Similarly, improved ourinterest coverage andoverall ratio leverage ratio. which 10%redeemable preferred stock, and $100millionof debt $179millioninmortgage $469 millioninseniornotes, acquire andto properties repay orrefinance approximately to through assetdispositions, fundsraised alongwith funds, We usedthose Oseniornotes in2005. ourSeries issuance of $440 million. approximately 2006forgross proceeds thefirstquarter of of New York onorabouttheend to selltheSwissôtel TheDrake, We have adefinitive alsosigned agreement mately $259million. approxi- we have forgross proceeds soldfourproperties of Thus farin2006, approximately $92millionin2005. of price forasales which by properties, 120Courtyard owns Marriott ourinterest intheCBMJoint Venture LLC, 85%of sale of forapproximatelyproperties $149millionandcompleted the We soldfive non-core approximately $274millionin2005. for Regency Washington D.C. onCapitol Hill in Washington, 8 83 8 (1.0) 36.9 488 290 (8.3) 30.7 483 397 7)N/M (74) N/M — 7—6 11.7 60 — 67 3 N/M (3) ebleew ucsflyeeue nanme fthese We believe we successfully executed onanumber of approximately we raised from $639million the Additionally, we acquired theHyatt Consistent thesepriorities, with HNE%CHANGE % CHANGE (3) (3) (3) other significant operating statistics: operating other significant 27 70.0 (247) 4N/M 14 3 — (3) n insurance settlement. nge from 2003to 2004 (3) 53005_FinancialsX2 4/10/06 15:35 Page 27

2005 Compared to 2004 hotels, which experienced a decline in RevPAR in the fourth Hotel Sales Overview. Hotel sales increased $303 million, or quarter due to Hurricane Wilma. Our suburban hotels experi- 8.7%, to approximately $3.8 billion for 2005. Hotel sales enced a comparable hotel RevPAR increase of 9.9%, which include approximately $152 million and $59 million for 2005 reflected an average room rate increase of 7.7%. and 2004, respectively, of sales from hotels acquired in 2005 Comparable Hotel Sales by Geographic Region. For full and 2004. Sales for properties sold in 2005 or 2004 or classified year 2005, the majority of our geographic regions experienced as held-for-sale as of December 31, 2005 have been reclassified strong growth in comparable hotel RevPAR with the DC Metro, as discontinued operations on our condensed consolidated Mountain, Mid-Atlantic and Pacific regions all experiencing statements of operations. See “Discontinued Operations” below. double-digit growth rates. We discuss operating results for our full-service hotels on a Our DC Metro region had a comparable hotel RevPAR comparable basis. Comparable hotels are those properties that increase of 15.0%. The improvement was driven by consistent we have owned for the entirety of the reporting periods being strong performance at all of our hotels in the region, which compared. Comparable hotels do not include the results of benefited from solid group and business transient demand. properties acquired or sold, or that incurred significant prop- Overall, comparable hotel RevPAR increases for the region erty damage and business interruption or large scale capital reflected an average room rate increase of 11.5% and an average improvements during these periods. As of December 31, 2005, occupancy increase of 2.4 percentage points. 98 of our 107 full-service hotels have been classified as compa- Our Mountain region experienced a comparable hotel rable hotels. The following discussion is of the sales results RevPAR increase of 14.9%, led by a 16.2% RevPAR increase at of our comparable hotels considering the mix of business our three comparable hotels in the Denver market. We also (i.e. transient, group or contract), property type (i.e. urban, experienced an 11.2% RevPAR growth at our hotels located in suburban, resort/conference or airport) and geographic region. the Phoenix/Scottsdale area. See “Comparable Hotel Operating Statistics” for a complete Comparable hotel RevPAR for our Mid-Atlantic region description of our comparable hotels and further detail on increased 12.1%. The increase was driven by the performance at these classifications. Comparable hotel sales increased 7.7% our three New York City hotels with comparable hotel RevPAR to approximately $3.6 billion for 2005. The revenue growth growth of 17.0%, which was the strongest RevPAR growth in

reflects the increase in comparable RevPAR of 9.5%, as a result any of our major urban markets for the year. Strong group, 2005 of an increase in average room rates of 7.6% and an increase in transient and international demand has strengthened the per- occupancy of 1.2 percentage points. Food and beverage rev- formance in the New York City market. enues for our comparable hotels increased 5.6%, primarily due Our Pacific region had a comparable hotel RevPAR increase to an increase in catering and outlet revenues. of 10.2%, as we experienced strong RevPAR growth in the Los Comparable Hotel Sales by Customer Mix. Demand was Angeles, Hawaii and San Diego markets. strong in 2005, enabling our operators to significantly increase Comparable hotel RevPAR in our Florida region grew by host hotels & resorts average daily room rates, particularly in the premium and cor- 5.9% as a result of comparable hotel RevPAR increases at our 27 porate transient segments. For our comparable Marriott hotels, Tampa and Miami/Fort Lauderdale hotels of 6.2% and 11.0%, which represent 78% of our total comparable rooms, premium respectively. The region’s fourth quarter results were signifi- and corporate transient average daily rates increased 12.6% cantly affected by business interruption due to Hurricane when compared to last year. Our overall transient average room Wilma, which struck Southern Florida in October. rate for these hotels increased 10.2%. The gap between transient Our Atlanta region rebounded from a difficult third quarter and group rate widened in 2005 indicating pricing power is (RevPAR decline of 3.7%) to post a full year RevPAR increase strong. With increased levels of transient demand, we expect our of 5.8%, after a strong 13.4% fourth quarter RevPAR increase. managers to continue aggressive growth in room rates in 2006. The rebound for the region is attributable to strong transient Total group room revenue for our comparable Marriott business demand, which was supplemented by the relocation of hotels increased 6.2% compared to last year, primarily due to two city-wide events from New Orleans. an increase in average room rates of approximately 5.0%. Room Comparable hotel RevPAR for our New England region rates for groups should continue to improve in 2006, as a lower increased 3.4%. Our hotels in the Boston market, which had percentage of group business would have been booked for those underperformed during the first three quarters of 2005, had a periods in 2004 or earlier when room rates were significantly strong fourth quarter with RevPAR growth of 9.3%, which lower than those our managers were able to charge. Currently, resulted in an annual RevPAR growth of 5.0%. We expect oper- group booking pace has declined modestly for 2006, reflecting ating growth at these properties to improve in 2006 based on our managers’ strategy of keeping more rooms available for the expected increases in convention activity and an overall higher-rated transient segments. However, we are experiencing improvement in the Boston economy. meaningful growth in the average daily rate of our definitive The North Central region of our portfolio experienced an group business for 2006. increase in comparable hotel RevPAR of 6.8% as average room Comparable Hotel Sales by Property Type. For 2005, rev- rates increased 6.9%. The region was led by our Chicago hotels, enues increased significantly across all of our hotel property where RevPAR increased 7.9%. types, led by our airport hotels with a comparable hotel Overall, comparable hotel results in our South Central region, RevPAR increase of 10.1%, which reflected an average room which includes Texas and Louisiana, were not significantly rate increase of 8.2%. Our urban hotels performed well in 2005, affected by Hurricane Katrina. However, the operations of the with comparable hotel RevPAR growth of 9.9% to $140.63. The New Orleans Marriott, which is considered a non-comparable significant increase in comparable hotel RevPAR at our urban hotel, have been, and will continue to be, affected by the large- properties was primarily driven by an increase in average room scale devastation in New Orleans. RevPAR in the region grew by rate of 7.8%, while average occupancy improved by 1.4 percent- 9.3%, driven primarily by strong increases in occupancy and age points. Our resort/conference hotels had comparable hotel average room rate at our three properties in Houston, which RevPAR growth of 6.8% to $153.82, with average room rate benefited from business resulting from the evacuation of the growth of 7.1%. These hotels include many of our Florida Gulf Coast in the aftermath of Hurricane Katrina. 53005_FinancialsX2 4/10/0615:35Page28 28 host hotels & resorts 2005 restricted cashbalances. dueto increasesmarily inthe interest oncashand rates earned Syndrome (SARS). Severe Acute Respiratory hotels due to theoutbreak of businessatourToronto received inconnectionthelossof with proceeds businessinterruption thatwe represents $3millionof thegainoninsurance settlement In 2004, have beenresolved. ourclaims once allof proceeds damagein2006, forproperty insurance We to expect recognize asaresult additionalgains of Hurricane following Orleans Marriott Katrina in August 2005. lostprofit atourNew insurance proceeds received asaresult of businessinterruption tlement in2005relates to $9 million of building rent andsystem costs. auditfees, insurance, corporate such asemployee stock-based compensation expense, employee andbonuses andothercosts salaries consistmarily of pri- which totaled inboth2005and2004, $67million expenses, ceeds related damageclaim. to ourproperty we have received approximately $3millionininsurance pro- To date, thatallreleases andcontingenciesperiod are resolved. record we will againoninsurance settlementinthe off, written theamounts insurance settlementproceeds are inexcess of to theextent thatour Further, operations. the statement of there on isnoeffect accordingly, an insurance receivable and, theassetshas beencompletely offsetby theestablishmentof of Thewrite-off which repair includescertain andclean-upcosts. thedamagedassets, the approximate $38million bookvalueof we have off written As aresult, the damagedoneto theseassets. reimbursementprovides forthereplacement uswith cost for Ourinsurance policy Hurricane Katrina andHurricane Wilma. located inNew dueto sites inFlorida Orleansandvarious and benefitsinsurance. wages utilities, particularly increasing atarate above inflation, costs andcertain costs occupancy increasing increases, with variable ing costs to continue to increase in2006asaresult of We operat- expect tomanagement feesearned increase in2006. hotels reaching thesethresholds andtheincentive number of We the expect ourproperties. revenues of andprofitability inthe thegrowth 20.6%were adirect result of ment feesof theincrease while inmanage- increases inoilandgasprices, dueto primarily costs increased utility 15.8%, example, For differ. costs onspecific theeffect will though enues, inflationandrev- are affected by changes inoccupancy, able, which are bothfixed andvari- costsoperating andexpenses, Our which are includedindiscontinued operations. 2005, the costs forhotels we have soldandheldforsaleatDecember 31, costs Property-level operating andexpenses exclude for 2005. costs andexpenses increased 6.1%to approximately $3.3billion these properties in2004. these properties amajorrenovation projects atmostof and thecompletion of thestronger economy have continued to improve asaresult of attheleasedlimited-serv operations The $5millionimprovement inrental isfrom income primarily aswell asleaseincome hotel. from onefull-service leases, erty hotelsfrom andthree our71leasedlimited-service office prop- ePRo 10.4%. RevPAR of experienced anincrease incomparable hotel are inToronto, which three of OurfourCanadianproperties, increased 9.0%. Interest Income. Gain onInsurance Settlement. Corporate Expenses. andOther damageto sixproperties we property incurred 2005, During Property-level Operating Costs. Operating Property-level Rental Income. Comparable hotel RevPAR forourinternational properties Our rental income represents leaseincome neeticm nrae 1 ilo,pri- Interest income increased $10million, The gainoninsurance set- Corporate andother Corporate Property-level operating ice hotel which properties Joint VentureLLC. ourinterest inCBM 85%of lion taxexpense from thesaleof the provision forincome taxes reflects the$28mil- primarily 2005. since thesaleinMarch, hasrecorded netincome recorded net lossesthroughout 2004, which had thejointventure, Additionally, 50% to 3.6%. reduced percentage ourownership inthejointventure from interest inCBMJoint Venture LLC March during 2005which our 85%of affiliates decreased by $15milliondueto thesaleof by owned ships thatare third partially parties. ourconsolidated hotel partner- of certain as thenetincome of aswell Host LP, isdueto theincreaserily inthenetincome of interestThe increase expense inourminority for2005prima- interests inHost thepartnership LP. held approximately 95%of thecontracts. million declineinthefairvalueof dueto the$7 The$6millionlossin2004isprimarily 2005. wereThese agreements of quarter terminated inthefourth ourCanadianhotels. currency exchange ontwo contracts of theforeign is dueto the$2millionincrease inthefairvalueof The gainonforeign currency andderivative primarily contracts Joint VentureLLC. ourinterest inCBM 85%of $69milliononthesaleof gain of dueto thepre-tax primarily increased $63million, transactions increased interest rate debt. rates forourvariable These declinesininterest expense were offsetby partially issuediscounts debtprepayments. associated with and original financingcosts deferred call premiums andtheacceleration of includes $30millionfor2005and$552004the interest expense Specifically, debt repayments andrefinancings. prepayment associated penalties with decline intheamountof aswell asa 2004 and2005debtrepayments andrefinancings, thedecrease inourinterest-bearing obligationsfrom result of f29pretg ons and anincrease inaverage room rate 2.9percentage points, of astrong increase inoccupancy asaresult of 7.3%for2004, of inrevenuesgrowth reflects theincrease incomparable RevPAR The hotel salesincreased 6.4% to approximately $3.4billion. Comparable hotels wereservice classifiedascomparable hotels. our full- 103of 2004, December 31, As of comparable basis. below. Operations” See“Discontinued tions. which have been reclassified to discontinued opera- presented, 2005forallperiods December 31, classified asheldforsaleof in 2004andexclude we salesfortheproperties have soldor salesforthethree hotels acquired approximately $59millionof Hotel salesfor2004include mately $3.5billionfor2004. Hotel SalesOverview. 2004 Compared to 2003 these hotels. resp million for2005and2004, $19millionand$52 of tax, net of We recognized again, tively. respec- income before taxes was$9millionand$22million, wereproperties $61million revenues forthese For 2005and2004, 2005. December 31, two hotels classifiedasheldforsaleat of as theoperations aswell five hotels soldin2005andninehotels soldin2004, of andthegainorlossondisposition operations theresults of of Discontinued Operations. Discontinued for)incometaxes. from (provision Benefit Affiliates. (Losses) of inEarnings Equity InterestMinority Expense. Gain (Loss) Contracts. onForeign Currency andDerivative Transactions.Net GainsonProperty We hotels on a results discussoperating forourfull-service Interest Expense. Interest expense decreased $40millionasa Hotel salesincreased 11.4%to approxi- n 16mlin epciey and respectively, and $196million, Discontinued consist operations so eebr3,20,we 2005, December 31, As of ciey on thedispositionof ectively, Net gainsonproperty Equity inlossesof Equity The increase in 53005_FinancialsX2 4/10/0615:35Page29 hr ure n togdmn ntefut ure f2004. of quarter third andstrong quarter demandinthefourth ties benefited from the Republican National Convention inthe OurNew Yorkimproved 10.7%over year. theprior proper- City RevPAR intheLos atourproperties Angeles market. Pacific alsoreflect region a6.5%increase incomparable hotel Theresults forthe 14.5%. San Francisco market hotels of in 2004reflects anincrease incomparable hotel RevPAR atour Theimprovement inthePacific region San Francisco Bay area. in the particularly related to thearea’s companies, technology overperforming thepastthree years wasthedeclineintravel reason hadbeenunder- thisregion Theprimary in occupancy. increases significant with hotelparable RevPAR increased 8.0%, continued to improve ascom- 2002and2003, a wholeduring respectively. 10.9%and9.9%, RevPAR increased 9.7%, where Atlanta, Atlanta andTheRitz-Carlton, The Four Seasons, Atlanta, Theimprovement wasledby Hyatt, TheGrand 6.0%. ourhotels intheregion. renovations atfourof Growth wasslowed theyear during by rooms rates in2004. Metro to a5.2%increase inaverage dueprimarily region room by 25.6%fortheyear. where RevPAR improved from theSwissôtel inlate brand 2003, which wasconverted and wasledby theHyatt Regency Boston, Nationalthe Democratic Convention thethird during quarter benefited region The from improved 11.0%over year. theprior 2004 comparable hotel RevPAR inourNew region England Full year we experienced RevPAR gainsinmostregions. 2004, 2002and2003. depressed levels of business travel in2004compared thesignificantly with which reflected increase asignificant in hotels, for ourairport largestincreases The were respectively. properties, and airport resort/conference suburban, 7.0%and12.0%forurban, 6.4%, Comparable hotel RevPAR increased 6.8%, types. property ourhotel revenues increased consistently across allof 2004, resulted infewer rooms available business. fortransient which advance forgroups, room reservations numbers of managers improved overall occupancy by accepting greater our Additionally, travel andthesteady intheeconomy. growth Thisincrease reflects theincreased business or0.7%. slightly, whileouraverage group room rate wasup mately 7.5%, approxi- dueto anincrease primarily inoccupancy of year, andRitz-CarltonMarriott hotels wasup8.2% compared to last demand. ing transient improv- rooms soldatdiscounted asaresult rates of number of that ourhotel managershadgreater success inreducing the Thisindicates average room rate increased transient by 5.4%. our while upfrom 25.8%lastyear, demand, total transient of aspremium andcorporate occupancy increased to 29.3% year, andRitz-CarltonMarriott hotels wasup6.8% compared to last and premium business. from lower-rated discount businessto higher-rated corporate room nights, ashiftintransient isshowing ourportfolio mix of thebusiness 2004, trend we noted inthefirstthree of quarters enues andtheoverall increase inoccupancy. dueto anincrease rev- primarily incatering increased 5.7%, Food andbeverage revenues forourcomparable hotels 2.9%. of Comparable hotel RevPAR inourMid-Atlantic region as which hadlaggedbehindtheportfolio Our Pacific region, comparable hotel RevPAR grew by For our Atlanta region, Comparable hotel RevPAR increased 9.2%forourDC Comparable Hotel SalesbyGeographic Region. Comparable Type. Hotel SalesbyProperty total group room revenue forourcomparable For 2004, room total revenue transient forourcomparable For 2004, Comparable Hotel SalesbyCustomer Mix. For fullyear Continuing a During an.I 94 esl otoi fFairfield Inns by Marriott of we soldaportfolio In 1994, gains. deferred to therecognition are of dueprimarily transactions 2003 and2004. debtrepayments andrefinancings thatoccurred in amount of decreased approximately $60milliondueto thesignificant interest expense After excluding theseitems, respectively. debtprepaymentsassociated madein2004and2003, with issuediscounts financingcosts thatweredeferred andoriginal callpremiums andaccelerated million and$31of Interest expense includes$55 Convertible Preferred Securities. interest on classifiedasdividends which waspreviously Interest expense for2004includes$32millionof $5 million. opnainPlc omte fteBado Directors. theBoard of Compensation Policy Committee of that are subjectto establishedby performance the criteria shares thatwe may issue 2003 andanincrease inthenumber of appreciationsignificant inourstock since price December 31, the to anincrease instock compensation expense asaresult of due primarily theseexpenses increased $7million, 2004, During buildingrent andsystem costs. auditfees, corporate insurance, other costs such asemployee stock-based compensation expense, employee andbonuses and salaries consist of expenses primarily operating performance of our individual hotels. ourindividual performance of operating which are basedonthe earned incentive managementfees, costs Operating andexpenses alsoincludebaseand costs. andsalesmarketing utility benefit, an increase inwage, costs anincrease associated inoccupancy with atourhotels and increase costs inoperating andexpenses isdueto additional The expenses increased 5.1%to approximately $2.6billion. Comparable hotel included indiscontinued operations. which are costs forhotels we have soldandheld forsale, costs Property-level operating and expenses exclude the lion. costs andexpenses increased 8.2%to approximately $3.1bil- during 2004. during $6millionto $106million increase intotal rental income of reason forthe wastheprimary This better. substantially formed renovations thatunderwent theproperties in2003per- 2004, While several stillwere leasedproperties underrenovation in hotels andtheweak economic conditions intheirmarkets. renovationsunderwent to enablethemto compete newer with theseproperties of ties suffered portion becauseasignificant hotel proper- attheleasedlimited-service operations In 2003, aswell asleaseincome hotel. from onefull-service leases, erty hotelsfrom andthree our71leasedlimited-service office prop- fteCnda olrcmae oteUS dollar. theCanadiandollarcompared to theU.S. of thefavorable appreciation of in2003andtheeffect restrictions hasrecovered astheregion from theSARSrelated travel 24.5%, experienced increases inRevPAR which are inToronto, of of three OurfourCanadianproperties, increased 17.5%for2004. respectively. 2.2%and2.7%, comparable RevPAR increases of RevPAR andMountain inourNorth Central experienced regions while RevPAR region, declined0.9%inourSouthCentral non-recoverable losses. we recorded $3millionof 2004, During damageandbusinessinterruption. property levels of varying andtheNew intheregion experiencederties OrleansMarriott Our12prop- damageinFlorida. causedsignificant hurricanes four During August andSeptember, improved 7.1%over 2003. Net Gains on Property Transactions.Net GainsonProperty Interest Expense. Corporate Expenses. andOther Property-level Operating Costs. Operating Property-level Rental Income. Comparable hotel RevPAR forourinternational properties RevPAR wasrelatively inotherregions unchanged from 2003. comparable hotel RevPAR region intheFlorida For 2004, Our rental income represents leaseincome uig20,interest expense decreased 2004, During Corporate andother Corporate Property-level operating Net gainsonproperty 29 host hotels & resorts 2005 53005_FinancialsX2 4/10/06 15:35 Page 30

and received a note receivable in partial payment. Subsequently, ■ Embassy Suites Chicago Downtown-Lakefront Hotel we recorded a loss on the note due to a decline in the opera- (acquired in April 2004); tions of the hotels. During 2004, the owner of the hotels filed ■ Fairmont Kea Lani Maui (acquired in July 2004); for bankruptcy and several properties were sold. We recognized ■ Newport Beach Marriott Hotel (major renovation started a previously deferred gain of approximately $12 million based in July 2004); on the amount of the proceeds we received. Loss on Foreign Currency and Derivative Contracts. ■ Mountain Shadows Resort (hotel sold pending comple- During 2004, the loss on foreign currency and derivative con- tion of significant contingencies, which have not been tracts is primarily due to the approximate $7 million loss from resolved as of March 1, 2006); the foreign currency exchange contracts related to mortgage ■ Scottsdale Marriott at McDowell Mountains (acquired in debt that was secured by three of our Canadian hotels for the September 2004); majority of 2004, as the value of the U.S. dollar continued to ■ Atlanta Marriott Marquis (major renovation started decline in relation to the Canadian dollar. These contracts were August 2005); deemed ineffective for hedge accounting purposes in 2003, ■ which resulted in an $18 million loss at that time. New Orleans Marriott (property damage and business Minority Interest Expense. Minority interest expense interruption from Hurricane Katrina in August 2005); consists of our minority partners’ share of the income or loss and in consolidated hotel partnerships and the approximate 6% ■ Hyatt Regency Washington on Capitol Hill, Washington, ownership in Host LP. D.C. (acquired in September 2005). Equity in Losses of Affiliates. Equity in losses of affiliates Additionally, the operating results of the fourteen hotels we consists of our portion of the earnings (losses) of two partner- disposed of in 2005 and 2004 also are not included in compara- ships in which we own non-controlling interests. The decrease ble hotel results for the periods presented herein. Moreover, in the loss can be attributed to a decrease in the net loss of because these statistics and operating results are for our full- CBM Joint Venture LLC in 2004 and an increase in the income service hotel properties, they exclude results for our non-hotel from our investment in Tiburon Golf Ventures, L.P. properties and leased limited-service hotels.

2005 Discontinued Operations. Discontinued operations consist We evaluate the operating performance of our comparable of the results of operations and the gain or loss on disposition hotels based on both geographic region and property type. These of five hotels sold in 2005, nine hotels sold in 2004, eight hotels divisions are generally consistent with industry data provided by sold in 2003, and the gain on the disposition and business hospitality research firms such as Smith Travel Research. interruption proceeds for the New York Marriott World Trade Geographic regions consist of the following (only states in Center hotel in 2003, as well as the operations of two hotels which we own hotels are listed): host hotels & resorts classified as held for sale at December 31, 2005. For 2004 and ■ Pacific—California, Hawaii, Oregon and Washington; 30 2003, revenues for these properties were $196 million and $500 million, respectively, and income before taxes for the same ■ Mountain—Arizona and Colorado; periods was $22 million and $200 million, respectively. We rec- ■ North Central—Illinois, Indiana, Michigan, Minnesota, ognized a gain, net of tax, of $52 million and $65 million for Missouri and Ohio; 2004 and 2003, respectively, on the disposition of these hotels. ■ South Central—Louisiana, Tennessee and Texas; Comparable Hotel Operating Statistics ■ New England—Connecticut, Massachusetts and New Hampshire; We present certain operating statistics (i.e., RevPAR, average daily rate and average occupancy) and operating results (rev- ■ Mid-Atlantic—Pennsylvania, New Jersey and New York; enues, expenses and adjusted operating profit) for the periods ■ DC Metro—Maryland, Virginia and Washington, D.C.; included in this report on a comparable hotel basis. We define ■ Atlanta—Georgia and North Carolina; our comparable hotels as full-service properties (i) that are ■ owned or leased by us and the operations of which are included Florida—Florida; and in our consolidated results, whether as continuing operations ■ International—Canada and Mexico. or discontinued operations, for the entirety of the reporting Property types consist of the following: periods being compared, and (ii) that have not sustained sub- ■ Urban—Hotels located in central business districts of stantial property damage or business interruption, or under- major cities. This includes most of our large convention gone large-scale capital projects during the reporting periods center properties, suburban markets or edge cities located being compared. Of the 107 full-service hotels that we owned outside the urban core in larger metropolitan areas; on December 31, 2005, 98 have been classified as comparable hotels. The operating results of the following nine hotels that ■ Suburban—Hotels located in office parks or smaller sec- we owned as of December 31, 2005 are excluded from compa- ondary markets; rable hotel results for these periods: ■ Resort/conference—Hotels located in resort/conference ■ Memphis Marriott (construction of a 200-room expan- destinations such as Florida, Hawaii and Southern sion started in 2003 and completed in 2004); California; and ■ Airport—Hotels located at or near airports. 53005_FinancialsX2 4/10/0615:35Page31 hotels soldin2004: forfive operations hotels soldin2005andnine the results of including 2005and2004, ties fortheyear endedDecember 31, million from December 31, 2004. The decrease primarily is Thedecrease primarily 2004. million from December 31, $163 which wasadecrease of cashandequivalents, lion of includingacquisitions. capitalto finance future growth, of We from Hostvided LP. onexternal sources dependprimarily Funds usedto make are thesedividends pro- taxable income. our required to to ourstockholders distribute atleast90%of we are As aREIT, todebt payments anddividends stockholders. capitalexpenditures, We foracquisitions, usecashprimarily Cash Requirements LIQUIDITY AND CAPITAL RESOURCES RevPAR Average Occupancy Rate Room Average Resort/ Airport Suburban Urban Comparable Type byProperty International Mountain New England South Central Atlanta DC Metro North Central Mid-Atlantic Florida Pacific Comparable byRegion 2005and2004: December 31, asof type All Types Conference Regions All Cash Balances. The following statisticsareThe following for The following table sets forth performance information forourco performance information tablesetsforth The following SO EEBR3,20 EREDDDCME 1 05YA NE EEBR3,2004 YEARENDEDDECEMBER31, 2005 YEARENDEDDECEMBER31, 2005 AS OFDECEMBER31, 2004 YEARENDEDDECEMBER31, 2005 YEARENDEDDECEMBER31, 2005 AS OFDECEMBER31, RPRISROSRT ECNAE EPRRT ECNAE EPRREVPAR REVPAR PERCENTAGES RATE REVPAR PERCENTAGES RATE ROOMS PROPERTIES RPRISROSRT ECNAE EPRRT ECNAE EPRREVPAR REVPAR PERCENTAGES RATE REVPAR PERCENTAGES RATE ROOMS PROPERTIES O FN.O AL CUAC AL CUAC CHANGEIN OCCUPANCY DAILY OCCUPANCY DAILY OF NO. OF NO. CHANGEIN OCCUPANCY DAILY OCCUPANCY DAILY OF NO. OF NO. 6738124 5992.89 90.93 75.9 $140.63 67.9 122.41 76.7% 133.96 $183.26 7,328 12,195 22,874 16 33 39 109.83 140.27 89.78 166.06 69.0 124.51 77.2 67.8 159.13 79.2 181.76 $130.22 71.6 132.47 3,968 209.71 75.9% 4,661 173.99 4,923 $171.51 6,720 11 7,027 11 13 11,035 10 11 20 84,8 6.07. 122.82 153.82 73.6 70.9 166.80 216.80 48,785 6,388 98 10 122.82 73.6 166.80 48,785 98 so eebr3,20,we had$184mil- 2005, December 31, As of ,5 3.87. 96.83 70.72 113.35 102.94 72.2 62.6 72.9 134.18 76.3 112.93 155.57 1,953 134.96 1,940 3,032 3,526 5 5 6 6 EEBR3,DECEMBER31, DECEMBER 31, $121.66 $167.64 052004 2005 72.6% all of our full-service proper- our full-service all of YEAR ENDED VRG VRG VRG VRG PERCENT AVERAGE AVERAGE AVERAGE AVERAGE PERCENT AVERAGE AVERAGE AVERAGE AVERAGE $109.51 $152.03 72.0% ilo.Hwvr 8 ilo fthisdebtcanbeextended for $88millionof However, million. $55 of amortization inadditionto principal mature in2006, onourliquidity.effect remaining restricted cashbalances donothave asignificant The conditions. meeting certain released to usasaresult of approximately $71millionwere covenant requirements of escrowed fundsheldinaccordance restrictive with debt 2005, OnOctober 31, cash collateral andexcess cashflow deposits). aswell as insurance, real estate taxes, reserves fordebtservice, 2004(including $45millionfrom December 31, a decrease of which was lenderrequirements, that wasrestricted asaresult of theeconomy. of growth provided bycapacity andthecontinuing ourcredit facility that we have and maintained basedontheflexibility historically cash balances closerto the$100millionto $150millionlevel we have now reduced our As aresult, ceeds from hotel sales. offset by anincrease incash provided by andpro- operations Thesecashoutlays were partially stock payments. anddividend ourpreferred theredemption of expenditures theyear, during capital significant available cash, approximately of $274million forapurchase of price D.C. on Capitol Hill in Washington, theHyatt Regency Washington to theacquisitionattributable of mparable full-service hotels by geographic region andproperty hotelsregion by geographic full-service mparable ehv prxmtl 13mlino debtthatwill We have approximately $173millionof cash we alsohad$109millionof 2005, December 31, As of 100 53 179 9.9% $127.95 75.3% $170.00 10.2% $118.19 73.7% $160.37 1.27. 43 10.1 9.9 84.37 82.71 74.6 66.5 113.12 124.44 9.0 14.9 3.4 88.87 9.3 61.54 5.8 109.64 94.19 15.0 6.8 72.3 103.82 57.7 12.1 121.96 72.9 5.9 84.06 122.86 74.9 106.70 148.19 68.4 150.48 117.60 74.8 125.73 67.8 151.79 78.3 163.01 71.4 123.93 189.17 164.70 5.67. 1.19.5 6.8 112.21 143.97 72.4 71.1 154.96 202.44 9.5 112.21 72.4 154.96 31 host hotels & resorts 2005 53005_FinancialsX2 4/10/0615:35Page32 32 host hotels & resorts 2005 reduced ourdebtbalances by approximately $385millionearly which further the Convertible Subordinated Debentures, tion indebtdoesnotreflect theconversion orredemption of Thisreduc- principal. of redemptions andamortization ments, repay- approximately $153millionasaresult of in total debtof we hadanetreduction 2005, For theyear endedDecember 31, est payments andleverage remains akey managementpriority. suitable return oninvestment. continue to beableto findacquisition targetsthatprovide a We canprovide noassurance thatwe will ties hasincreased. proper- acquiring thecost of asaresult, and, industry lodging boththecapitalmarkets andthe due to theimprovement of potential acquirers hotel hasincreased forindividual properties thenumber of Additionally, needed. if acquisition financing, to obtainadditional ourability orof acquisition opportunities We asto cannotbecertain thesize ortiming of the future. andwe to expect continueacquisition transactions to dosoin analyzingandnegotiatingpossible identifying, process of beinthe from timeto time, We may, indebtedness. tion of ouravailable cashandtheincurrence orassump- credit facility, advances underour OPunitsby Host LP, issuance of Host, of includingproceeds fromofferings equity methods, bination of befinancedanticipate thatouracquisitions through acom- will We otherREITs orsimilarreal estate entities. ties orassetsof thesecuri- of all orsubstantially all ventures andacquisitions of joint assets, single involvingincluding transactions portfolios, large scaledevelopment islimited. further andresort/convention inurban erties destinationswhere andupper-upscale prop- luxury ourtargetprofiletent of with and over thenext several years to acquire assetsthatare consis- believe continue there inthenearterm will to beopportunities We andabroad. both domestically acquisitions, portfolio we remain interested assetand inpursuingsingle Portfolio, approximately $30million. for acombined total of which leased, we previously HotelMarriott atLenox in Atlanta, ourhotels andthelandunderJW ing adjacent to oneof we alsopurchased aretail build- 2004, During indebt. million $34 includingtheassumptionof approximately $502million, we acquired three foranaggregate properties purchase of price In 2004, SuitesMarriott O’Hare forapproximately $5million. also purchased theChicago theground leaseassociated with we 2005, During approximately $274million. purchase of price fora Regency Washington D.C. onCapitol Hill in Washington, 2006. repaid of inthefirstquarter Theremaining balance was discussed above andavailable cash. therestricted cash therelease of with quarter thefourth during which $80millionwasrepaid of corporate purposes, general andfor onourCanadianproperties the remaining mortgage ouravailable to underourcredit retire facility capacity lion of decline inthecashflow from ourbusiness. ournear-termto aswell dealwith asany maturities potential credit oravailability underourlineof we have sufficientcash, We believe conditions certain are met. three one-year terms if Debt RepaymentsDebt andRefinancings. We may acquire structures, through various properties theStarwood In additionto acquisition thepending of Acquisitions. we borrowed approximately $100mil- 2005, On October 14, n20,we acquired the834-room Hyatt In 2005, Reducing future inter- n h aeo 5 fourinterest intheCBMJoint Venture 85%of and thesaleof approximately $122million non-core hotels fornetproceeds of five Activity for2005includedthesaleof compared to 2004. for2005declinedbyactivities $76 ing profit in2005. to the increase inoperat- $364 millionfor2004dueprimarily tions for2005increased $148millionto $512million from holders. to equity expenses anddistributions corporate andother costs, operating capital expenditures, assetacquisitions, cashare debtservice, usesof Our principal capitalmarkets. obtain additionalfinancingthrough various to andourability borrowing under ourcredit facility assets, of thesale cashare cashfrom operations, sourcesOur principal of Cash Sources andUses of lion to $500milliononsuch investments. we expect to spendapproximately $300mil- next several years, over the ects have strong generated historically returns and, Theseproj- Orlando fortheMarriott hall World Center Hotel. anexhibit approximately $70millionforthedevelopment of We alsorecently beganwork onaplannedinvestment of anewrestaurant concept andupdated meetingspace. rooms, guest redesigned suites, aspaand20newluxury addition of which includesthe approximately $60million, 2005 atacost of Beach Hotel Marriott theNewport inDecember tioning of We completed therenovation andreposi- tioning/ROI projects. revenues) property andby ouravailable cash. mately 5%of approxi- fundedwith ourhotels (typically of lished atcertain fixture andequipment fundsestab- funded by thefurniture, Our renewal andreplacement capitalexpenditures are generally ment capitalexpenditures were approximately $242million. issue discounts debtprepayments. associated with financingcosts deferred andoriginal and theacceleration of lion for2005and$55million2004thecallpremiums interest expense includes$30mil- Specifically, financing costs. previously-deferred call premiums andtheacceleration of any applicable thepayment of asaresult of as definedbelow, diluted date andFFOper share, would earnings affect maturity Any refinancing orretirement before the and otherfactors. restrictions contractual requirements, ourliquidity conditions, dependonprevailing market will any, if debt, Repurchases of pursuantto such theirterms. securities redemption of through theearly insomecases, atender offeror, tions, privately negotiated transac- through openmarket purchases, We may purchase seniornotes forcash market conditions. favorable debtfrom timetomortgage timeto take advantage of 6.4years. a weighted-average of maturity 2005andwe have December 31, points since 2003to 7.2%asof lowered ouraverage interest by rate approximately 50basis 2005and2004 during thetransactions The combined of effect ourdebtin2004. ourdebtin2005and$830millionof lion of we refinanced approximately $609mil- Additionally, in 2006. Cash Used inInvesting Activities. byOperations. Cash Provided we spentapproximately $107milliononreposi- For 2005, Capital Expenditures. We may continue to redeem orrefinance seniornotes and o 05 ourrenewal andreplace- For 2005, Our cashprovided by opera- million to $429millionwhen Cash usedininvesting 53005_FinancialsX2 4/10/0615:35Page33 aur 04Sl fteMxc iyArotMrit 30 45 50 59 Detroit Romulus Marriott, the Atlanta Northwest Marriott, Saleof theDallas/Fort Worth theMexico Marriott Airport Marriott City Airport Saleof Saleof 2004 January 2004 January the Salt Lake Marriott City Saleof May 2004 theBethesdaMarriott Saleof December 2004 December 2004 coe 05Sl fCalteMrit xctv ak21 146 92 27 28 $ (2) (1) (89) Tampa Westshore atFarmington, Hartford Marriott and Marriott Albuquerque Marriott Saleof Torrance Marriott Saleof ourinterest inCBMJoint Venture LLC 85%of Saleof 2005 January Charlotte Executive Marriott Park Saleof 2005 January Fort Lauderdale Marina Marriott Saleof March 2005 Albany Marriott Saleof October 2005 Suites ChicagoMarriott Deerfield 2006 January Saleof atResearch Marriott Triangle Park 2006 January Saleof 2006 February 2006 February Chicago the455-room EmbassySuites Lakefront, $(274) Purchase of DISPOSITIONS May 2004 the270-room Scottsdale atMcDowell Marriott Mountains Purchase of DESCRIPTIONOFTRANSACTION the834-room Hyatt Regency Washington D.C. onCapitol Hill in Washington, Purchase of September 2004 September 2005 ACQUISITIONS DATE TRANSACTION We have alsocommitted to sellthe $113million. proceeds of for$146millionandthreeMarina Marriott non-core hotels for approximately $251million. expenditures of atourproperties andcapital ninenon-core hotels, $246 millionfrom thesaleof approximately thenetproceeds of approximately $503million, hotel andotherassetsfortotal properties cashexpenditures of for approximately $274million. Hyatt Regency Washington D.C. onCapitol Hill in Washington, the Investing in2005alsoincludetheacquisition activities of ourexisting portfolio. to maximize thevalueof our strategy expenditures of by to in2005aspart $98million $349million we increased ourcapital Additionally, LLC for$92million. uy20 ucaeo h 5-ut arotKaLn (355) the450-suite Fairmont Kea Lani Purchase of July 2004 the improvements thatresulted inoperations inanincrease in $83 millionto $102millionwhencompared to 2004dueto itsmaturity. to retirefor theright thisdebtinadvance of pay premiums totaling approximately inexchange $27million we were required to debtin2005, mortgage and prepayment of seniornotes In theredemptions connection of with mation. Seethetablebelow foradditional infor- preferred stock. lion of $100mil- approximately $631millionandtheredemption of debtprepayments of consisted primarily of financing activities whilecash usedin financingcosts, netof mately $639million, forapproxi- debtsecurities includedtheissuance of activities cashprovided by financing 2005, During respectively. 2004, was$246millionand$276for2005 net, activities, Sale price included the assumption by the buyer of $20 million of mortgage debt. mortgage $20millionof includedtheassumptionbySale price thebuyer of debt. mortgage $34millionof Investment includestheassumptionof price ntefrtqatro 06 we soldtheFort Lauderdale 2006, In of thefirstquarter three includedtheacquisition of Activity for2004primarily uig20,ourcommon payments increased dividend 2005, During Cash Used Activities. inFinancing eri otfedMrit,AlnaMrit ocosadteFletnMrit 70 Total dispositions Atlanta Norcross Marriott andtheFullerton Marriott Detroit SouthfieldMarriott, Total acquisitions Cash usedinfinancing 2004 (inmillions): fiscalyear ties thathave beencompleted since of thebeginning purposes. corporate general acquisitions fund orrepositioning/ROI projects orfor debt, repay Portfolio, theStarwood used to fundthepurchase of Thenetproceeds from any be dispositionswill to $300million. beapproximatelytional dispositionsfor2006will $200million We believe thataddi- beprovided assubstitutioncollateral. will removed from thecollateral andtheHyatt Regency Washington be The Drake will thesale, of aspart lion CMBSloanand, thecollateral our$548mil- securing of Drake iscurrently part The approximately $440million. forgross proceedsquarter of thefirst New York onorabouttheendof Swissôtel TheDrake, million with the proceeds from the issuance of 4 million shares 4million theproceeds with million from theissuance of HMC’s 10%Class A preferred stock forapproximately $104 we redeemed all4.16millionshares of 2004, On August 3, rity. itsmatu- exchange to retire fortheright thisdebtinadvance of to pay premiums totaling approximately in $40million we were required seniornotes in2004, theredemptions of with In connection See thetablebelow foradditionalinformation. approximately $1.2billion. debtprepayments of consisted of primarily whilecashusedinfinancingactivities debt securities, and equity by through theissuance financingactivities of vided Class Bpreferred stock inMay 2005. our10% $100millionof million dueto theredemption of stock declinedby $7millionwhencompared to 2004to $30 onourpreferred dividends At thesametime, taxable income. The following table summarizes significant investing significant tablesummarizes The following activi- uig20,apoiaey$. ilo fcashwaspro- approximately $1.2billionof 2004, During (1) (2) (INVESTMENT) SALE (INVESTMENT) PRICE 754 $ $(776) (58) 66 62 58 33 host hotels & resorts 2005 53005_FinancialsX2 4/10/0615:35Page34 34 host hotels & resorts 2005 aur 0583%mrgg nteHrfr arota amntnasmdb ue (20) loan the5.19%Canadianmortgage Partial prepayment of ontheHartford atFarmington Marriott assumedby 8.35%mortgage buyer December 2004 2005 January ue20 rcesfo h suneo 5mlincmo tc 301 $(101) (104) approximately 7.2%anda weighted average interest of rate a ourtotal debtwas$5.4billionwith 2005, December 31, As of General FINANCIAL CONDITION common 25million stock Proceeds from theissuance of (1) 8 10%Class A preferred stock 10%Class Bpreferred approximately stock shares 4million of 4.16millionshares of Proceeds from 4millionshares theissuance of of June 2004 Redemption of Redemption of May/June 2004 August 2004 May 2005 EQUITY Principal amortization 2005/2004 116 $ loan the6.7%Canadianmortgage Prepayment of Draw ontheCredit Facility October 2005 theCreditOctober 2005 Facility theCredit Facility Repayment of Repayment of November 2005 loan 5.195%Canadianmortgage Proceeds from theissuance of DESCRIPTIONOFTRANSACTION 2006 January 2006 January DEBT DATE TRANSACTION the8 of a 05Peamn fte9 otaedb ntoRt-alo oes(140) 34 7 Partial redemption of September 2004 ontheScottsdale Assumed atMcDowell Marriott 6.08%mortgage Mountains hotel September 2004 theremaining 8 Discharge of debtontwo Ritz-Carlton the9%mortgage hotels Prepayment of April 2005 May 2005 pi 05Prilrdmto f7 Partial redemption of April 2005 aur 04Rdmto ftermiig84%Sre eirnts(218) (44) (27) (11) 345 484 ontwo Ritz-Carlton the9%mortgage hotels Partial prepayment of theremaining Cseniornotes 8.45%Series Redemption of 2004 January ontheHanover the8.58%mortgage Marriott Prepayment of 2004 January ontheMexico the 12.68%mortgage Marriott Airport Payment of 3.25%Exchangeable SeniorDebentures due2024 Proceeds from theissuance of 2004 January 7 Partial redemption of 7 2004 January Partial redemption of March 2004 Lseniornotes 7%Series April 2004 Proceeds from theissuance of May 2004 August 2004 6 Proceeds from theissuance of 8 Partial redemption of March 2005 March 2005 since 2004(inmillions): these are January non-cashtransactions) ourCo (notincludingtheconversions transactions ing costs) andequity of The Canadian mortgage hadafloatinginterestThe Canadianmortgage rate basedon 7 ⁄ 8 % Class E preferred shares and available cash. The table below summarizes other significant debt (net of deferred financ- deferred debt(netof Thetablebelow othersignificant summarizes % ClassEpreferred shares andavailable cash. Net transactions equity Net debttransactions 7 7 7 3 7 ⁄ ⁄ ⁄ ⁄ ⁄ 8 8 8 8 8 eisBsno oe (494) (65) (336) (280) (169) Bseniornotes % Series Bseniornotes % Series Bseniornotes % Series Eseniornotes % Series Bseniornotes % Series 3 ⁄ 8 eisEsno oe (20) Eseniornotes % Series 3 ⁄ 8 eisNsno oe 639 Nseniornotes % Series IO ls25bsspit.Theinterest reflect rates shown thera plus275basispoints. LIBOR (1) aey8%o u ethsafxdrt finterest. ourdebthasafixed of rate mately 85%of approxi- Additionally, 6.4years. of weighted average maturity (1) vril uodntdDbnue n20 n 06 as nvertible Subordinated Debentures in2005and2006, 7 ⁄ 8 ls rfre tc 98 % ClassEpreferred stock ea ftedt fthetransactions. thedate of te asof TRANSACTION AMOUNT 194 $ $(378) (119) 100 (80) (20) (34) (19) 53005_FinancialsX2 4/10/0615:35Page35 eisOsno oe,wt aeo 6 of arate with Oseniornotes, Series eisMsno oe,wt aeo 7%due August 2012 of arate with Mseniornotes, Series otaedb nnrcus)scrdb 31blino real estate assets, Mortgage debt(non-recourse) secured by $3.1billionof Credit facility eisKsno oe,wt aeo 7 of arate with Kseniornotes, Series 9 of arate with Iseniornotes, Series eisEsno oe,wt aeo 8 of arate with Eseniornotes, Series ovril uodntdDbnue,wt aeo 6 arate of with Convertible Subordinated Debentures, eisGsno oe,wt aeo 9 of arate with Gseniornotes, Series xhnebeSno eetrs ihart f3.25%due April 2024 of arate with Exchangeable SeniorDebentures, syteeadohrcniin ntesno oe netr,we isfy theseandother conditions intheseniornotes indenture, interest coverage andsat- long aswe maintaintherequired level of So adjusted total assets. lessthan45%of secured indebtedness of adjusted total assets(usingundepreciated real estate values)and lessthan65%of Convertible Subordinated Debentures) of includemaintainingtotaldividends indebtedness (excluding our Other covenants to incurindebtedness limitingourability andpay theperiod. of occurred they atthebeginning as if and financings, dispositions such asacquisitions, effectto thetransactions, giving based onourpro fiscalquarters results forma forthefourprior operat solidated statement of financing charges thatare includedininterest expense onourcon- callpremiums anddeferred Convertible Subordinated Debentures, excludes from interest expense items such asinterest onour culated inaccordance ourseniornotes indenture with and iscal- ratio This atleast2.0xby partnership. theoperating of ratio anEBITDA-to-interest coverage including theachievement of conditions, various subject to andthesatisfactionof restrictions to incurindebtedness ourability andpay is dividends indenture, respective annual rates indicated onthetableabove. our outstandingseniornotes semi-annually inarrears atthe We pay interest toare thecredit of oneach parties facility. series lenders that with agreements andotherhedging swap agreements andinterest rate otherseniordebt, certain as ourcredit facility, aswell the notes outstandingunderourseniornotes indenture, benefit Theguarantees andpledgesratably oursubsidiaries. of interests equity inmany and currently are secured by pledgesof ourexisting subsidiaries indenture are guaranteed by of certain notes The outstanding underourseniornotes partnership. ness andseniorto allsubordinat partnership’s theoperating unsubordinated indebted- allof with payment of ourseniornotes are equalinright notes indenture, oursenior Under theterms of as theseniornotes indenture. which we refer to collectively issues by partnership, theoperating theindentures governing seniornotes ourvarious provisions of General. Senior Notes (4) (3) (2) (1) Other through May maturing 2012 9.7%, anaverage with of rate Senior notes, 7 of arate with Bseniornotes, Series Debentures beeliminated inconjunction thesecond notheld by will 2006redemption. third with quarter parties n 2mlino outstandingConvertible Preferred dur Securities We intend to commoning $2millionof shares. thisdebthadbeenconverted into approximately 24.0millionof $368millionof 2006, 10, February As of 2005. Thehotel wassoldonJanuary6, 2004. December 31, thatwasreclassified asliabilitiesassociate debtrelated mortgage to theHartfordFarmington, Marriott Excludes $20millionof $1mil aninterest of swapagreement rate Includes thefairvalueof $(6)millio interest of swapagreements rate Includes thefairvalueof and 2004, respectively, maturing through February 2023 through February maturing respectively, and 2004, 2005 7.8%and7.7%atDecember 31, anaveragewith interest of rate Restrictive Covenants. Restrictive so eebr3,20 n 04 u etwscmrsdo (inmillions): ourdebtwas comprised of 2005and2004, December 31, As of Total seniornotes Total debt h olwn umr sadsrpino thematerial of isadescription summary The following ne h em ftheseniornotes Under theterms of os diinly thecalculationis Additionally, ions. dolgtoso theoperating ed obligationsof 1 3 7 1 ⁄ 1 3 2 ⁄ ⁄ ⁄ ⁄ 8 8 ⁄ 8 % due January 2007 % dueJanuary 4 8 % due February 2006 % dueFebruary % due August 2008 % dueNovember 2013 % dueOctober 2007 % dueMarch 2015 3 ⁄ 4 % dueDecember 2026 (3) (2) (1) n h eodqatro 06 diinly h 1 ilo fC the$17millionof Additionally, 2006. ing thesecond of quarter inad$8mlina fDcme 1 05ad20,respectiv 2005and2004, December 31, lion and$18millionasof n 1mlina fDcme 1 05ad20,respective 2005and2004, December 31, n and$1millionasof h omnsokisal pnecag fthedebentures. the common stock issuableupon exchange of statement thatcurrently iseffective respect to with theresale of registration We have ashelf asdefined. fied institutionalbuyers, the Securities Act andmay notbe offered orsoldexcept to quali- thedebentures have notbeenregistered under upon exchange of Exchangeable SeniorDebentures andthecommon stock issuable The days. 30trading foratleast20of exchange pershare, price the thecommon stock ismore than120%of of ing saleprice includingatany timeatwhich the clos- conditions, under certain exchange theirExchangeable to SeniorDebentures maturity prior Holders may common dividends. including thepayment of exchange rate may beadjusted circumstances, undercertain The common stock. $17.82pershare of exchange of price which isequivalent to an approximately 28millionshares, total of or a thedebentures, amountof principal shares foreach $1,000of 56.1319 common stock of atarate exchangeable into shares of TheExchangeable SeniorDebentures currently are the issueprice. 2019at 2014and April 15, April 15, 2010, Debentures on April 15, to requireright usto repurchase theExchangeable Senior Holders have the intheindenture. redemption assetforth price 2009upon30days notice attheapplicable subsequent to April 19, the Exchangeable SeniorDebentures atany time of, orpart all, We canredeem forcash each year. July 15andOctober 15of 15, April Interest ispayable 15, inarrears onJanuary quarterly debt. ourunsubordinated allof payment with of and are equalinright 2024 The Exchangeable SeniorDebentures mature on April 15, seniornotes thatare exchangeable into common stock. of series andare theonly were issuedunderourseniornotes indenture, Thesedebentures issuediscount. and expenses andanoriginal fees underwriting netof $484 million, and received proceeds of 3.25%Exchangeable SeniorDebentures issued $500millionof liens. affiliates andtheincurrence of with transactions investments, acquisitions, capital expenditures, such aslimitationson matters, oncustomary imposes restrictions Ourseniornotes indenture also anacquisition. connection with in includingdebtincurred debt undertheseniornotes indenture, may pay preferred or common andincuradditional dividends Exchangeable Senior Debentures. Exchangeable Senior (4) EEBR3,20 EEBR3,2004 DECEMBER31, 2005 DECEMBER 31, $5,370 $ 136 3,050 1,823 346 493 650 725 387 451 236 — 20 90 13 nMrh1,20,we 2004, On March 16, d with assetsheldforsaleat d with onvertible Subordinated ly. ely. redeem theremain- $5,523 304 $ 2,890 2,043 346 491 725 492 468 243 300 — — 98 13 35 host hotels & resorts 2005 53005_FinancialsX2 4/10/0615:35Page36 36 host hotels & resorts 2005 our financialcondition could have prohibited themaintenance incircumstancesmaintain borrowings where adverse changes to we have to flexibility make gained and thisstructure, result of As a sponding covenants applicableto Revolving Facility A. andare setatlessrestrictive levels thanthecorre- est coverage, Revolving Bare Facility limited to leverage andunsecured inter- thefinancialcovenants applicableto interest coverage), fixed charge coverage andunsecured covenants forleverage, comparable (including to thosecontained facility inourprior covenants applicableunderRevolving Facility A are generally While thefinancial amounts borrowed undertheothertranche. ted to convert amountsborrowed into undereithertranche andwe are permit- Revolving Facility A orRevolving B, Facility covenants depending onwhetheramountsare borrowed under andisreduced to 7.0xthereafter. 2008, third of quarter our 2007untiltheday to endof prior thethird of quarter end of applicable to Revolving Bisthenreduced Facility to 7.25xfrom the themaximum leverage ratio 7.5x; isnotinexcessleverage ratio of amounts outstandingunderRevolving Bsolongasour Facility we are to permitted make andmaintain borrowings 2007, of our third quarter to prior theendof Specifically, from 7.5xto 7.0x. exceeds doesnotexceed 1.5xandourleverage ratio levels ranging ing atany timethatourunsecured interest coverage equalsor ratio Revolving Bisavailable Facility forborrow- the entire amountof By contrast, equalsorexceedsable whenourleverage ratio 7.0x. andnoamountsbeingavail- or exceeds 6.75xbutislessthan7.0x, $150millionbeingavailable equals whenourleverage ratio 6.75x, equalsorexceedsable whenourleverage ratio 6.5xbutislessthan $300millionbeingavail- islessthan6.5x, when ourleverage ratio $385million beingavailable with depending onourleverage ratio, amounts available forborrowing underRevolving Facility A vary Subject to compliance thefacility’s with financialcovenants, $190million. million and(2)aRevolving of Btranche Facility $385 (1)aRevolving Facility of A tranche two separate tranches: loan commitment into isdivided undertheamendedcredit facility falls below 6.0xfortwo consecutive fiscalquarters. are permitted to bereleased intheevent thatourleverage ratio thepledges facility, theprior As with to thecreditparties facility. lendersthatare with agreements andotherhedging agreements interest and swap rate otherseniordebt, certain notes indenture, aswellcredit asthenotes facility outstandingunderoursenior benefitour Theguarantees andpledgesratably subsidiaries. our interests equity inmany of currently issecured by pledgesof and ourexisting subsidiaries isguaranteed by of certain facility 2006. which wassubsequentlyrepaid of inthefirstquarter ity, approximately $20millionoutstandingunderourcredit facil- we had 2005, December 31, As of be alenderforsuch amount. commits to to thecredit facility, whether ornotcurrently party $100 millionto theextent thatany oneormore lenders, by thecredit upto facility option to increase theamountof We alsohave the theinitialscheduled maturity. at thetimeof conditions certain are met foranadditionalyear if the maturity We have anoptionto extend inSeptember 2008. uled maturity hasaninitialsched- Thecredit facility $150million. amount of inanaggregate inCanadianDollars our Canadiansubsidiaries $10millionandloansto of certain in anaggregate amountof credit letters of includes sub-commitments fortheissuance of also Thecredit facility $575million. ments intheamountof andprovidescredit aggregate facility revolving loancommit- replaced Thecredit facility ourprior and restated credit facility. General. Credit Facility Financial Covenants. Financial Dual Tranche Structure. thedebtunderamendedcredit facility, theprior As with nSpebr1,20,we entered into anamended 2004, On September 10, We are subjectto different financial nieorpirfclt,therevolving Unlike facility, ourprior URE OEAERTORATIO 1.05 1.00 1.00 COVERAGE RATIO 6.50 6.75 Third 2007to Quarter 7.00 2005toFirst Quarter 1.55 QUARTER 1.50 RATIO 1.50 FACILITY B—FINANCIAL COVENANT LEVELS RATIO COVERAGE RATIO 2007 2006 2005 YEAR FACILITY A—FINANCIALCOVENANT LEVELS in the credit facility throughin thecredit 2007: facility 2005. December 31, in compliance allourcovenants with asof We are come backinto compliance thefinancialcovenants. with we were ever to inthefutureunder theamendedcredit if facility financial covenants andwe donotlosethepotential to draw we donotsatisfythe if thecredit facility are not indefaultof solongasthere are noamountsoutstandingwe Hence, tranche. apply whenthere are undertherespective noborrowings for theRevolving Facility A andRevolving Bdonot Facility Thefinancialcovenants facility. undertheprior borrowings of nsdprino theloancommitment. of unused portion we pay commitment aquarterly feeonthe remain unused, the extent thatamountsunderthe amended credit facility to facility, theprior As with isgreaterleverage ratio than7.0x. to Revolving whenour Facility and.75%higher A borrowings thanthecorresponding applicable that is0.5%higher margin underRevolvingBorrowings Bare Facility subjectto amargin reference2.00% to 3.00%)thatissetwith to ourleverage ratio. from ranges LIBOR-based borrowings, inthecaseof (which, Revolving Facility A atfloatinginterest rates plusamargin custo fteSawo otoi.I diin whereas the In addition, portfolio. theStarwood acquisition of edness thatmay orassumedinconnection the beincurred with andcreditors loanfacility otherindebt- undercertain the bridge creditors collateral agreement with under pledge andsecurity the to share arrangements thebenefitof pledge andsecurity tolateral agentunderthecredit amendtheassociated facility thecol- Theamendmentauthorizes facility. loan ipated bridge theantic- amongotherthings, including, financing transactions, andassociated portfolio theStarwood theacquisition of of theclosing amendment to inanticipationof ourcredit facility corresponding covenants inourseniornotes indenture. be replaced will and dividends by lessrestrictive thegenerally investments andthelimitationsonacquisitions, tal expenditures, notbesubjectto we limitationsoncapi- will isbelowratio 6.0x, atany timethatourleverage In particular, fallsbelowratio 6.0x. covenants to become lessrestrictive atany timethatourleverage we have modifiedcertain contained facility, inourprior While such are similar to restrictions generally those dividends. debtandthepayment of theincurrence of investments, tions, acquisi- such aslimitationsoncapitalexpenditures, facility, prior matters thatwere oncustomary restrictions alsorestricted inour eodQatr20 .07.50 1.50 Second 2007 Quarter orhQatr20 .07.25 1.50 2007 Fourth Quarter The following table summarizes thefinancialtests tablesummarizes The following contained Other Covenants. Other Interest andFees. First Amendment. NEUE AIU FIXEDCHARGE MAXIMUM UNSECURED IIU MINIMUM MINIMUM NEETLVRG COVERAGE LEVERAGE INTEREST Our amended credit facility imposes Our amendedcredit facility We pay interest underthe onborrowings nJnay3,20,we entered into an 2006, 30, On January NEUE MAXIMUM UNSECURED MINIMUM NEETLEVERAGE INTEREST 53005_FinancialsX2 4/10/0615:35Page37 h wsôe hcg,which we refer to astheCMBSPortfolio. the Swissôtel Chicago, and the Westin New York, Buckhead Atlanta, Swissôtel TheDrake, the theHyatt Regency Boston, theHyatt Regency Reston, Boston, Overlooking theHyatt Regency Cambridge, Francisco Airport, New theHyattYork Regency San Marquis Marriott Times Square, Thesehotel are properties the were triggered. the CMBSLoan, which we refer to as ties secured loan, by a$548millionmortgage ourhotel proper- restrictive covenants of oneight 2002 and2003, rad arotWrdCne,74% due1/1/2008 7.48%, Orlando Marriott World Center, otHtlPoete I .2,due10/11/2017 8.22%, Host Hotel Properties II, due7/1/2009 8.45%, San DiegoMarriott, otnMrit olyPae .9,due6/1/2006 8.39%, Boston Copley Place, Marriott due3/1/2007 8.58%, Harbor Beach Marriott, due12/11/2022 7.8%, Resort andSpa, Marriott Springs Desert due2/11/2023 7.4%, Atlanta Marquis, Marriott Capital leasesandother (7) (6) (5) (4) (3) (2) (1) revenue industrial bonds, Philadelphia Marriott Airport OTHER DEBT debt Other mortgage due8/1/2009 7.54%, CMBS Loan, MORTGAGE DEBT (IN MILLIONS) there achieve canbenoassurances thatwe will thisobjective. although such asseniornotes, otherfinancingalternatives, with We may refinance secured debt ourtotal debt. a percentage of oursecured debtas we expect to reduce theamountof Over time, 4.2years. of 7.8%andanaverage maturity average interest of rate ourtotal debtandouraggregate secured debthadan 34% of secured debtrepresented approximately 2005, December 31, As of recourse fundsandothercustomary provisions. misapplication of fraud, is recourse solelyto specificassetsexcept ininstances of debt ourmortgage Substantially allof secured debt. by mortgage General. Debt Mortgage are andremain incurred facility loan outstanding. bridge be maintainedsolongasany loansorcommitments underthe theamendmentrequires thatsuch collateral secutive quarters, at any fallsbelow timethatourleverage ratio 6.0xfortwo con- permitted such collateral previously credit to facility bereleased hldlhaMrit ovninCne,84% due4/1/2009 8.49%, ConventionPhiladelphia Marriott Center, WMrit ahntn .. .% due9/15/2006 6.5%, D.C., JW Marriott Washington, age interest rate of 7.36% that mature through 2016, as well as capital leases with varying interest rates and maturity dates. interest rates andmaturity varying aswell ascapital leaseswith 7.36%thatmature through 2016, age interest rate of $20millionoutstandingunderourcre Capital leasesandotherconsist of 2005 andmature through 2017. have anaverage interest of rate debtamounts thatare lessthan$40million, mortgage individual debtconsists of Other mortgage requirements must bemetinorder to exercise thesecond andthird one-year options. three one-year extension optionsundertheloanagree we exercised thefirstof September 2005, During 8.1%. amaximum rate of with hasanintere thismortgage Also, 2005. isatDecember Therate shown 31, plus2.10%. isbasedonLIBOR This floatingrate mortgage based onexcess cashflow. but doesnotincludeaddition presented payment considering theincrease istheminimumamortization principal ininterest rate, apremium canberepaid theloans or without however, thesetwo thatown isappliedto properties by principal; thepartnerships 200basispointsandallexcess cash(asdefinedinth theinterest rate ontheseloansincreases aminimum of in2010, Beginning payments b but doesnotincludeadditionalprincipal payment considering theincreaseis theminimum principal ininterest rate, Theamortizati onthatdate. apremium canbe repaid theloan orpenalty without however, isapplied to principal; the partnership 200basispointsandallexcess cash(asdefinedinthe theinterest rate onthisloanincreases aminimum of in2007, Beginning interest ourlimited inthe partnership aswell asapledgeof debtissecured onthree byThis mortgage hotels, firstmortgages Washington besubstituted ascollateral fortheloan. will debtissecured hotel byThis mortgage propert eight 7 Total andotherdebt mortgage Total otherdebt Total debt mortgage sarsl fthedeclineinop As aresult of 3 ⁄ 4 ,due12/1/2017 %, so eebr3,20,we had23assetsthatwere 2005, December 31, As of (6) (7) (1) erations of our properties in ourproperties of erations (4) (2)(3) e n a eti etitv oeat.Effective thependingsaleo with restrictiveies andhascertain covenants. (5) (4) i aiiy hc a eadi h is ure f20 which wasrepaid of inthefirstquarter dit facility, $1,933 548 $ 0520 0720 092010 2009 2008 2007 2006 2005 1,823 110 218 183 129 141 174 te eta fDcme 1 2005: December 31, other debtasof related andmaturities and toscheduled amortization mortgage 2011. andmatures ourCanadianproperties onMarch 1, of which issecured by four 5.195%, afixeddate) with interest rate of million USDollarsbasedontheexchange rate ontheissuance $135millionCanadianDollars($116 gage debtintheamountof we issuedmort- 2006, January During approximately $19million. theprepayment of with ourCanadianproperties secured by two of Washington besubstituted ascollateral. will theCMBSloanandrecentlysecuring acquired Hyatt Regency beremoved itwill ascollateral 2006, thefirstquarter the endof TheDrake onorabout theanticipatedconjunction saleof with in Additionally, approximately $71millionwere released to us. 2005escrowed fundsintheamountof and onOctober 31, levels required to release theescrowed fundsundertheCMBSloan cash flow from forthepasttwo theseproperties metthe quarters operating thethird 2005, quarter theendof As of returned to us. thecashthathadbeenescrowed be will atwhich point, quarters, minimum cashflowated thenecessary fortwo consecutive 2002andremained ineffectuntiltheCMBSPortfolio gener- ter of inthethird Thisprovision beginning quar- wastriggered million. twelveand equipmentforthetrailing monthsdeclinesbelow $96 fixtures ground rent andreserves forfurniture, insurance, taxes, netcashflow after payment of if debtservice after payment of to retain excess certain servicer cashflow from theCMBSPortfolio The CMBSLoancontains aprovision thatrequires themortgage 70 88 88 85 90 40 79 The following table summarizes ouroutstandingdebtand tablesummarizes The following we retired theremaining mortgage 2005, On October 17, 4$2 8$7 —$— $ $— $470 28 $ 26 $ 24 $ 29$7 35$5 1 $443 $18 $753 $315 $175 $229 2 7 9 5 8353 18 753 295 175 229 0——90 — — 20 — — 0——50 — — 20 — — —— 40————— 88———— — 85———— — BALANCE AS OFDECEMBER31, 1 — — — 210 4 4 7 — — 174 3 3 3 119 135 5 8 5 7 5373821 4 7 4 8 33333734 9 26 2 288——— — 22273—— Santa Clara Partnership.Santa Clara h rk,theHyatt Regency Drake, The f 06, three loans with anaver- three loanswith 06, loan agreement) generated by generated agreement) loan e loan agreement) generated agreement) e loan ased onexcess cashflow. eat nta ae The onthatdate. penalty al principal payments al principal 8.0% atDecember 31, on presented inthistable st rate capderivative et Certain ment. THEREAFTER 37 host hotels & resorts 2005 53005_FinancialsX2 4/10/0615:35Page38 38 host hotels & resorts 2005 ue1,20 uy1,20 $0.10/share $0.08/share $0.05/share 2004 2005 December 20, April 15, 2005 $0.11/share July 15, $0.12/share 2005 October 17, 2004 September 8, 2006 AMOUNT January 17, 2005 March 21, 2005 June 17, 2005 PAYMENTSeptember DATE 19, 2005 December 15, DECLARATION DATE 2005and2004. common 2006, stock during Directors. any bedetermined by will Host’s dividends Board of of amount The unlesssimilarlycontractually restricted. able income, tax- theamountof regardless of onitspreferreddividends stock, Host currently intends to continue paying contractually restricted. unlessotherwise itstaxable income, atleast100%of distribute to itsstockholders. payments by analyzingdividend when Host tions from Host LP, andtherequirement share thatthey pro indistribu- rata LP, also shouldtake into account positioninHost the5%minority investors For thesereasons, other common OPunitholders. twelve by cent Host perunitdistribution LPto Host aswell as a itwould bebased onpayment of idend onitscommon stock, Host paidatwelve cent pershare div- if For example, OP units. onallcommon orcorrespondingunit distribution preferred Host LPpays anequivalent per common orpreferred dividend, whenHost pays a As rule, ageneral by Hostdistributed LP. inamountsbeing onapro basis, rata theseholdersshare, units, limited partners. ous third-party thecommon OPunitsare heldby vari- The remaining 5%of thecommon OPunits. OP unitsandapproximately 95%of thepreferred of all substantially Host of istheowner Currently, corresponding common OPunitandpreferred OPunit. Host LPhasissuedto Host a Host, mon andpreferred stock of com- share For of every from Hostthrough distributions LP. pay onitscommon dividends andpreferred stock are provided Funds usedby Host to we donotreceive corresponding cash. income regard recognized butwith to fortaxpurposes which includingtaxable its taxableincome to qualifyasaREIT, Host isrequired to to itsstockholders distribute atleast90%of HOST DIVIDENDPOLICY would likely increase. orto issueadditionalpreferred stock refinancing orotherwise, a eitherinconnection with cost to issueadditionalseniornotes, our were unableto subsequentlyimprove ourcredit ratings, we If could onoursecurities bereduced. theratings decline, orourcredit were ouroperations ratios to if until2007, rities While we have noseniornote matu- toa B2rating aB1rating. from to andthepreferred aBa3rating aBa2rating stock from Moody’s ourseniornotes debt upgraded 2005, October 13, On our preferred stock from to aCCC+rating aB-rating. on therating from to andupgraded aB+rating aBB-rating Standard and Poor’s onourseniordebt therating upgraded 2005, OnNovember 8, Investors andStandard &Poor’s. Service preferred stock thatare by rated Moody’s $250 millionof seniornotes outstandingand we have $3.1billionof Currently, Credit Ratings The following table sets forth cash distributions onour cashdistributions tablesetsforth The following Host’s current policyoncommon to isgenerally dividends positioninHost LPcommon theminority OP As aresult of guarantees (by amount)are dollar listed below: Thelargest payments undertheseguarantees to beremote. any material We consider thelikelihood of unrelated party. circumstances certain includingdefaultby an in theevent of butthatwe have agreed to pay arrangements, and contractual spin-offs that are dispositions, notonourbooksdueto various commitments we have madeto forleasesordebt, third parties balance sheetarrangements: to off- material thefollowing we are party 2005, December 31, As of have contingent certain liabilitiesandguarantees. refer to as “off-balance underwhich sheetarrangements”) we unconsolidated with entities(which we arrangements tractual orothercon- agreements We transactions, to various are party Off-Balance Sheet Arrangements CONTRACTUAL OBLIGATIONS OFF-BALANCESHEET ARRANGEMENTS AND esgiiat in2009. be significant, or cease to expire, generally will theserestrictions On average, remote andtherefore to notmaterial ourfinancialstatements. any indemnificationto material be that thelikelihood of we believe ourcontrol, iswithin these potential transactions Becausethetimingof such hotels forincome tax purposes. of gainto owners theformer in therecognition andallocationof orto take thatwould otheractions result 11 additionalhotels, of to aportfolio allocated valueattributable theoriginal 50% of We alsohave agreed notto sellmore than under theagreement. theperiod the hotel debtduring orrefinancing themortgage fortheirtaxconsequencesthe owners resulting from ourselling require agreements These thatwe indemnify ing onthehotel. depend- periods debtforvarying or refinancing themortgage orrepaying we have agreed to onsellingthehotels, restrictions five hotels, of andcurrent owners theformer considerations of to bematerial. ing arrangements We do notexpect any amountspaidunderthetaxshar- Host. as well asany liabilitiestheIRSmay successfully against assert including any related interest by incurred andpenalties) Host, localandforeign, state, obligated to pay taxes certain (federal, Host LPis between agreement Hostpartnership andHost LP, underthe Additionally, pay agreement. underthetaxsharing produce thatwe may taxliability amaterial beobligated to could Thisadjustment affiliate bythis former wasowned us. an item that deducted by theperiod affiliate aformer during could adjust ataxingauthority For example, us. affiliated with and penalties)relating inwhich to thecompanies periods were includingany related interest localandforeign, state, (federal, we are obligated to pay taxes certain Crestline Corporation), andBarceló Corporation Host Services Marriott International, affiliated former companieswith (such asMarriott Tax Arrangements. Sharing Guarantees. Tax Indemnification Agreements. ■ ■ aiiy We nolongerhave interest anownership inthe facility. andoperates aseniorliving which owns Partnership, we Leisure owned Park VentureIn Limited 1997, 2005. December 31, mately $27millionasof thesefuture rental payments isapproxi- gate amountof Theaggre- thefuture rental payments. our guarantee of represent divested restaurants thatwere soldsubjectto Theseprimarily divestedcertain properties. non-lodging We remain contingently liableforrental payments on ehv eti urnes which consist of We have guarantees, certain Under agreements taxsharing For reasons relating to tax 53005_FinancialsX2 4/10/0615:35Page39 our business judgment ormake estimates:our businessjudgment significant accounting critical certain policiesthatrequire usto exercise represent Thefollowing our consolidated financialstatements. accountingour significant policiesare disclosed inthenotes to Allof are believed to bereasonable underthecircumstances. estimates otherassumptionsthat onexperience andonvarious We baseour onanongoingbasis. long-lived assets, ment of includingthoserelated to theimpair- mates andjudgments, We evaluate ouresti- results could differfrom theseestimates. actual asaresult, assumptions asto future and, uncertainties and theuseof judgment policies involves theexercise of these applicationof amounts would different, bematerially While we donotbelieve thereported period. reporting revenues the andexpenses during the reported amountsof ourfinancialstatements and assets andliabilitiesatthedate of estimates thereported amountof andassumptionsthataffect which requires managementto make GAAP, with conformity Our consolidated financialstatements have beenprepared in CRITICAL ACCOUNTINGPOLICIES (4) (3) (2) (1) managementfees Deferred Long-term debtobligations (IN MILLIONS) Purchase obligations aia es biain — — 2 2 4 leaseobligations Operating Capital leaseobligations oa 927$,4 219$,9 $4,165 $1,896 $2,139 $1,047 $9,247 Total aino h aaeetareeto h aeo thehotel andistherefore notdeterminable. orthesaleof themanagementagreement nation of owner’s prio achieved therequired income thresholds forpayment of ourpropert managementfeesto ourhotel managersforsomeof we have payment of deferred ourmanagementagreements, Under terms of Expenditures.” thecurrent year year amountreflects thatwere prior contracts ornotcomple deferred expenditures into later years andsomeof we have theabil Under ourcontracts, commitments forcapitalexpenditures atourhotels. Our onlypurchase consist obligations of payable to usundernon-cancelable subleases. respectively, $481 million, Future minimum leasepayments have notbeenreduced by aggregate minimum subleaserentals from restaurants andtheHPTsublease 2005. December 31, centage interest asof rate we ha For rate debt, variable term debt obligationsbasedontheweighted average interest rate forbothfixed debt. andvariable Interest payments have been andestimated interest debtmaturities payments. principal, of includeamortization The amountsshown ■ ■ record chargeaproperty’s when animpairment fairvalue we For impaired assets, thehotel. net bookvalueof counted cashflows forthehotel would belessthanthe future undis- whereby, ourhotels hasbeenimpaired, of charge we when believean impairment thatoneormore testing. Impairment theleases, mately $20millionthrough thefullterm of Thefuture minimum leasepayments are approxi- leases. liable fortheamountsdueunderrespective ground we remain contingently 2005, 2004andJanuary of quarter three hotels inthefourth In thesaleof connection with idb h urn we fthefacility. fied by thecurrent of owner isindemni- inturn, who, Barceló Crestline Corporation, we have beenindemnifiedby ments undertheguarantee, to theextent we are required to make anyHowever, pay- Development in2027. Authority through theirmaturity municipal bondsissuedby theNew Jersey Economic regard interest with to andprincipal $14.7millionof of but we remain obligated underaguarantee partnership, (3) (4) (2) (1) We are required by GAAPto record OA ER1T ER O5YAS5 YEARS 3TO 5 YEARS 1TO 3 YEARS 1 YEAR TOTAL 739$65$,2 164$3,108 $1,694 $1,922 615 $ $7,339 ,4 1 1 0 1,018 202 215 112 1,547 318318——— 39———39 iyt s h iigo h amns fay isbasedonfuture any, if thepayments, Thetimingof to us. rity ESTA MORETHAN LESS THAN reflected inthefuture. inoperations which would be to record charges, additionalimpairment results could orproperty-level require us economic conditions, aia xedtrs aha fDcme 1 2005: December 31, each asof capital expenditures, andcapitalleasesprojectedpayments onouroperating future minimum lease estimated interest payments onourdebt, and The tablebelow ourobligationsforprincipal summarizes Obligations Contractual dated financialstatements. may befoundinNotesheet arrangements 16to ourconsoli- ■ hne nteeetmts supin,future changes in assumptions, Changes intheseestimates, Information onotherguarantees andotheroff-balance plete thesaleare unlikely to change orthattheplanned oneyearpleted andthatactionsrequired within to com- becom- will theassetisprobable, ensure thatthesaleof ahotel asheld-for-sale isintended to the classificationof as Assets “Held forSale.” of Classification arvle,icuigcnieaino capitalization includingconsideration of fairvalues, • and future capitalexpenditures, • expected usefullife, • holdingperiod, • projected cashflows, • including: tions andestimates, we make many assump- ourhotels, of theimpairment of In theevaluation net bookvaluemay notberecoverable. events orchanges incircumstances indicate thatahotel’s or well aswhenever anassetisclassifiedas forsale” “held as estimated useful life, itspreviously before theendof becomes more likely besold thannotthatahotel will it when cash flows are cashflows, lessthanhistorical includingwhen current orprojected several situations, We test in forimpairment is lessthanitsnetbookvalue. ehv enidmiidb h ucae fthehotel. we have beenindemnifiedby thepurchaser of andineach case, related to theseground leasesisremote, We believe thatany liability including renewal options. ae,discount rates andcomparable sellingprices. rates, PAYMENTS DUEBYPERIOD ve usedtheapplicableper- e.See“Capital ted. t odfrsm fthese to defersomeof ity oeain,thetermi- operations, included inthelong- f$16millionand s of Our policyfor ies thathave not 39 host hotels & resorts 2005 53005_FinancialsX2 4/10/0615:35Page40 40 host hotels & resorts 2005 determining fair values for impairment tests.determining fairvaluesforimpairment in estimates andjudgments sion above concerning theuseof Seethediscus- record we will loss. animpairment the property, fair valuelesssellingcosts islower thanthenetbookvalueof ■ ■ ■ To theextent isclassifiedasheldforsaleandits aproperty 05 Ourinterest afairmarket with rate swapagreements 2005. December 31, outstandingasof swapagreements rate Contracts. Derivative Valuation of recorded inthatperiod. anincrease inincome taxexpense would be realized, taxassetsmay thedeferred notbe of oraportion, all, When adetermination ismadethat assets inthefuture. beabletowe realize will tax the$100millionindeferred andwe believe that itismore likely thannotthat assets, determining avaluationallowance tax forourdeferred projected in taxableincome andtaxplanningstrategies future differences, existing taxabletemporary reversals of includingfuture We have considered factors, various nized inacompany’s financialstatements ortaxreturns. events thathave beenrecog- future taxconsequences of rent year taxliabilitiesandassetsforthe anddeferred taxes payable orrefundable forthecur- the amountof standardsand reporting forincome taxes isto recognize financialaccounting Theobjective of 2005. December 31, inconsolidated taxassetsasof deferred $19 million, avaluationallowance of netof mately $100million, Tax Deferred Assets. Valuation of ourhotels. any of sale of expense andnetincome (loss)orthegainlosson change intheestimated lives could depreciation affect a management believes itsestimates are reasonable, While well market asspecific andeconomic conditions. as ital expenditures to maintainandrefurbish theassets, cap- assumptionsincludingcost andtimingof number of theassetsare basedona Thelives of the related assets. theleaseterm ortheestimated usefullifeof of the shorter expense forleaseholdimprovementsand amortization is ourassets expense isbasedontheestimated usefullifeof Expense. andAmortization Depreciation financingcontingencies nosignificant exist which • non- thebuyer hascommitted amountof asignificant • to bindingagreement a purchase theproperty • Directors hasapproved thesale(to the ourBoard of • conditions thefollowing are met: of all when thatweproperties are actively marketing asheldforsale we classify Specifically, completed inatimelymanner. exist which could from prevent being thetransaction andnofinancingcontingencies depositatrisk significant thebuyer has a until purchase are agreements executed, asaleare frequently notknown timing andfinalterms of underwhich real the estateexperience with transactions Thispolicyisconsistent our with bewithdrawn. sale will a timelymanner. nottocould becompleted causethetransaction in and refundable cash; has beensigned; approval); thesalerequires Board extent of thedollarmagnitude We have approxi- have We We hadthree interest Depreciation award—the requisite service period (usually thevesting (usually period requisite service award—the employee isrequired inexchange to provide service forthe berecognizedThat cost will over which an during theperiod theaward limited exceptions). (with fairvalueof grant-date basedonthe instruments equity exchange foranaward of received employee services in to measurelic entity the cost of Thestatement requires apub- nized inthefinancialstatements. resulting from berecog- share-based all payment transactions which requires thatthecost Based Payment (“FAS 123R”), Share- 123R, theFASB issuedSFAS No. In December 2004, New Accounting Standards Application of ■ cial statements. the assetsandliabilitieswould beincludedinourfinan- and operations theresults of thenallof required to doso, we were if orjointventures, our current partnerships we donotbelieve we are required to consolidate any of While isnotmaterial. operations ations onourresults of theiroper- non-recourse to thecompany andtheeffectof Thedebtontheseinvestments is voting interest entities. entitiesare These considered to be accounting. method of and otherinvestments which we record usingtheequity we have investments hotel inentitiesthatown properties Currently, are notcontrollable through voting interests. aswell asfinancialinterests that based onvoting rights, the partners of andprivileges rights of theimportance of includingassessment control, of entities intheevaluation andjointventure partnership to theconsolidation of Policies.Consolidation rates and shortening terms torates andshortening maturity. interest andexchange year levels basedonchanging of derivatives islikely to fluctuate from materially year to our Thefairvalueof impactourvaluations. rates will andexpected future actual interest orexchange the level of Any event thatimpacts and asmarket conditions change. change over timeascashreceipts andpayments are made will theseinstruments Thevaluesof exchange curves. rate exchange derived rates from market observed interest and future interest and are based onanexpectation of cashflow Thevariable streams expected cashpayments. discounted future cashreceipts andthediscounted nettingthe utilize themarket of standard methodology which valuations, third party ments through theuseof theseinstru- of all We estimate thefairvalueof (loss). increase ordecrease infairvalueisrecorded innetincome thatareagreements fairvaluedeach andthe quarter We alsohave two interest rate cap net income (loss). thebalance sheetto current sectionof equity stockholders’ since itsinceptioninstrument may bereclassified from the thederivative accumulated inthe valueof lossorgain the existing highly-effective hedgeto become ineffective, causean or any othercircumstance, agement strategy, Shouldany change inman- reflected incurrent earnings. thederivative usedasa hedge would be fair valueof any change inthe effective, swap doesnotqualifyashighly interest aparticular rate if tions forhedgeaccounting, While we intend to continue to meetthecondi- ments. inNotedescribed 1to ourconsolidated financialstate- as 2005 have asfairvaluehedges, beendesignated December 31, approximately $(5)millionasof value of Judgment isrequired respect with 53005_FinancialsX2 4/10/06 15:35 Page 41

period). No compensation cost is recognized for equity instru- REPORTING PERIODS ments for which employees do not render the requisite service. Reporting Periods for Consolidated Statement Employee share purchase plans will not result in recognition of of Operations compensation cost if certain conditions are met; those condi- The results we report are based on results of our hotels reported tions are much the same as the related conditions in FAS 123. to us by our hotel managers. Our hotel managers use different We adopted the fair value provisions of FAS 123 in 2002 and, reporting periods. Marriott International, the manager of the therefore, have recognized the costs associated with all share- majority of our properties, uses a year ending on the Friday based payment awards granted after January 1, 2002. The provi- closest to December 31 and reports twelve weeks of operations sions of FAS 123R are effective as of January 1, 2006. The for the first three quarters and sixteen or seventeen weeks for the adoption of this standard in 2006 will not have a material effect fourth quarter of the year for its Marriott-managed hotels. In on our financial position and results of operations. contrast, other managers of our hotels, such as Hyatt, report In March 2005, the FASB issued FASB Interpretation No. 47, results on a monthly basis. Host, as a REIT, is required by tax Accounting for Conditional Asset Retirement Obligations, an laws to report results on a calendar year. As a result, we elected interpretation of FASB Statement No. 143 (“FIN 47”), which to adopt the reporting periods used by Marriott International clarified the term “conditional asset retirement obligation” as modified so that our fiscal year always ends on December 31 to used in FASB Statement No. 143. A conditional asset retirement comply with REIT rules. Our first three quarters of operations obligation refers to a legal obligation to perform an asset retire- end on the same day as Marriott International but our fourth ment activity in which the timing and (or) method of settle- quarter ends on December 31 and our full year results, as ment are conditional on a future event that may or may not be reported in our statement of operations, always includes the within the control of the entity. The obligation to perform the same number of days as our calendar year. asset retirement activity is unconditional even though uncer- Two consequences of the reporting cycle we have adopted tainty exists about the timing and (or) method of settlement. are: (1) quarterly start dates will usually differ between years, As a result of the issuance of this statement, we will recognize except for the first quarter which always commences on January 1, the fair value of the liability for any conditional asset retirement and (2) our first and fourth quarters of operations and year-to- obligations when incurred, which is generally upon acquisition, date operations may not include the same number of days as

construction, or development and (or) through the normal 2005 reflected in prior years. For example, set forth below are the operation of the asset, if sufficient information exists to reason- quarterly start and end dates for 2006, 2005 and 2004. Note that ably estimate the fair value of the obligation. The adoption of the second and third quarters of each year both reflect twelve this interpretation did not have a material impact on our finan- weeks of operations. In contrast, the first and fourth quarters cial position or results of operations. reflect differing days of operations. host hotels & resorts

(1) 2006 2005 2004 41 START-END DATES NO. OF DAYS START-END DATES NO. OF DAYS START-END DATES NO. OF DAYS First Quarter January 1–March 24 83 January 1–March 25 84 January 1–March 26 86 Second Quarter March 25–June 16 84 March 26–June 17 84 March 27–June 18 84 Third Quarter June 17–September 8 84 June 18–September 9 84 June 19–September 10 84 Fourth Quarter September 9–December 31 114 September 10–December 31 113 September 11–December 31 112 (1) Reflects an additional day in February for the leap year.

While the reporting calendar we adopted is more closely Reporting Periods for Hotel Operating Statistics and aligned with the reporting calendar used by Marriott Comparable Hotel Results International, another consequence of our calendar is we are In contrast to the reporting periods for our consolidated state- unable to report the month of operations that ends after our fis- ment of operations, our hotel operating statistics (i.e., RevPAR, cal quarter-end until the following quarter because our hotel average daily rate and average occupancy) and our comparable managers using a monthly reporting period do not make mid- hotel results are always reported based on the reporting cycle month results available to us. Hence, the month of operation that used by Marriott International for our Marriott-managed hotels. ends after our fiscal quarter-end is included in our quarterly This facilitates year-to-year comparisons, as each reporting results of operations in the following quarter for those hotel period will be comprised of the same number of days of opera- managers (covering approximately one-fourth of our full-service tions as in the prior year (except in the case of fourth quarters hotels). As a result, our quarterly results of operations include comprised of seventeen weeks (such as fiscal year 2002) versus results from hotel managers reporting results on a monthly basis sixteen weeks). This means, however, that the reporting periods as follows: first quarter (January, February), second quarter we use for hotel operating statistics and our comparable hotel (March to May), third quarter (June to August) and fourth quar- results may differ slightly from the reporting periods used for ter (September to December). While this does not affect full year our statements of operations for the first and fourth quarters and results, it does affect the reporting of quarterly results. 53005_FinancialsX2 4/10/06 15:35 Page 42

the full year. Set forth below are the quarterly start and end dates hotel managers reporting on a monthly basis are included in our for 2006, 2005 and 2004 that are used for our hotel operating sta- operating statistics and comparable hotel results consistent with tistics and comparable hotel results reported herein. Results from their reporting in our consolidated statement of operations.

Hotel Result Reporting Periods for Operating Statistics and Comparable Hotel Results—for Marriott Managed Properties

2006 2005 2004(1) START-END DATES NO. OF DAYS START-END DATES NO. OF DAYS START-END DATES NO. OF DAYS First Quarter December 31–March 24 84 January 1–March 25 84 January 3–March 26 84 Second Quarter March 25–June 16 84 March 26–June 17 84 March 27–June 18 84 Third Quarter June 17–September 8 84 June 18–September 9 84 June 19–September 10 84 Fourth Quarter September 9–December 29 112 September 10–December 30 112 September 11–December 31 112 (1) Reflects an additional day in February for the leap year.

NON-GAAP FINANCIAL MEASURES accounting for real estate assets implicitly assumes that the We use certain “non-GAAP financial measures,” which are value of real estate assets diminishes predictably over time. measures of our historical financial performance that are not As noted by NAREIT in its April 2002 “White Paper on Funds calculated and presented in accordance with GAAP, within the From Operations,” since real estate values have historically meaning of applicable SEC rules. They are as follows: (i) Funds risen or fallen with market conditions, many industry investors From Operations (FFO) per diluted share, and (ii) Comparable have considered presentation of operating results for real estate Hotel Operating Results. The following discussion defines these companies that use historical cost accounting to be insufficient terms and presents why we believe they are useful measures of by themselves. For these reasons, NAREIT adopted the defini- our performance. tion of FFO in order to promote an industry-wide measure of REIT operating performance. FFO Per Diluted Share We calculate FFO per diluted share, in accordance with 2005 We present FFO per diluted share as a non-GAAP measure standards established by NAREIT, which may not be compara- of our performance in addition to our earnings per share ble to measures calculated by other companies who do not use (calculated in accordance with GAAP). We calculate FFO per the NAREIT definition of FFO or calculate FFO per diluted diluted share for a given operating period as our FFO (defined share in accordance with NAREIT guidance. In addition, as set forth below) for such period divided by the number although FFO per diluted share is a useful measure when comparing our results to other REITs, it may not be helpful to host hotels & resorts of fully diluted shares outstanding during such period. The investors when comparing us to non-REITs. This information 42 National Association of Real Estate Investment Trusts (NAREIT) defines FFO as net income (calculated in accordance with should not be considered as an alternative to net income, GAAP) excluding gains (or losses) from sales of real estate, operating profit, cash from operations, or any other operating the cumulative effect of changes in accounting principles, real performance measure prescribed by GAAP. Cash expenditures estate-related depreciation and amortization and adjustments for various long-term assets (such as renewal and replacement for unconsolidated partnerships and joint ventures. FFO is capital expenditures) and other items have been and will be presented on a per share basis after making adjustments for incurred and are not reflected in the FFO per diluted share the effects of dilutive securities, including the payment of pre- presentations. Management compensates for these limitations ferred stock dividends, in accordance with NAREIT guidelines. by separately considering the impact of these excluded items We believe that FFO per diluted share is a useful supple- to the extent they are material to operating decisions or mental measure of our operating performance and that assessments of our operating performance. Our consolidated presentation of FFO per diluted share, when combined with statements of operations and cash flows include depreciation, the primary GAAP presentation of earnings per share, provides capital expenditures and other excluded items, all of which beneficial information to investors. By excluding the effect of should be considered when evaluating our performance, as real estate depreciation, amortization and gains and losses well as the usefulness of our non-GAAP financial measures. from sales of real estate, all of which are based on historical Additionally, FFO per diluted share should not be considered cost accounting and which may be of lesser significance in as a measure of our liquidity or indicative of funds available evaluating current performance, we believe that such measure to fund our cash needs, including our ability to make cash can facilitate comparisons of operating performance between distributions. In addition, FFO per diluted share does not periods and between other REITs, even though FFO per measure, and should not be used as a measure of, amounts diluted share does not represent an amount that accrues that accrue directly to our stockholders’ benefit. directly to holders of our common stock. Historical cost 53005_FinancialsX2 4/10/0615:35Page43 Gain onhotel dispositions Adjustments fordilutive securities: Preferred stock redemptions level costs andexpenses to results arrive atproperty-level because We eliminate corporate- as well asdepreciation andamortization. corporate-level costs andexpenses related to ourcapitalstructure, present thesecomparable hotel results operating by eliminating We scale capitalimprovements theseperiods. during incurred damageorlarge property significant acquisitions ordispositions, effectto beingcompared any theperiods giving without of entirety the hotels during owned resultsent operating forfull-service Ourcomparable hotelresults operating pres- mation forinvestors. basisassupplementalinfor- or “same store” a comparable hotel, on andadjusted profit, operating expenses, such ashotel revenues, We hotels, results present operating forourfull-service certain ResultsComparable Hotel Operating (4) (3) (2) (1) interestMinority benefit(expense) Senior notes redemptions anddebtprepayments EXCEPT PERSHARE AMOUNTS) (IN MILLIONS, (c) (b) (a) Adjustments: Net income (loss)available to common shareholders EXCEPT PERSHARE AMOUNTS) (IN MILLIONS, eoclaino Net Income (Loss) Available toCommon Shareholders toFunds Share From Diluted per Operations Reconciliation of Gain onCBMJoint Venture LLC sale Represents the portion of the above listed amounts attributable to minority partners inHost LP. theabovepartners to minority listed amountsattributable Represents of theportion ourinterest inCBMJoint Venture. 85%of onthesaleof tax, of net Represents thegain, seeNote 5to thecondensed consolidated statements. For detail, further theClass A preferred stock. redemption of in2004alsoincludestheincremental Theadjustment 2004. of quarter theClass A pre 2005andtheredemption of theClassBpreferred stock inthesecond of quarter theredemptionconjunction of with which we Represents issuance costs forpreferred the original stock, presented. theperiods during senior notes andmortgages We recognized thesecosts inconjunct operations. includedininterest expense intheconsolidated statements of for refinancings, aswell asincremental in issuediscounts financingcosts, anddeferred original Represents callpremiums andtheacceleration of which inthetablebelow: isshown dilutedFFO per diluted presented (loss)per share share andearnings periods forcertain were affected by significantly certai are they anti-dilutive. No if forsecurities effectisshown to convert interest theirlimited to partnership common OPunits. thosepreferred OPunitsheldby minority comprehensive stock plans, Dilutive may securities inclu dilutive securities. dilutedFFO per share inaccordance NAREIT with isadjusted of fortheeffects interestsRepresents to inHost theminority FFOattributable LP. F fmnrt ateso Host LP of partners minority FFO of Partnership adjustments Depreciation andamortization suigcneso fConvertible Assuming conversion of Exchangeable Assuming conversion of Amortization of deferred gains deferred of Amortization suigdsrbto fcommon shares granted of Assuming distribution ano ipstos net Gain ondispositions, Per diluted share Total h olwn alspoiearcniito fnetincome tablesprovideThe following areconciliation of Senior Debentures assumed purchased ataverage market price under thecomprehensive stock planlessshares FFO perdiluted share Subordinated Debentures (b)(c) (2) (4) (3) (a) (1) E NOENETINCOME NET INCOME re required to becharged netincome against (loss)availabl NOEPRSAEICM PERSHARE INCOME PERSHARE INCOME LS)SAE MUT(OS HRSAMOUNT SHARES (LOSS) AMOUNT SHARES (LOSS) 15330$.38 353.0 $135 45445$1.15 414.5 $475 (loss) available to common shareholders pershare to FFOperdiluted prnr,convertible int andotherminority debtsecurities partners, 7 1.05 — 371 iied rmtedt fisac ftheClassEpreferred issuance of fromdividends thedate of LS)FO(OS FFO (LOSS) FFO (LOSS) 6)—(.17) — (60) 2)—(.07) — (24) .6$(.08) $(36) $.06 21 $ (4 $(34) $(34) . (.01) 2.5 — 0—.03 — 10 92. (.04) 28.1 19 23. — 30.9 32 8 (.02) — (8) 9— 19 1— 41 1 2 (4) (1) (4) hotel operating resultshotel operating we present donotrepresent our total thecomparable expenses anddepreciation andamortization, accounting to beinsufficientby themselves. resultsoperating forreal estate companies cost thatuse historical investors many industry have considered presentation of ditions, real estate have valueshistorically market con- orfallenwith risen because As noted earlier, assets diminishespredictably over time. real estate implicitlyassumethatthevalueof for real estate assets, which are cost based onhistorical accounting non-cash expenses, these are expenses, depreciation property-level andamortization becauseeven though We eliminate depreciation andamortization, ourhotels. into performance of theongoingoperating cific insight we results believe provide property-level investors more spe- with 052004 2005 052004 2005 sarsl fteeiiaino corporate-level costs and theeliminationof As aresult of YEAR ENDEDDECEMBER31, YEAR ENDEDDECEMBER31, 4)372$(.12) 337.2 $ (41) 28319$.77 $ 361.9 $278 6 1.08 — 364 1)—(.03) — (11) 5)—(.16) — (52) 1)—(.05) — (18) 5)$(59) $ (59) 1)$(61) $ (12) (0)$(.17) $(.04) . (.01) 3.0 — —— —— 1—.06 — 21 52. — 21.7 15 n transactions, the effect of theeffect n transactions, —— 2— 52 6 (6) (6) e to common stockholders in 14 de sharesunder granted terest thecallperiod during ion with theprepayment of ion with erests thathave theoption stock to thedate of ferred stockferred inthethird share: 43 host hotels & resorts 2005 53005_FinancialsX2 4/10/06 15:35 Page 44

revenues, expenses or operating profit and these comparable hotel (1) The reconciliation of total revenues per the consolidated statements of operating results should not be used to evaluate our performance operations to the comparable hotel sales is as follows: as a whole. Management compensates for these limitations by YEAR ENDED separately considering the impact of these excluded items to the DECEMBER 31, extent they are material to operating decisions or assessments of (IN MILLIONS) 2005 2004 our operating performance. Our consolidated statements of oper- ations include such amounts, all of which should be considered Revenues per the consolidated statements by investors when evaluating our performance. of operations $3,881 $3,574 We present these hotel operating results on a comparable Revenues of hotels held for sale 52 52 hotel basis because we believe that doing so provides investors Non-comparable hotel sales (327) (271) and management with useful information for evaluating the Hotel sales for the property for which period-to-period performance of our hotels and facilitates com- we record rental income 49 47 parisons with other hotel REITs and hotel owners. In particular, Rental income for office buildings and these measures assist management and investors in distinguishing limited service hotels (84) (80) Other income — (1) whether increases or decreases in revenues and/or expenses are Adjustment for hotel sales for comparable due to growth or decline of operations at comparable hotels hotels to reflect Marriott’s fiscal year (which represent the vast majority of our portfolio) or from for Marriott-managed hotels (7) (11) other factors, such as the effect of acquisitions or dispositions. While management believes that presentation of comparable Comparable hotel sales $3,564 $3,310 hotel results is a “same store” supplemental measure that provides useful information in evaluating our ongoing performance, this (2) The reconciliation of operating costs per the consolidated statements of measure is not used to allocate resources or assess the operating operations to the comparable hotel expenses is as follows: performance of these hotels, as these decisions are based on data YEAR ENDED for individual hotels and are not based on comparable portfolio DECEMBER 31, hotel results. For these reasons, we believe that comparable hotel (IN MILLIONS) 2005 2004

2005 operating results, when combined with the presentation of GAAP operating profit, revenues and expenses, provide useful Operating costs and expenses per the information to investors and management. consolidated statements of operations $3,362 $3,177 The following table presents certain operating results and sta- Operating costs of hotels held for sale 40 39 tistics for our comparable hotels for the periods presented herein: Non-comparable hotel expenses (244) (201) Hotel expenses for the property for which

host hotels & resorts Comparable Hotel Results we record rental income 49 47 Rent expense for office buildings and 44 YEAR ENDED DECEMBER 31, limited service hotels (79) (78) Adjustment for hotel expenses for comparable (IN MILLIONS, EXCEPT HOTEL STATISTICS) 2005 2004 hotels to reflect Marriott’s fiscal year for Number of hotels 98 98 Marriott-managed hotels (5) (10) Number of rooms 48,785 48,785 Depreciation and amortization (368) (349) Percent change in Comparable Hotel RevPAR 9.5% — Corporate and other expenses (67) (67) Comparable hotel sales Gain on insurance settlement 9 3 Room $2,182 $1,998 Comparable hotel expenses $2,697 $2,561 Food and beverage 1,143 1,082 Other 239 230 (3) Non-comparable hotel results, net, includes the following items: (i) the Comparable hotel sales (1) 3,564 3,310 results of operations of our non-comparable hotels whose operations are included in our consolidated statement of operations as continuing Comparable hotel expenses operations and (ii) the difference between the number of days of opera- tions reflected in the comparable hotel results and the number of days Room 531 500 of operations reflected in the consolidated statements of operations. Food and beverage 846 811 (4) Represents rental income less rental expense for limited service properties Other 149 145 and office buildings. Management fees, ground rent and other costs 1,171 1,105 Comparable hotel expenses (2) 2,697 2,561

Comparable hotel adjusted operating profit 867 749 Non-comparable hotel results, net (3) 85 71 Comparable hotels classified as held for sale (12) (13) Office buildings and limited service properties, net (4) 5 2 Other income — 1 Depreciation and amortization (368) (349) Corporate and other expenses (67) (67) Gain on insurance settlement 9 3 Operating profit $ 519 $ 397 53005_FinancialsX2 4/10/06 15:35 Page 45

QUANTITATIVE AND QUALITATIVE DISCLOSURES sensitive to changes in interest rates, including interest rate ABOUT MARKET RISK swaps and debt obligations. For debt obligations, the table Interest Rate Sensitivity presents scheduled maturities and related weighted average interest rates by expected maturity dates. For interest rate Our future income, cash flows and fair values relevant to finan- swaps, the table presents notional amounts and weighted cial instruments are dependent upon prevalent market interest average interest rates by expected (contractual) maturity dates. rates. Market risk refers to the risk of loss from adverse changes Notional amounts are used to calculate the contractual payments in market prices and interest rates. The majority of our out- to be exchanged under the contract. Weighted average variable standing debt has a fixed interest rate. We use some derivative rates are presented in U.S. dollar equivalents, which is our financial instruments to manage, or hedge, interest rate risks reporting currency. The interest rate swaps and caps that we related to our borrowings. have entered into are strictly to hedge interest rate risk and not The table below provides information about our derivative for trading purposes. financial instruments and other financial instruments that are

EXPECTED MATURITY DATE

($ IN MILLIONS) 2006 2007 2008 2009 2010 THEREAFTER TOTAL FAIR VALUE LIABILITIES DEBT: Fixed rate $140 $873 $431 $754 $511 $2,558 $5,267 $5,658 Average interest rate 7.4% 7.1% 6.9% 6.8% 7.1% 7.3% Variable rate Variable rate $ 88 $ — $ 20 $ — $ — $ — $ 108 $ 108 Average interest rate 6.4% 6.3% 6.3% —% —% —% Total debt (1) $5,375 $5,766 2005 INTEREST RATE DERIVATIVES INTEREST RATE SWAPS Fixed to variable $ — $692 $ — $ — $ — $ — $ 692 $ (5) Average pay rate 9.3% 10.0% —% —% —% —% Average receive rate 9.4% 9.3% —% —% —% —%

(1) Excludes the fair market value of the interest rate swaps which totaled approximately $(5) million as of December 31, 2005. host hotels & resorts 45 As of December 31, 2005, approximately 85.1% of our debt as fair value hedges for both financial reporting and tax purposes bears interest at fixed rates. This debt structure largely mitigates and the amounts paid or received under the swap agreements the impact of changes in interest rates. We have some financial will be recognized over the life of the agreement as an adjust- instruments that are sensitive to changes in interest rates, ment to interest expense. Changes in the fair value of the swap including our credit facility. The interest rate on our credit and the Series I senior notes and Series G senior notes, respec- facility is based on a spread over LIBOR, ranging from 2.0% to tively, are reflected in the balance sheet as offsetting changes and 3.75%. There was $20 million outstanding on our credit facility have no income statement effect. The fair value of the Series I at December 31, 2005. interest rate swap at December 31, 2005 and December 31, 2004 We expect the proportion of fixed rate debt in our capital was $1 million and $18 million, respectively. The fair value of structure to range from 70% to 85% of our total debt, although the Series G interest rate swaps at December 31, 2005 and there can be no assurances that we will be able to achieve this December 31, 2004 was $(6) million and $1 million, respectively. result on terms acceptable to us. In furtherance of this objec- These amounts are included in the senior notes line item on our tive, we have entered into three interest rate swaps effectively consolidated balance sheet. converting $692 million of fixed rate payments to floating rate If market rates of interest on our variable rate debt and the payments based on a spread to LIBOR. above swap agreements increase or decrease by 100 basis points, On December 20, 2001, we entered into a 5-year interest rate the change in interest expense would change future earnings swap agreement, which was effective on January 15, 2002 and and cash flows by approximately $8 million annually. matures in January 2007, effectively converting our Series I senior notes to floating rate debt. Under the swap, we receive fixed-rate Exchange Rate Sensitivity payments of 9.5% and pay floating-rate payments based on one- As we have non-U.S. operations (specifically, the ownership of month LIBOR plus 450 basis points on a $450 million notional hotels in Canada and Mexico), currency exchange risk arises as a amount, which is equal to the current amount of outstanding normal part of our business. To manage the currency exchange Series I senior notes. On August 21, 2003, we entered into two risk applicable to ownership in non-U.S. hotels, where possible, four-year interest rate swap agreements, which mature October we may enter into forward or option contracts. The foreign cur- 2007, effectively converting our Series G senior notes to floating rency exchange agreements that we have entered into are strictly rate debt. Under the swaps, we receive fixed-rate payments of to hedge foreign currency risk and not for trading purposes. 9.25% and we make floating-rate payments based on six-month On August 30, 2001, our Canadian subsidiaries entered into LIBOR plus 590 basis points on a $242 million notional a mortgage loan pursuant to which they borrowed $96.6 mil- amount, which is equal to the current amount of outstanding lion (denominated in U.S. dollars) at a variable rate of LIBOR Series G senior notes. We have designated the interest rate swaps plus 2.75%. At that time, we entered into currency forward 53005_FinancialsX2 4/10/0615:35Page46 46 host hotels & resorts 2005 comprehensive income inourconsolidated balance sheet. includedinaccumulated which waspreviously other 2003, approximately $18millionin We recognized alossof hedges. as resulted nolongerqualifying contracts intheforward we entered which into transactions certain In December 2003, changes recorded inaccumulated othercomprehensive income. were recorded offsetting atfairvalueonthebalance sheetwith contracts andtheforward payments, thedebtservice hedges of which were ascashflow designated payments, debt service dollarsonamonthlybasisto cover Canadian dollarsto U.S. converting tocontracts hedgethecurrency exposure of foreign currency exchange agreements. andno no outstandingnotionalamountunderthesecontracts we have After thesesales, sale. onthedate thosecontracts of of which approximated thefairvalue respectively, and $10million, forapproximately to athird party $8million respectively, lion, approximately $32millionand$19mil- currency of contracts theforeign thenotionalamountsof we assigned October 2005, In January 2005and related to thesecontracts. respectively, $7million, $2millionandalossof we recorded againof For 2005and2004, each period. operations dated statement of thechange infairvalueisrecorded inourconsoli- Accordingly, 53005_FinancialsX2 4/10/0615:35Page47 okn ttmnsicue mn tes thefollowing: amongothers, looking statements include, different from thoseexpressed orimpliedby usintheforward- performance orachievements to bematerially results, our actual Factors which may cause anduncertainties. risks assumptions, includingreferences to assumptions. similar terms andphrases, “may,” andother “continue,” “predict,” “plan,” “project,” “will,” “could,”as “anticipate,” “believe,” “estimate,” “expect,” “intend,” such terms andphrases statements are identified by theiruseof Theseforward-looking amountsnotyet determinable. mates of future results andesti- basedonforecastsother information of analysesand amongotherthings, annual andrelate report to, Thesestatements are includedthroughout this 1995. Act of thePrivate LitigationReform Securities themeaningof within statements In we thisreport make some “forward-looking” These forward-looking statementsThese forward-looking are subjectto numerous ■ ■ ■ ■ ■ ■ ■ ■ preferred stock; our andintheterms of defaultthat could occur, of includingtherisk contained inourdebtagreements, to pay resulting dividends from restrictive covenants andourability flexibility the reduction inouroperating obtain financinginthefuture; which may to affectourability leverage, our degree of may inaccordance notperform expectations; with thatpotential acquisitionsand therisk ordevelopments to acquireour ability ordevelop additionalproperties managers; property to our maintaingoodrelationshipsour ability with accommodations androom rate; of quality location, to competeour ability effectively inareas such asaccess, including meetingcapitalexpenditure requirements; to inafirst-classmanner, maintainproperties our ability procedures andcosts; construction prices, influence ordetermine wages, changes intaxes andgovernment regulations that our liquidity; financingand andtheavailability andterms of perties rates andoccupancy thatcanbeachieved by such pro- room thelevel of atourhotels, products andservices and changes demandfor affect intravel patterns thatwill national andlocaleconomic andbusinessconditions FORWARD-LOOKING STATEMENTS tions orcircumstances onwhich any such statement isbased. condi- regardexpectations with thereto orany change inevents, ment contained inthisannual to report reflect any change inour release any to updates any orrevisions state- forward-looking we disclaimany obligationto publicly laws, securities federal Except required by asotherwise the above. the factors described looking statements are by qualifiedintheirentirety reference to ourforward- Accordingly, and uncertainties. risks unknown are subjectto change andto inherent and known ments, aswell asany state- forward-looking operations, and results of Ourfuture financialcondition from thoseprojected orassumed. tions could beincorrect andactualresults could differmaterially statementrate andtheforward-looking basedontheseassump- theseassumptionscould prove to beinaccu- any of assumptions, statements ourforward-looking are baseduponreasonable of Although we believeAlthough thattheexpectations reflected inany ■ ■ ■ ■ ■ ■ ■ ihteScrte n xhneCmiso,orSEC. andExchange theSecurities with Commission, in our Annual Report onForm 10-Kandinotherfilings other factors discussedundertheheading “Risk Factors” and costs andexpenses; operating ourproperty-level the relatively fixed nature of newdebtfinancings; and availability of onthecost any agencydowngrades rating of the effect thelimitationsimposedby theserules; within to operate effectively oursubsidiaries of and theability andourability income forfederal taxpurposes, sidiaries to maintaintheirstatusastaxableREITsub- subsidiaries our of certain of theability incomefederal taxpurposes, for tosatisfy therules maintainitsstatusasapartnership to partnership theoperating of theability tax purposes, order income foritto maintainREITstatusforfederal Host’s to continue ability to satisfycomplex in rules taxlegislative action; the effectsof interpretation thereof; andchanges inlaws andregulations orthe requirements, the needforcompliance environmental with andsafety including andinitiatives, actions government approvals, insurance onourproperties; property adequate orfullreplacement cost “all-risk” toinsurance maintain forterrorist actsandourability on travel to recover andourability fullyunderourexisting andpotential terror terrorist activity alerts the effectof 47 host hotels & resorts 2005 53005_FinancialsX2 4/10/0615:35Page48 48 host hotels & resorts 2005 Other Debt EQUITY STOCKHOLDERS’ LIABILITIES AND Cash andcashequivalents Restricted cash Other fixtures andequipmentreplacement fund Furniture, net financingcosts, Deferred Investments inaffiliates Due from managers Assets heldforsale net andequipment, Property ASSETS EXCEPT PERSHARE AMOUNTS) (IN MILLIONS, 2005 AND 2004 DECEMBER 31, tchles equity Stockholders’ otherconsolidated partnerships of partners minority Interest of L.P. Host Marriott, of partners minority Interest of assetsheldforsale Liabilities associated with Accounts payable andaccrued expenses Accumulated othercomprehensive income Additional paid-incapital omnsok a au .1 750millio parvalue$.01, Common stock, Convertible Subordinated Debentures debt Mortgage and$491millio including$493million Senior notes, Deficit Other Cumulative redeemable preferred stock (liquidationpr 5. ilo hrsise n usadn,respectively 351.4 millionshares issuedandoutstanding, eetrs respectively Debentures, oa iblte n tchles equity Total liabilitiesandstockholders’ equity Total stockholders’ 10.0millionand14.0millio 50 millionshares authorized; Total liabilities Total debt Total assets CONSOLIDATED BALANCE SHEETS hrsatoie;361.0millionshares and n shares authorized; See Notes to Consolidated FinancialStatements ,nto icut fExchangeable Senior of discount, netof n, frne$5 ilo n 30mlin respectively), eference $250millionand$350million, hrsise n usadn,respectively n shares issuedandoutstanding, $7,434 $3,050 $8,245 $8,245 052004 2005 3,080 1,823 2,417 5,683 5,370 (923) 241 148 184 109 157 143 387 110 119 165 — 15 63 41 41 73 26 4 $7,298 $2,890 $8,421 $8,421 2,953 2,043 2,395 5,818 5,523 (911) 337 113 156 347 154 168 151 492 122 113 13 70 69 51 98 86 26 3 53005_FinancialsX2 4/10/0615:35Page49 Less: Dividends onpreferred Dividends stock Less: affiliates inlossesof Equity interestMinority expense Gain (loss)onforeign currency andderivative contracts transactions Net onproperty gains Interest expense Interest income BASIC AND DILUTED EARNINGS(LOSS) PERCOMMONSHARE BASIC AND DILUTED EARNINGS(LOSS) PERCOMMONSHARE: NET INCOME(LOSS) AVAILABLE TO COMMONSTOCKHOLDERS NET INCOME(LOSS) Income from discontinued operations. INCOME (LOSS) FROM CONTINUINGOPERATIONS Benefit from (provision for)income taxes INCOME (LOSS) BEFOREINCOMETAXES onConvertibleDividends Preferred Securities OPERATING PROFIT EXPENSES REVENUES EXCEPT PERSHARE AMOUNTS) (IN MILLIONS, 2004 AND 2003 2005, YEARS ENDEDDECEMBER31, Discontinued operations Continuing operations Gain oninsurance settlement Hotel expenses departmental Food andbeverage Rooms Other income Other Food andbeverage Rooms Rental income Corporate andotherexpensesCorporate Depreciation andamortization expenses Other property-level Management fees Total hotel sales sunecsso redeemed preferred stock Issuance costs of Total costs operating andexpenses Total revenues CONSOLIDATED STATEMENTS OF OPERATIONS See Notes to Consolidated FinancialStatements .38 $ 135 $ .30 $ $2,341 0520 2003 2004 2005 3,770 3,362 3,881 1,032 1,180 (443) 877 566 249 111 519 166 138 162 368 291 170 (27) (16) (24) .08 — — 80 21 28 67 (4) (1) (9) 2 .2 (.07) $ (.12) $ .4 $(1.00) (.34) $ 4)$(21) $ (41) $ 214$1,875 $2,114 ,6 3,111 3,467 ,7 2,933 3,177 3,223 3,574 ,2 1,023 1,121 43 (488) (483) 4 773 474 842 526 213 232 0 100 106 9 290 397 4 342 289 128 349 290 141 6 870 965 3)(35) (37) (247) (260) (74) (84) 1)(22) (16) 2 .93 .22 —14 (32) — 75 11 17 11 4261 13 74 10 760 67 4 (5) (4) 4 — (4) (19) (6) 3 (3) (3) 112 49 host hotels & resorts 2005 53005_FinancialsX2 4/10/0615:35Page50 50 host hotels & resorts 2005 RFRE COMMON PREFERRED 2004 AND 2003 2005, YEARS ENDEDDECEMBER31, HRSOUTSTANDING SHARES 00310Blne eebr3,20 4 300$93 15 $ $(923) $3,080 4 $ 241 $ 2005 December 31, Balance, 361.0 10.0 (2) $ $(830) $2,100 3 $ 339 $ 2002 December 31, Balance, 264.8 14.1 40314Blne eebr3,20 3 ,5 91 13 (911) 2,953 3 337 2004 December 31, 28 Balance, 351.4 14.0 (851) 2,617 3 339 2003 December 31, Balance, 321.4 14.1 41 eepino ls rfre tc 10 4 — (4) — — (100) Class A Preferred Stock Redemption of — (4.1) 40 eepino ls rfre tc 9)——()— (4) — — (96) ClassBPreferred Stock Redemption of — (4.0) . suneo ls rfre tc 8———— — — — 98 ClassEPreferred Stock Issuance of — 4.0 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY e noe———1 14 $ — (23) 14 34 (23) — 34 — — — — — — — — — — Foreign currency contracts forward Foreign adjustment currency translation — Othercomprehensive income — (loss): Net income — — — — — — . suneo omnsok—112—— — — 102 $166 — (27) 1 (147) — — — — 3 166 — — — — 3 — — — — — — common stock Issuance of 6.8 — 301 — — interests limited partner $ Redemptions of — — onpreferred Dividends stock 1.1 — oncommon Dividends stock — — (37) — — (19) — — Common stock issuedforthecomprehensive 1 — — — 1.7 — — Comprehensive income — — — — Unrealized loss onHMServices 1 — — (15) — Foreign adjustment currency translation — — Othercomprehensive income — (loss): — Net income — — — (15) — — — — — common stock — Issuance of — — — 25.0 — — — interests limited partner Redemptions of — 501 onpreferred Dividends stock 2.6 oncommon Dividends stock — — — — — — Common stock issuedforthecomprehensive — — 2.4 — — Comprehensive loss — — Unrealized common stock lossonHMServices 18 — Foreign currency contracts forward — Foreign adjustment currency translation — Othercomprehensive income — (loss): — 18 Net loss — — — — — common stock — Issuance of — 51.0 — — Common stock issuedfo 1.4 — Comprehensive income — — — Unrealized common stock gainonHMServices — — Realized lossonforeign currency contracts forward — — — iied npeerdsok———(5 — (35) — — — interests limited partner Redemptions of onpreferred Dividends stock 4.2 — — — o omnsok——7—— — 7 — — — — 18 — — — — for common stock 14 — stock andemployee stock purchase plans — — — 21 — — for common stock stock andemployee stock purchase plans omnsokt e noe————()(1) (1) — — (1) — — (1) — — common stock to netincome — 1 — 1 — — to netincome — — to netincome o omnsok——7—— — 7 — — — — 9 — — for common stock and employee stock purchase plans AND COMPREHENSIVE INCOME (LOSS) r thecomprehensive stock See Notes to Consolidated FinancialStatements (IN MILLIONS) RFRE OMNPI-NERIG OPEESV INCOME COMPREHENSIVE EARNINGS PAID-IN COMMON PREFERRED TC TC AIA DFCT NOE(OS (LOSS) INCOME(LOSS) (DEFICIT) CAPITAL STOCK STOCK DIINLRTIE TE COMPREHENSIVE OTHER RETAINED ADDITIONAL ACCUMULATED (15) $ $168 $44 53005_FinancialsX2 4/10/0615:35Page51 Distributions to minority interests to minority Distributions onpreferred stockDividends net cumulative redeemable preferred stock, Issuances of CASH AND CASHEQUIVALENTS, CASH AND CASHEQUIVALENTS, INCREASE (DECREASE)INCASH AND CASHEQUIVALENTS cash Change inrestricted common stock Issuances of repaymentsScheduled principal contracts Canadiancurrency forward Prepayment of Debt prepayments repayments netof Draw oncredit facility, debt Issuances of Financing costs FINANCING ACTIVITIES Other World Trade Center hotel Disposition of expenses netof LLC, interest inCBMJoint Venture, Proceeds from thesaleof net assets, Proceeds from salesof INVESTING ACTIVITIES Adjustments to reconcile to cashprovided by operations: Net income (loss) OPERATING ACTIVITIES (IN MILLIONS) 2004 AND 2003 2005, YEARS ENDEDDECEMBER31, Dividends oncommonDividends stock cumulative redeemable preferred stock Redemption of frominvestments equity Distributions Acquisitions Note receivable collections fixtures andequipmentreplacement fund Change infurniture, Capital expenditures: Discontinued operations: Cash provided by (usedin)financingactivities Cash usedininvesting activities Changes inotherliabilities Depreciation andamortization Repositionings andotherinvestments Renewals andreplacements Amortization of deferred financingcosts deferred of Amortization Changes inotherassets Change inaccrued interest payable interestMinority expense affiliates inlossesof Equity (Gain) lossonforeign currency andderivative contracts transactions Net onproperty gains Income taxes Change induefrom managers Gain ondispositions Depreciation Cash provided by activities operating CONSOLIDATED STATEMENTS OF CASH FLOWS n fyear end of year of beginning See Notes to Consolidated FinancialStatements 184 $ 166 $ 0520 2003 2004 2005 (631) (246) (429) (163) (102) (100) (284) (107) (242) 347 512 650 122 368 (10) (30) (58) (18) (12) (17) (19) (75) — — — — 45 20 90 14 16 17 (2) 5 5 2 7 1 7 1 8 4 764 $ 347 $ —$14 $— 120 (1,007) (1,230) 26 179 (276) (147) (505) 47 403 (417) 14 — (104) (324) (503) 27 (197) (207) 6 361 764 6 371 364 0 501 301 3 813 837 184 246 4 342 349 3)(35) — (37) (19) 3)(12) (38) 6)(52) (61) (16) (16) — (47) 5)(65) (52) 4)(20) (44) 1)17 (15) 2)(30) (20) —— —— (7) — 185 — 9(13) 19 8— 98 736 17 7— 47 022 20 22 16 617 16 7 (6) (7) 3 22 (3) 5 (5) (5) 63 (10) 9 619 45 51 host hotels & resorts 2005 53005_FinancialsX2 4/10/0615:35Page52 52 host hotels & resorts 2005 interest inaconsolidated partnership. partner’s aminority inredemption of 2004, December 30, which we hadpurchased Vornado on Realty Trust, units of respectively. $41 million, $35millionand valuedat$19million, partners by minority held L.P. Host Marriott, of orOPunits, units, partnership were issuedup respectively, 2004and2003, 2.6 millionand4.2shares for2005, approximately 1.1million, common stock issued, the shares of of Additionally, ourConvertible Subordinated Debentures. of 2.1million common shares were issuedupontheconversion of 6.8million common 2005, stock issuedduring the shares of Of respectively. common stock, lion and56.6millionshares of 30.0mil- we issued9.6million, 2004and2003, 2005, During fteFnnilAcutn tnad or,o AB revision orFASB, theFinancial Accounting Standards Board, of themeaning we interest are within inavariable anowner entity we determine that if Additionally, block managementdecisions. inor to participate stockholders orotherpartners minority of Thecontrol factors we consider includetheability ship interest. partner- thegeneral of whenwe amajority own investments, partnership inthecaseof anothercompany or, voting shares of the factors determining control) whenwe over own 50%of other We consolidate entities(intheabsence of trolled affiliates. theCompany andcon- anditssubsidiaries the accounts of The accompanying consolidated financialstatements include Consolidation Presentation of and Principles Basis of International. orMarriott anditssubsidiaries, Inc. International, 89are by managedorfranchised Marriott theseproperties, Of Hilton® and Westin® names. brand Four Seasons®, Fairmont®, Hyatt®, Ritz-Carlton®, undertheMarriott®, primarily Mexico operated CanadaandMexicoToronto City, andCalgary, located properties throughout theUnitedlodging States, hotel full-service andupper-upscale, 107luxury interests in, which are referred to asOP units. interests, partnership the approximately own 95%of 2005, December 31, and asof Host LP We of are partner thesolegeneral and itssubsidiaries. partnership, or theoperating orHost LP, L.P., Host Marriott, conductedoperations solely our with orREIT, self-administered real estate investment trust, We operateasaself-managedand hotel properties. of owner the isprimarily structure, through anumbrella partnership operating corporation, aMaryland Host Corporation, Marriott Business of Description 1 nJnay3 05 etaserd$7mlino preferred $47millionof we transferred 2005, 3, On January so eebr3,20,w we,orhadcontrolling we owned, 2005, December 31, As of POLICIES SUMMARY OFSIGNIFICANT ACCOUNTING SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ntecneso foperating on theconversion of through an operating partnership, through anoperating AND FINANCING ACTIVITIES n qimn fapproximately $131million. and equipmentof debtsecured by mortgage thehotel andproperty $95 millionof we andrecorded beganconsolidating the partnership As aresult, foreclosed onanote receivable from theotherlimited partner. We after thepartnership alsobecamethe solelimited partner lion. for approximately $3mil- D.C. in in theJWMarriott Washington, interest interest andthepreferred equity heldby outsidepartners debt. lion inmortgage approximately $34mil- includingtheassumptionof $58 million, approximately forapurchase of price at McDowell Mountains, debtby thebuyer.mortgage approximately $20millionof including theassumptionof approximately $25million, Farmington forapurchase of price is shown foranyis shown thatare securities anti-dilutive. No effect Debentures andtheExchangeable Senior Debentures. theConvertible Subordinated ests to common OPunits, that have theoptionto convert inter- theirlimited partnership interests otherminority partners, OP unitsheldby minority thosepreferred undercomprehensiveshares granted stock plans, potentially dilutive securities. common stock outstandingplusother shares of age number of by theweighted aver- adjusted forpotentially dilutive securities, netincomedividing (loss)available to common stockholders as common (loss)per Diluted share earnings iscomputed by ing. common stock outstand- shares of weighted average number of net income (loss)available to common stockholders by the common (loss)per Basic earnings share iscomputed by dividing (Loss)PerEarnings Common Share results could differfrom thoseestimates. Actual revenues period. thereporting andexpenses during of thefinancialstatements andthereported amounts the date of contingent assetsandliabilitiesat liabilities anddisclosure of assetsand and assumptionsthataffectthereported amountsof requires managementto make estimates orGAAP, America, accounting accepted generally principles intheUnited States of financialstatements with inconformity The preparation of FinancialStatements inthePreparation Estimates of Use of andbalances havetransactions beeneliminated. All intercompany material consolidatethen we will theentity. or both, occur, they the entity’s expected residual returns if receive of amajority occur, they the entity’s expected lossesif of amajority interest absorb andthatourvariable will Entities” Variable Interest “Consolidation of 46, to Interpretation No. uigJn 03 we acquired theremaining partner general JuneDuring 2003, we acquired theScottsdale Marriott 2004, On September 22, we soldtheHartford at Marriott 2005, 6, On January Dilutive may securities include 53005_FinancialsX2 4/10/0615:35Page53 Diluted earnings (loss)availableDiluted earnings to maretls fthefairvaluelesscosts to sell islower than lossif impairment record we will an are met, thesecriteria If in atimelymanner. exist which could from prevent beingcompleted thetransaction nonrefundable financingcontingencies cashandnosignificant under which thebuyer hascommitted amountof asignificant tobinding agreement purchase hasbeensigned theproperty a Directors hasapproved thesale, for-sale whenourBoard of we classify assetsasheld- Accordingly, bewithdrawn. sale will toactions complete thesaleare unlikely to change orthatthe becompleted oneyear will andthat within asset isprobable, thehotel. ence between thefairvalueandnetbookof lossisrecorded a forthediffer- isimpaired, aproperty If value. flows are from lessthanitsnetbook each property individual itisprobablewhether thatestimated undiscounted future cash revenues. property 5% of approximately fundedwith which isgenerally hotels, certain ment fundforrenewal andreplacement capitalexpenditures at FIFO cost ormarket andexpensed asutilized. Food and beverage inventory items are recorded atthelower of purchases are expensed whenopenedandplaced inservice. Subsequent replacement three years. estimated usefullifeof over Theseamountsare amortized thenfully the is expanded). rooms ormeetingspace atahotel tion orwhenthenumber of ispurchasedtory amajorrooms (inconjunction renova- with inven- significant or when ahotel opening, linen) atthetimeof therelated assets. or theusefullives of theleaseterm improvements over are amortized of theshorter Leasehold three to ten years forfurniture andequipment. 40years and generally forbuildings theassets, useful lives of methodovercomputed usingthestraight-line theestimated Depreciation is and maintenance are expensed asincurred. repairs while improvements andcapitalleasesare capitalized, Replacements and development andconstruction. during cost includesinterest andreal estate taxes incurred properties, For newlydeveloped andequipmentisrecordedProperty atcost. andEquipment Property (1) (loss)availableBasic earnings to Net income (loss) PER SHARE AMOUNTS) EXCEPT (IN MILLIONS, Represents issuance costs theClassBpreferred associated theoriginal stock with in2005andtheClass A preferred stock in2 suigdsrbto fcommon of Assuming distribution common stockholders redeemed Issuance costs of onpreferred stockDividends common stockholders ewl lsiyahtla edfrsl hntesl fthe We classifyahotel asheldforsalewhentheof will ourreal estate basedon properties We of assessimpairment fixtures andequipmentreplace- We maintainafurniture, silver, glass, We capitalize inventory certain (such aschina, less shares assumedpurchased comprehensive stock plan, shares underthe granted at average market price preferred stock (1) NOESAEICM HR NOESHARE INCOME SHARE INCOME SHARE INCOME LS)SAE MUT(OS HRSAON LS)SAE AMOUNT SHARES (LOSS) AMOUNT SHARES (LOSS) AMOUNT SHARES (LOSS) 16330$.47 $ 353.0 $166 15355$.38 $ 355.5 $135 3 5. .38 353.0 135 2)—(.08) — (27) . — 2.5 — 4 (.01) — (4) 0520 2003 2004 2005 E E PER PER PER infinite have lives ourpartnerships asdefinedinSFAS 150. noneof 2005, December 31, As of 2004. December 31, that have infinite lives totaled asof $3million interests inconsolidated partnership Third investments party respectively. 2005and2004, December 31, $83 millionasof in theconsolidated balance sheetsandtotaled and $26million otherconsolidated partnerships of partners minority interest of thathave partnership the operating finite lives are includedin interests inconsolidated partnership Third investments party of respectively. 2005and2004, December 31, $122 millionasof in theconsolidated balance sheetsandwas$119million Host LP of partners minority ispresentedparties asinterest of by owned third partnership theoperating The percentage of InterestMinority obligation to repay thedebtincashfrom financingactivities. it isappropriate the to linkthechanges cashwith inrestricted underourloanagreements, restrictions are thedirect result of managementbelieves thatbecausetheseamounts cash flows, thestatement of For of purposes andprovisions. restrictions and excess cashflow debtagreement depositsdueto mortgage aswell ascash collateral furniture andfixtures, insurance, taxes, real estate Restricted cash includes reserves fordebtservice, Restricted Cash purchase to becashequivalents. 90 days orlessatthedate of We of consider liquidinvestments allhighly amaturity with Cash andEquivalents cost toor expire further us. without are asconditions satisfied deferral subsequent periods requiring andrecognized saleordeferred asincome in nized atthetimeof are properties recog- Gainsonsalesof sale onthebalance sheet. ations andclassifytheassetsrelated liabilities asheldfor oper- discontinued onourconsolidated operations statement of as thesale, buyer orthatisrequired to berepaid asaresult of includinginterest expense ondebtassumedby the ating results, therelated together with oper- We classifytheloss, will ciation. depre- cease thehotel incurring andwill amountof the carrying YEAR ENDEDDECEMBER31, 3. 4210$.05 $ 281.0 14 $ — $ 337.3 — $ (1 3. (1)$2)210$(.07) 281.0 $(21) $(.12) 337.3 $(41) 4)373(1)(1 8. (.07) 281.0 (21) (.12) 337.3 (41) 3)—(1)(5 (.12) — (35) (.11) — (37) — —————— 4 .1 — — — (.01) — (4) 004. 53 host hotels & resorts 2005 53005_FinancialsX2 4/10/0615:35Page54 54 host hotels & resorts 2005 Foreign currency translation Unrealized common stock gainonHMServices (IN MILLIONS) income (loss)inthebalance sheetare asfollows: total accumulated othercomprehensive The components of Other Comprehensive Income (Loss) are provided. services Revenues are recognized whenthe ourhotels. expenses of reflect operations revenues and Our consolidated results of Revenues comprehensive income. are adjustments reflectedtranslation inaccumulated other Theresulting exchange atthebalance rate ineffect sheetdate. dollarsusingthe are theproperties to translated U.S. of assetsandliabilities The average exchange rates fortheperiod. dollarsusingthe tothe localcurrency andthentranslated U.S. of Theoperations Mexico. locatedproperties inCanadaa four consist ourforeign operations of 2005, December 31, As of Foreign Currency Translation thedebt. overamortized theremaining lifeof Financing costs related to long-term debtare and deferred Charges Deferred theirrespective subsidiaries. each of aswell as and foreign taxes paidby partnership, theoperating state taxes paidby Host partnership andtheoperating sidiaries, thetaxableREITsub- tax provision related to of theoperations The consolidated income taxprovision orbenefitincludesthe state andforeign income tax. are tosubsidiaries subject federal, ourtaxableREIT Additionally, assets. certain onsalesof gains” we are to subject taxes on “built-in- on any retained income, In additionto andstate paying federal taxes other requirements. income annually to ourstockholders certain andcomply with ourtaxable provided allof we distribute incomefederal tax, are notsubjectto assuch, theInternal Revenue Code and, of whenthenewrate isenacted. intheperiod inearnings ognized taxassetsandliabilitiesfromdeferred achange isrec- intaxrates Theeffecton differences are expected to berecovered orsettled. enacted taxrates ineffectfortheyear inwhich thosetemporary taxassetsandliabilitiesare Deferred measured using bases. existing assetsandliabilitiestheirrespective tax amounts of utable to differences between thefinancialstatement carrying are recognized fortheestimated future taxconsequences attrib- “Accounting forIncome Taxes.” taxassetsandliabilities Deferred We account forincome taxes inaccordance SFAS with 109 Income Taxes Total accumulated othercomprehensive income We have elected to betreated asaREITundertheprovisions these properties arethese properties maintainedin nd one property located in nd oneproperty 052004 2005 $4 $15 11 $5 $13 8 related to stock-based employee compensation includedinthe thecost Therefore, vestoption plangenerally over fouryears. Awards underouremployee stock 2002. tled after 1, January modified orset- prospectively to allemployee awards granted, and appliedit or SFAS 123, Stock-Based Compensation,” “Accounting for 123, SFAS No. value recognition provisions of we adopted thefair 2002, Effective January 1, to Employees.” “Accounting forStock 25, Issued dance with APB OpinionNo. we accounted forthoseplansinaccor- Prior to 2002, in Note 8. whic employee compensation plans, we maintainedtwo stock-based 2005, At December 31, Accounting forStock-Based Compensation anywith oneinstitution. credit exposure financial institutionsandlimittheamountof these therelative credit standingof of evaluations periodic We perform financialinstitutions. credit-quality high various We maintaincashandequivalents with cash equivalents. cashand credit consist of risk principally concentrations of thatpotentially subjectustoFinancial instruments significant Credit Risk of Concentrations bemeasuredacquired atfairvalue. will entity an assetsandliabilitiesof all As aresult, accounting. method of We account forbusinesscombinations underthepurchase Business Combinations thesecontracts. discussionof further SeeNote 4for operations. in theaccompanying statement of included inlossonforeign currency andderivative contracts and have thereafter beenmarked to market and each period nolonger mettherequirementstracts forhedgeaccounting thesecon- 2003, During lated othercomprehensive income. offsettingchanges recorded with to accumu- sheet atfairvalue, requirements forhedgeaccounting are recorded onthebalance Gainsandlossesoncontracts thatmeetthe ative instruments. which are considered deriv- related to theCanadianproperties, WeMexico have purchased City. currency contracts forward currencies relating to located ourproperties inCanadaand covered by theterminated swap. therelated debtover theremaining period interest expense of to asadjustments gains orlossesare andamortized deferred aninterest rate swap, Upon earlytermination of tive contracts. arecontracts recorded inlossonforeign currency andderiva- the gains andlossesfrom thechanges inthe market valueof andthe are marked theinstruments to market, Otherwise debt. orchargesoffsetting adjustments recorded to theunderlying with derivatives isrecorded ontheaccompanying balance sheet, the andthefairvalueof toas adjustments interest expense, theagreements arethese agreements recognized over thelifeof amountspaidorreceived under hedge accounting are met, therequirements for If considered derivative instruments. We have interest rate swapsandinterest rate capswhich are Derivative Instruments We are alsosubjectto exposure from fluctuations inforeign h are more described fully 53005_FinancialsX2 4/10/0615:35Page55 sunecsso redeemed Issuance costs of onpreferred stockDividends eut Total stock-based employee Deduct: Total stock-based employee Add: Pro netincome forma (loss) Pro netincome forma (loss)available to ments forwhich employees donotrender therequisite service. No compensation cost isrecognized instru- forequity period). thevesting (usually period requisite service the award—the an employee isrequired inexchange to provide service for be recognizedThat cost will over which during theperiod theaward limited exceptions). (with fairvalueof grant-date based onthe instruments equity in exchange foranaward of received employee services to measurepublic entity thecost of The statement requires a nized inthefinancialstatements. resulting from berecog- share-based all payment transactions which requires thatthecost Based Payment (“FAS 123R”), Share- 123R, theFASB issuedSFAS No. In December 2004, New Accounting Standards Application of (1) asreported Net income (loss), PER SHARE AMOUNTS) EXCEPT (IN MILLIONS, and unvested awards ineach period. ouroutstanding value basedmethodhadbeenappliedto of all thefair share (loss)per on netincome if (loss)andearnings theeffect tableillustrates Thefollowing restricted stock plans. pensation costs stock forsharesunderourdeferred and granted stock-based employee com- did notchange thecalculationof SFAS 123 Theadoptionof SFAS 123. effectiveoriginal date of value basedmethodhadbeenappliedto theseawards since the thefair is lessthanthatwhich would have beenrecognized if 2004and2003 netincome orlossfor2005, determination of Earnings (loss) per share (loss)per Earnings stock in2005andtheClass A preferred stock in2004. Represents issuance costs theClassBpreferred associated theoriginal with under fairvaluemethodforall compensation expense determined related taxeffects netof reported netincome (loss), compensation expense includedin Basic and diluted—pro forma Basic anddiluted—pro reported Basic anddiluted—as common stockholders preferred stock related taxeffects netof awards, (1) YEAR ENDEDDECEMBER31, $166 $135 0520 2003 2004 2005 $ .38 $ .38 166 (27) (22) 22 (4) —$14 $— 4)$(21) $ (42) (1)$(.07) $(.12) $(.07) $(.12) 3)(35) (37) 2)(16) (25) 416 24 1 14 (1) 4 — (4) Construction inprogressConstruction Furniture andequipment andleaseholdimprovementsBuildings Land andlandimprovements (IN MILLIONS) December 31: asof the following andequipmentconsistsProperty of reclassified to thecurrent year conform presentation. with year financialstatement prior amountshaveCertain been Reclassifications operations. position orresults of interpretation didnothave impactonourfinancial amaterial this Theadoptionof theobligation. estimate thefairvalueof exists to sufficientinformation reasonably if theasset, ation of oper- ordevelopment and(or)through thenormal construction, uponacquisition, which isgenerally obligation whenincurred, fortheconditional theliability assetretirement fair valueof recognize we the will thisstatement, theissuance of result of As a settlement. exists aboutthetimingand(or)methodof retirement isunconditional uncertainty even activity though obligationto The theasset perform theentity. the control of are conditional onafuture event thatmay ormay notbewithin inwhich the ment activity obligation refers to alegaloblig Aconditional assetretirement 143. used inFASB Statement No. theterm as clarified “conditional assetretirement obligation” which 143(“FIN47”), FASB Statement No. interpretation of an Accounting forConditional Asset Retirement Obligations, operations. effect onourfinancialpositionorresults of nothave thisstandard in2006will amaterial The adoptionof 2006. 1, January FAS 123Rare effective asof provisions of The 2002. based payment awards after granted January 1, have recognized thecosts share- all associated with therefore, FAS 123in2002and, We adopted thefairvalueprovisions of ditions are much thesameasrelated conditions inFAS 123. thosecon- conditions certain are met; compensation cost if of Employee share purchase notresult inrecognition planswill Less accumulated depreciation 2 and amortization nMrh20,teFS sudFS nepeainN.47, theFASB issuedFASB Interpretation No. In March 2005, PROPERTYEQUIPMENT AND iigad(r ehdo settlement timing and(or)methodof ation to anassetretire- perform 864 $ 7,434 $ 10,382 (2,948) 052004 2005 1,176 8,163 179 7,298 $ 826 $ (2,650) 1,115 7,922 9,948 85 55 host hotels & resorts 2005 53005_FinancialsX2 4/10/0615:35Page56 56 host hotels & resorts 2005 Other 1% — — Three full-service hotels Three full-service — — club 36-holegolf hotels 120Courtyard hotels Three full-service — 1% 898 — 19 475 33 $ — club 36-holegolf hotels 120Courtyard $17 49% 50% — 841 1% 100% Other 7 17 370 L.P. $ Ventures, Tiburon Golf CBM Joint Venture LLC Host FinancialTrust Marriott $17 (IN MILLIONS) 49% 3.6% 100% Other L.P. Ventures, Tiburon Golf CBM Joint Venture L.P. Host FinancialTrust Marriott (IN MILLIONS) osldt n,acrigy are accounted forunderthe accordingly, consolidate and, We investments own invoting interest entitieswhich we donot hsrsle norrcgiigte$9 ilo f6 This resulted inourrecognizing the$492millionof (the preferred securities “Convertible Preferred Securities”). oise1 ilo hrso 6 to issue11millionshares of Financial TrustMarriott which wascreated solely (the “Trust”), theHost we were required to deconsolidate theaccounts of Carlton, Naples Golf Resort. Cash distributions from Cash this distributions Resort. Naples Golf Carlton, clubsurrounding TheRitz- which thegolf owns L.P., Ventures, from thisinvestment 2004and2003. during 2005anddidnotreceive$1 millionduring any distributions approximately We received of cashdistributions agreements. InternationalMarriott pursuantto long-term management oursubsidiaries. usorany of by, CBMJoint Venture’s or guaranteed None debtisrecourse to, of to redeem ourremaining hastheright interest.partnership the Thereafter, between December 2007andDecember 2009. conditions, undercertain to redeem ourremaining interest, WeCBM Joint Venture. have to causethepartnership theright interest we a3.6%limited own in partner recapitalization, Post- International Marriott andSarofimwith Realty Advisors. CBMJoint Venture LP(“CBM Joint partnership, Venture”), Joint Venture LLC wasrecapitalized andconverted into alimited CBM ourinterest, In thesaleof conjunction with $41 million. approximately of taxes, netof and recorded againonthesale, approximately $92million Joint Venture LLC of forasalesprice seeNote 4. Trust andtheConvertible Preferred Securities, onthe For information further Debentures were outstanding. Convertible Subordinated $387millionof 2005, December 31, As of ourcommon stock. we issued6.8millionshares of asaresult, exercised to convert theirright and, $105million, of aliquidationprice with Convertible Preferred Securities, lion of 2.1mil- theholdersof 2005, During operations. statements of the related payments asinterest expense onourconsolidated we have classified Additionally, $17 millioninvested intheTrust. the investment, asanequity balance sheetandrecognizing, our classifiedinthemezzaninesectionof previously Securities Convertible Preferred the$475millionof eliminating as debt, “Convertible Subordinated Debentures”) issuedby theTrust convertible subordinated debentures dueDecember 2026(the 3 oa 6 $1,373 $69 $1,211 $41 Total Total u oteipeetto fFN4Ro aur ,2004, 1, FIN46RonJanuary Due to theimplementationof We have interest a49%limited inTiburon partner Golf CBMJoint Venture’s 120hotels isoperated by Each of ourinterest inCBM we sold85%of MarchDuring 2005, INVESTMENTS IN AFFILIATES 3 ⁄ 4 % convertible income quarterly WESI OUR OWNERSHIP WESI OUR OWNERSHIP NEET NETETDB ASSETS DEBT INVESTMENT INTERESTS NEET NETETDB ASSETS DEBT INVESTMENT INTERESTS 3 ⁄ 4 % Operating expensesOperating Total revenues (IN MILLIONS) Equity Other assets net andequipment, Property (IN MILLIONS) Dividends onConvertibleDividends Interest expense Interest income profitOperating for theyears endedDecember 31follows: fiitscnit fthefollowing: affiliates consists of Investments in us. andnotguaranteed by, non-recourse to, theseaffiliates is debtof The accounting. methodof equity Convertible Preferred Securities Other liabilities Debt December 31forouraffiliates follows: for approximately $1million. hotel, theBudapest Marriott owns that apartnership sold our49%interest Rt., inDunaSzalloda we 2004, OnDecember 30, thedebtisnon-recourse to us. of antees orcommitments andall inrelation to thesepartnerships andwe do nothave any guar- islessthan$500,000, partnerships these valueof Thetotal carrying or indirectly three own hotels. respectively. 2004and2003, $1 millionin2005, $6millionand investment were approximately $1million, Convertible Subordinated Debentures Expenses Net income (loss) Preferred Securities Depreciation andamortization due from Host Corporation Marriott SO EEBR3,2004 AS OFDECEMBER31, 2005 AS OFDECEMBER31, Combined summarized operating resultsCombined operating forouraffiliates summarized Combined balance asof summarized sheetinformation We interests thatdirectly inthree minority own partnerships Total liabilitiesandequity Total assets 37mlino Convertible Subordinated Debentures $387 millionof 42mlino Convertible Subordinated Debentures $492 millionof 482 $ $30 0520 2003 2004 2005 (348) (31) (60) (46) 33 88 $1,788 $1,788 $1,270 841 $ 4 427 $ 441 $ 3)$(43) $ (32) $ 052004 2005 35 (318) (325) 546 131 370 387 3)— (94) (32) (92) (58) (57) 31 3— 51 33 59 898 $ $1,618 $1,618 $1,049 139 475 106 492 77 53005_FinancialsX2 4/10/0615:35Page57 eisKsno oe,wt aeo 7 of arate with Kseniornotes, Series 9 of arate with Iseniornotes, Series 9 of arate with Gseniornotes, Series eisOsno oe,wt aeo 6 of arate with Oseniornotes, Series 7%due August 2012 of arate with Mseniornotes, Series Convertible Subordinated Debentures, call premiums call and Convertible Subordinated Debentures, excludes from interest expense items such as interest onour calculated inaccordance ourseniornotes indenture with and is ratio This atleast2.0xby partnership. theoperating of ratio an EBITDA-to-interest coverage including theachievement of conditions, various of andthesatisfaction tosubject restrictions to incurindebtedness ourability andpay is dividends indenture, tive annual rates indicated onthetableabove. therespec- outstanding seniornotes semi-annually inarrears of our We pay interest of oneach series for thesesameprovisions. repaid orthepre-Series Kindenture hasbeenamendedto allow only gointo effectoncewill allpre-Series Kseniornotes are theseprovisions However, pay onourpreferred dividends stock. make investments certain and utilize assetsaleproceeds, debt, provisionscertain thatallow to foradditionalflexibility incur Oindenture MandSeries contain Series K, TheSeries facility. to lendersthatare thecredit parties with agreements hedging andinterest andother swapagreements rate other seniordebt, certain aswell asour credit facility, our seniornotes indenture, antees benefitthenotes andpledgesratably outstandingunder Theguar- oursubsidiaries. interests equity inmany of pledges of andare ourexisting subsidiaries currently secured by of certain outstanding underourseniornotes indenture are guaranteed by Thenotes detailbelow. thatare discussedinfurther respectively, approximately $(5)millionand$19million, of agreements forinterest andfairvalueadjustments rate swap respectively, approximately $11millionand$14million, includes discounts of 2005and2004 December 31, standing seniornotes balance asof out- The respectively. and 2004was$3.1billion$2.9billion, 2005 December 31, ouroutstandingseniornotes asof amount of face The partnership. theoperating subordinated obligationsof partnership’s unsubordinated indebtedness andsenior to all theoperating allof payment with of ior notes are equalinright General. Senior Notes (3) (2) (1) Other through May 9.7%maturing 2012 anaverage with of rate Senior notes, 7 of arate with Bseniornotes, Series (IN MILLIONS) Credit facility thefollowing: Debt consists of eisEsno oe,wt aeo 8 of arate with Eseniornotes, Series xhnebeSno eetrswt aeo 3.25%due April 2024 Exchangeable of arate SeniorDebentures with Mortgage debt (non-recourse) secured by $3.1 billion of real estate assets, with anaverage with interest rate real estate assets, Mortgage debt(non-recourse) secured by $3.1billionof ovril uodntdDbnue,wt aeo 6 arate of with Convertible Subordinated Debentures, 4 tDcme 1 04 h oe a odo aur ,2005. Thehotel wassoldon January6, 2004. at December 31, thatwasreclassified asliabilitiesassociate debtrelated mortgage to theHartfordFarmington, Marriott Excludes $20millionof $1mil aninterest of swapagreement rate Includes thefairvalueof $(6)millio interest of swapagreements rate Includes thefairvalueof Total debt of 7.8% and 7.7% at December 31, 2005 and 2004, respectively, maturing through February 2023 through February maturing respectively, 2005and2004, 7.8%and7.7%atDecember 31, of Total seniornotes Restrictive Covenants. Restrictive DEBT ne h em forsno oe netr,oursen- our seniornotes indenture, Under theterms of ne h em fthesenior notes Under theterms of 1 3 7 1 ⁄ 1 3 2 ⁄ ⁄ ⁄ ⁄ 8 ⁄ 8 8 % due January 2007 % dueJanuary 4 8 % due August 2008 % due February 2006 % dueFebruary % dueOctober 2007 % dueNovember 2013 % dueMarch 2015 3 ⁄ 4 % dueDecember 2026 (2) (1) inad$8mlina fDcme 1 05ad20,respectiv 2005and2004, December 31, lion and$18millionasof n 1mlina fDcme 1 05ad20,respective 2005and2004, December 31, n and$1millionasof 60mlino 6 $650 millionof Nseniornotes were theSeries exchanged for 2005, On July 19, ourotheroutstandingexisting seniornotes. mately $2.4 billionof and approxi- ourcredit facility basis, on anequalandratable ourdirect andindirect which alsosecure, subsidiaries those of we have pledgedthecommon interests equity of for thenotes, As security guaranteed andotherindebtedness. our credit facility thathave oursubsidiaries also comprising allof our subsidiaries, Theseniornotes are guaranteed by of certain and September 15. 6 compliance ourseniornotes covenants. with we are in 2005, December 31, As of liens. ates andincurrence of affili- with transactions investments, acquisitions, expenditures, such aslimitationsoncapital matters, tions oncustomary Ourseniornotes indenture alsoimposesrestric- an acquisition. inconnection includingdebtincurred with ior notes indenture, or common andincuradditionaldebtunderthesen- dividends we may pay preferred conditions intheseniornotes indenture, interest coverage andsatisfytheseother the required level of Solongaswe maintain adjusted total assets). less than45%of undepreciated real estate values)andsecured indebtedness of adjusted total assets(using lessthan65%of Debentures) of indebtedness (excluding ourConvertible Subordinated incur indebtedness andpay includemaintainingtotal dividends covenants Other to limitingourability theperiod. of beginning occurred they atthe asif dispositionsandfinancings, tions, such asacquisi- to effect thetransactions, giving fiscal quarters calculation isbasedonourpro results forma forthefourprior the In addition, operations. on ourconsolidated statement of financingchargesdeferred thatare includedininterest expense ahi rer ttert f6 cash inarrears of attherate We pay will interest onthenotes semi-annually in obligations. oursubordinated our seniorindebtedness andseniorto of all allof payment with of 2015andare equalinright on March 15, The seniornotes mature approximately $639million. ceeds of 3 ⁄ 8 Issuances. % Series Nseniornotes duein2015andreceived% Series netpro- nMrh1,20,we issued$650millionof 2005, On March 10, 3 ⁄ 8 eisOsno oe.Tetrso the terms The of Oseniornotes. % Series (3) 3 ⁄ 8 % peryear payable onMarch 15 d with assetsheldforsale d with ly. ely. $5,370 136 $ 052004 2005 1,823 3,050 DECEMBER 31, 451 236 650 725 346 387 493 — 90 13 20 304 $ $5,523 2,043 2,890 468 243 300 725 346 492 491 — — 98 13 57 host hotels & resorts 2005 53005_FinancialsX2 4/10/0615:35Page58 58 host hotels & resorts 2005 of 1933 and are, therefore, freely transferable by theholders. freely transferable therefore, 1933andare, of Mseniornotes arethe Series registered undertheSecurities Act except that Lseniornotes, theSeries identical to theterms of Mseniornotes are theSeries substantially terms The of notes. oe eeecagdfr$5 ilo f7 notes were exchanged for$350millionof Lsenior theSeries In January 2005, which isdiscussedbelow. orde 36mlino our7 to redeem $336millionof Lseniornotes andavailable theSeries cash from theissuance of we usedthenetproceeds 2004, OnSeptember 2, each year. of payable 15and semiannually inarrears onFebruary August 15 Interest is ourotherseniorindebtedness. allof ment with pay- of 2012andare equalinright notes mature on August 15, Lsenior TheSeries feesandexpenses. underwriting discounts, $345millionafter senior notes andreceived netproceeds of by theholders. transferable freely therefore, 1933andare, under theSecurities Act of except Oseniornotes are thattheSeries registered aspects, Oseniornotes are material Series identicalinall substantially oe eeecagdfr$2 ilo f7 notes were exchanged for$725millionof Series Oseniornotes seniornote forthefollowing Series repayments: by theholders. freely transferable therefore, are, 1933and senior notes are registered undertheSecurities Act of except K thattheSeries Jnotes, theSeries identical to theterms of Kseniornotes are theSeries substantially Theterms of notes. the Exchangeable SeniorDebentures atany timesubsequent to of, orpart We canredeem forcashall, each year. October 15 of July 15 and April 15, payable 15, inarrears onJanuary quarterly Interest is ourunsubordinated debt. of all payment with of 2024andare equalinright Debentures mature on April 15, TheExchangeable Senior feesandexpenses. underwriting after discounts, $484 million, and received netproceeds of 3.25%Exchangeable SeniorDebentures issued $500millionof ceeaino related financingfees. deferred acceleration of thecallpremium andthe which includesthepayment of debtin2004, $55 millionontheearlyextinguishment of approximately We recorded aloss of date. itsmaturity of holders inexchange to retire fortheright thisdebtinadvance acallpremium to ourseniornotes require thepayment of of the New York Marriott terms The World Trade Center hotel. was fundedby theproceeds from theinsurance settlementfor Cseniornotes ourSeries The redemption of (discussed below). theExchangeable SeniorDebentures proceeds from issuance of Lseniornotes andthe ourSeries proceeds from issuance of Bseniornote redemptionsSeries were fundedthrough the The which were scheduled to mature in2008. bothof notes, Csenior ourSeries Bseniornotes and$218millionof Series related financingfees. deferred and theacceleration of callpremiums which includesthepayment of debtin2005, of nFbur 04 the$725million7 2004, In February On August 4, 2004, we issued $350 million of 7% Series L 7%Series we issued$350millionof 2004, On August 4, ■ ■ ■ Repayments. Exchangeable Senior Debentures. Exchangeable Senior our $895millionof we redeemed atotal of 2004, During $30millionontheearlyextinguishment We recorded alossof icag h eann 2 ilo f8 discharge theremaining of $20million approximately $21millionwasusedto 2005, on April 22, 7 to redeem $169millionof approximately $174millionwasused 2005, on April 11, our8 purchase $280millionof approximately $291millionwasusedto 2005, on March 17, senior notes. opypeamn rmus and to pay prepayment premiums; n20,we usedthenetproceeds from the In 2005, 7 ⁄ 8 7 % Series Bseniornotes, % Series ⁄ 8 3 % Series Bseniornotes and % Series ⁄ 8 % Series Eseniornotes; % Series nMrh1,20,we 2004, On March 16, 1 ⁄ 8 % Series Jsenior % Series 1 7 ⁄ 8 ⁄ 8 % Series Ksenior % Series % Series Msenior % Series 3 ⁄ 8 % Series E % Series edapoiaey74mlinsae f6 held approximately 7.4millionshares of subsidiary, awhollyowned Host FinancialTrust, Marriott 2005, amnso h ovril rfre euiis Under this payments ontheConvertible Preferred Securities. are too, Convertible Subordinated Debentures are so, deferred interest payments onthe If exceed 20consecutive quarters. the Convertible Subordinated notto Debentures foraperiod We may deferinterest payments on Subordinated Debentures. and interest andotherpayment dates ontheConvertible Convertible Preferred correspond Securities to theinterest rate andotherpayment dates forthe andthedistribution tion rate 6 annual of rate to receive preferential cumulative atan cashdistributions Preferred Securities. Convertible conversion by aholderof pursuant to anotice of Trust onlyconvert will Convertible Subordinated Debentures The ourcommon stock). $15.367pershare of version of price approximately 24millionshares (equivalent to acon- total of 3.2537shares perConvertible fora Preferred Security of rate ourcommon stock atthe theholderinto shares of option of Convertible Subordinated Debentures are convertible atthe andessentially wholly owned financial statements are to notmaterial investors astheTrust is ourmanagementhasconcluded thatsuch above; described ourguarantee theTrust are notpresented becauseof of Separate financialstatements which isitssoleasset. Debentures, the proceeds therefrom intheConvertible Subordinated commonown (the securities “Common Securities”) andinvest exists solelyto issuetheConvertible Preferred andits Securities TheTrust Convertible Subordinated Debentures issuedby us. theConvertible Preferred were Securities invested inthe of Proceeds from theissuance the Convertible Preferred Securities. amountsdueon provides andunconditional afull guaranteeof which theConvertible Subordinated Debentures were issued undertheindenture ourobligations pursuanttotogether with taken when Thisguarantee, areSecurities guaranteed by us. theConvertible Preferred ortheredemption of theTrust, of payments onliquidation by theTrust, distributions payment of The theTrust. beneficialinterestundivided intheassetsof TheConvertible Preferred represent Securities an million). $370 $50pershare (foratotal liquidationamountof ence of aliquidationprefer- with incomequarterly preferred securities, odecp oqaiidisiuinlbyr,asdefined. sold except to qualifiedinstitutionalbuyers, registered undertheSecurities Act andmay notbeoffered or thedebentures have notbeen stock issuableuponexchange of Exchangeable The SeniorDebentures andthecommon ing days. 30trad- foratleast20of theexchange pershare, price 120% of ourcommon stock ismore than which of theclosingsaleprice includingatany timeat conditions, undercertain maturity exchange theirExchangeable to SeniorDebentures prior Holders may to dividends ourcommon stockholders. of thepayment amongotherthings, exchange isadjusted rate for, The ourcommon stock. $17.82pershare of exchange of price which isequivalent to an approximately 28millionshares, of or atotal thedebentures, amountof principal each $1,000of 56.1319shares for ourcommon stock of atarate into shares of TheExchangeable SeniorDebentures are exchangeable price. 2019attheissue 2014and April 15, April 15, 2010, on April 15, require usto repurchase theExchangeable SeniorDebentures Holders have to theright intheindenture. assetforth price 2009upon30days notice attheapplicableredemption April 19, odr ftheConvertible Preferred are Securities entitled Holders of theConvertible Preferred andtherelated Securities Each of Convertible SubordinatedConvertible Debentures. 3 ⁄ 4 aal urel naras Thedistribu- % payable inarrears. quarterly has noindependentoperations. 3 so December 31, As of ⁄ 4 % convertible 53005_FinancialsX2 4/10/0615:35Page59 rowings, ranges from reference ranges 2.00%to 3.00%)thatissetwith rowings, LIBOR-based bor- inthecaseof (which, rates plusamargin undertheRevolvingborrowings Facility A atfloatinginterest We pay interest on theinitialscheduled maturity. the timeof conditions certain are metat foranadditionalyear if maturity We have anoptionto extend the inSeptember 2008. maturity TheCredit has aninitialscheduled Facility $150million. of inanaggregate inCanadianDollars amount subsidiaries $10millionandloansto ourCanadian aggregate amountof credit inan letters of sub-commitments fortheissuance of TheCredit alsoincludes Facility from 7.5xtoranging 7.0x. exceeds doesnotexceed 1.5xandourleverage ratio levels any timethatourunsecured interest coverage equalsor ratio Revolving Bisavailable Facility forborrowing at amount of theentire By contrast, equalsorexceedsleverage ratio 7.0x. andnoamountsbeingavailable our when but islessthan7.0x, being available equalsorexceeds whenourleverage ratio 6.75x $150million equalsorexceedsratio 6.5xbutislessthan6.75x, $300millionbeingavailable whenourleverage is lessthan6.5x, beingavailable $385million ourleverage ratio when with ratio, ing underRevolving dependingonourleverage Facility A vary amountsavailable forborrow- the facility’s financialcovenants, Subject to compliance with $190million. of Btranche Facility $385millionand(2)aRevolving ing Facility of A tranche (1)aRevolv- into isdivided credit two facility separate tranches: Therevolving loancommitment undertheamended amount. commits to bealenderforsuch to theCredit Facility, party whetherornotcurrently extent thatany oneormore lenders, by upto thefacility $100millionto the increase theamountof anoptionto $575millionwith commitments intheamountof andprovides credit aggregateour prior facility revolving loan TheCredit amends Facility Agents otherlenders. andcertain asCo-Documentation andCalyonGénérale New York Branch, Société Citicorp North Inc., America as Syndication Agent, N.A., America, of Bank asAdministrative Agent, Americas, (the “Credit Deutsche BankTrust with Facility”) Company we entered into anamendedandrestated credit facility 2004, Convertible Subordinated Debentures were outstanding. $387millionof 2005, December 31, As of ourcommon stock. of we issued6.8millionshares asaresult, to converttheir right and, exercised $105million, aliquidationvalueof with Securities, exchange fortheConvertible Subordinated Debentures. ourcommon stock issuedin shares of equal to thenumber of OPunits issueto usanumber of will partnership the operating such shares by us, Upon theissuance of delivered to such holder. be which will ourcommon stock, issueshares we of will holder, Upon conversion by aConvertible Preferred Securities Securities. Subordinated theConvertible Debentures underlying Preferred theConvertible forrepayment of liability assumed primary Preferred are redemption. Securities subjectto mandatory theConvertible adefault, Debentures upontheoccurrence of theConvertible Subordinated theacceleration of result of Upon orasa repayment atmaturity 1999. after December 2, theConvertible Subordinated Debentures redemption by usof areSecurities redeemable attheTrust’s optionuponany Subordinated Debentures. orjuniorto theConvertible passuwith pari thatrank securities respect to with ourcapitalstock ordebt cash distributions notbepermitted to we declare will orpay any circumstance, Amended andRestated Credit Facility. 2.1millionConvertible Preferred theholdersof 2005, During In connectionHost’s with theHost LP conversion to aREIT, theConvertible Preferred Subject to restrictions, certain On September 10, aaindla.A h ieo h rgnto ftela,each theloan, of theorigination At thetimeof Canadian dollar. was the theCanadiansubsidiaries the functionalcurrency of dollarsand wasdenominatedour Canadianproperties inU.S. loanon themortgage Prior to therepayment inOctober 2005, Derivative Instruments 2008. December 1, interest equalto 6.08%andmatures on debt hasafixed of rate The approximately $34million. debtof outstanding mortgage we assumedthe at McDowell Mountains inSeptember 2004, assets. proceedswas madewith from thesaleof thisdebt Theprepayment of ourproperties. secured by fourof debt mortgage we prepaid $82millionof 2004, of first quarter the During dispositionin2005. aproperty conjunction with debtassumedby thebuyer mortgage in and had$20millionof ourproperties debtsecured by mortgage two of of ior notes, thenetproceeds with from Osen- theSeries paid $140million, we pre- debtsecured by ourCanadian properties, the mortgage In additionto theprepayment of approximately $19million. of theprepayment with ourCanadianproperties secured by two of escrowedpreviously fundswere released to us. approximately $71millionof 2005, onOctober 31, As aresult, cashflow whenoperating mettherequired thresholds. 2005, of 2002andremained ineffectuntilthethird quarter of quarter T $96 million. twelveand equipmentforthetrailing monthsdeclinesbelow fixtures ground rent andreserves forfurniture, insurance, taxes, netcashflow after payment of (approximately $64million)if debtservice the CMBSPortfolio after paymentfrom of flow to retain excess certain requires servicer themortgage cash CMBSLoancontains The aprovision that CMBS Portfolio. which we refer to asthe andtheSwissôtel Chicago, Atlanta, the Westin New York, Buckhead the Swissôtel TheDrake, theHyatt Regency Boston, theHyatt Regency Reston, Boston, Overlooking theHyatt Regency Cambridge, Francisco Airport, theHyatt RegencyYork San Marquis Marriott Times Square, theCMBSLoanare Thesehotels securing theNew CMBS Loan. which we refer to asthe pass-through certificates, mortgage thatissuedcommercial atrust loan thatisthesoleassetof thesecovenants isdiscussedbelow. of impact whenitdeclinesbelow service or lenderto retain andholdinescrow thecashflow after debt contains restrictive covenants thatrequire servicer themortgage theseassetsare secured debtthat by mortgage of Eight 7.8%. of anaverage with interest rate that are secured debt, by mortgage we have 23assets 2005, December 31, As of recourse provisions. fundsandothercustomary misapplicationof except forfraud, debtisrecourse ourmortgage solelyto specificassets All of Debt Mortgage our Credit Facility. we hadapproximately $20millionoutstandingunder 2005, 31, December As of commitment feeis.55%onanannual basis. the Currently, undertheCredit unused capacity Facility. of basedontheamount vary commitmentquarterly feethatwill We are required to pay a basedonourleverage ratio. vary will Therate isgreater whenourleverage ratio than7.0x. higher applicableto Revolvingmargin Facility and.75% A borrowings thanthecorresponding thatis0.5%higher tosubject amargin underRevolving Borrowings Bare Facility to ourleverage ratio. ncnucinwt h ucaeo theScottsdale Marriott In the purchase conjunction with of we retired theremaining mortgage 2005, On October 17, ourhotel secure properties a$548millionmortgage of Eight his provision was triggered beginning inthethird beginning his provision wastriggered pcfe prtn ees The levels. specified operating 59 host hotels & resorts 2005 53005_FinancialsX2 4/10/0615:35Page60 60 host hotels & resorts 2005 a nSpebr20,we purchased asimilarinterest rate cap cap inSeptember 2005, theinterest rate Upon of theexpiration theloan. first two years of which cappedthefloatinginterest rate at8.1%forthe million, $88 we purchased aninterest anotional amountof rate capwith inSeptember 2003, D.C. Washington, secured by theJWMarriott, respectively. was $1millionand$18million, 2005and2004 thisinterest rate swapatDecember 31, value of fair The ting changes andhave noincome statement effect. Iseniornotes areSeries reflected inthebalance sheetasoffset- theswapand Changesinthefairvalueof interest expense. to asanadjustment theagreement recognized over the lifeof amounts paidorreceived be will undertheswapagreement andthe andtaxpurposes hedge forbothfinancialreporting We have theinterest designated rate swapasafairvalue notes. Isenior outstandingSeries is equalto thecurrent amountof which 2005)ona$450millionnotionalamount, December 31, plus450basispoints(8.9%at based onone-monthLIBOR 9.5%andpay floating-rate payments fixed-rate payments of we receive Under theswap, senior notes to floatingrate debt. effectively converting I ourSeries and matures 2007, inJanuary 2002 which waseffective 15, onJanuary rate swapagreement, respectively. and 2004, 2005 swaps was$(6)millionand$1atDecember 31, theseinterest rate fairvalueof The income statement effect. reflected inthebalance sheetasoffsettingchanges andhave no Gseniornotes are theswapsandourSeries the fairvalueof Changesin to asanadjustment interestthe agreements expense. berecognized over will under theswapagreements thelifeof andtheamountspaidorreceived andtaxpurposes reporting the interest rate swapsasfairvaluehedgesforbothfinancial We have designated Gseniornotes. outstandingSeries amount of which isapproximately equalto thecurrent notional amount, 2005)on a $242million basis points(10.1%atDecember 31, plus 590 floating-rate payments basedonsix-monthLIBOR 9.25%andwe make we receive fixed-rate payments of swaps, Under the Gseniornotes to ourSeries verting floating-rate debt. effectively con- rate thatmature swapagreements October 2007, approximately $19million. theloanfor prepaid theremaining outstandingbalance of foreign currency forapproximately contracts $18millionand we terminated theremaining In 2005, theloan. prepayment of we made anadditional$34million In December 2004, period. currencystanding forward contracts innetincome (loss)each theout- recorded theincrease ordecrease inthefairvalueof we Subsequent to theprepayment date, $18 millionin2003. approximately poses andwe recorded of alossonthecontracts werecurrency contracts deemedineffective foraccounting pur- theforward of all substantially As aresult, mately $8million. approxi- equalto theprepaymentscontracts forapayment of theloanandterminated theforeign currency $39 millionof we prepaid approximately 2003, During comprehensive income. offsettingchanges recordedsheet with inaccumulated other loon payment andwere recorded atfairvalueonthebalance andbal- thedebtservice were ascashflow designated hedgesof Thesecontracts includingthefinalballoonpayment. payments, dollarsonamonthlybasisto cover debtservice dollars to U.S. converting Canadian hedgedthecurrency exposurecontracts of Theseforward dollarsatafixed price. tocontracts buy U.S. entered thesubsidiaries into 60separatecurrency forward of In connection with the refinancing of the mortgage debt themortgage In connection therefinancing of with we entered into afive-year interest 2001, On December 20, we entered into two four-year interest 2003, On August 21, ilb eemndb otsBado Directors. bedetermined bywill Host’s Board of any dividends amountof The similarly contractually restricted. unless taxableincome, theamountof regardless of dividend, pay generally thequarterly we will For ourpreferred dividends, contractually restricted. unlessotherwise our taxableincome, atleast100%of tocommon distribute isgenerally dividends ourpolicy on However, taxable income to qualifyasaREIT. respectively. 2005and2004, December 31, shares outstandingasof 10.0millionshares and 14.0million with stock are authorized, noparvaluepreferred millionshares of Fifty respectively. 2004, 2005and December 31, and 351.4millionwere outstandingasof which 361.0million of are authorized, $0.01pershare, value of apar with common stock, Seven hundred millionshares of fifty operations. ments of ontheaccompanyingand amortization consolidated state- andisincludedindepreciation respectively, 2004 and2003, $2millionand$3in2005, leases totaled $3million, respectively. 2004and2003, $17 millionin2005, and $16million, financing costs deferred totaled $14million, of Amortization respectively. 2005and2004, December 31, as of accumulated amortization, netof $63 millionand$70million, amounted to which are includedinotherassets, financing costs, Deferred therelated discounts financingcosts. anddeferred of which includesprepayment premiums andtheacceleration debt, 518 3 respective lion and$55million, approximately $30mil- 754 of 2005and 2004, during 2,559 operations, of 451 (11) been includedininterest expense onourconsolidated statement 873 which have We recorded losses, construction activities. property 228 interest expense related to qualifying of lion and$2million $ $3mil- we capitalized $5million, 2004and 2003, 2005, During $453millionin2004and$4682003. lion in2005, was$423mil- amountscapitalized, netof Cash paidforinterest, (5) Interest Capital leaseobligations Discount onseniornotes Fair forinterest valueadjustment swaps rate Thereafter 2010 2009 2008 2007 2006 (IN MILLIONS) grgt etmtrte tDcme 1 2005are asfollows: Aggregate atDecember debtmaturities 31, DebtMaturities Aggregate 2005and2004. were atDecember immaterial 31, theinterest rate caps Thefairvaluesof and derivative contracts. thecapsare recorded ingain(loss)onforeign currency value of and thegainsandlossesfromeach period changes inthemarket Thecapsrepresent derivatives thatare marked to market 2006. theloanat8.1%through September that capsthefloatingrate of 5 Dividends. andequipmentundercapital property of Amortization TCHLES EQUITY STOCKHOLDERS’ eaerqie odsrbt tlat9%o our We are required atleast90%of to distribute y on theearlyextinguishment of ly, $5,370 5,383 53005_FinancialsX2 4/10/0615:35Page61 Class Cpreferred stock 10% ru nNvme ,1998andheld continuously thereafter group onNovember 3, Shares by owned or aperson ourcommon stock. of least 20%, orbeganatender orexchange offerforat atleast20%, ship of able 10days after orgroup acquired a person beneficialowner- are exercis- Therights subjectto adjustment. $55pershare, of oursatanexercise price preferred stock of junior participating aSeries A ashare of able entitlestheholderto buy 1/1,000thof whenexercis- Each right ourcommon stock. standing share of foreachone preferred out- stock wasdistributed purchase right of planunderwhich adividend adopted astockholder rights respectively. and $8million, 2005and2004were approximately $6million at December 31, Accrued preferred dividends haveers generally novoting rights. Thepreferred stockhold- each other. with andatparity below), preferredized Series stockA juniorparticipating (discussed stock seniorto classesrank preferred The redemption. tounpaid dividends thedate of plusaccrued and for $25.00pershare, respectively, stock, to redeem theClassCpreferred stock andClassEpreferred share. per diluted earnings calculatingourbasicand of mon stockholders forthepurpose netincome available to com- reflected inthedetermination of thisamounthasbeen Accordingly, issuance costs. the original The$4millionrepresents stock by approximately $4million. thepreferred valueof redemption exceeded price) thecarrying ourClassBpreferred stock (which isequalto the fair valueof The includingaccrued dividends. approximately $101million, for cumulative preferred stock orClassBpreferred stock, our10%ClassB allfourmillionshares of atpar, redeemed, we 2005, OnMay 20, and are payable inarrears. quarterly the$25.00pershare liquidationpreference tive perannum rate of are entitledto receive cumulative attheirrespec- cashdividends thepreferred stock bothclassesof Holders of preferred stock. (2) (1) Class Epreferred stock 8 10% stock preferred Class A Common stock ls rfre tc n ,3,0 hrso 8 Class Cpreferred stock and4,034,400shares of 10% 5,980,000shares of preferred stocktraded outstanding: ourcommon stock. million shares of we issued6.8 asaresult, exercised to convert theirright and, $105million, aliquidationvalueof with Preferred Securities, expenses. offering discount and theunderwriting $301 millionafter payment of Thenetproceeds from thesaleswere $12.12pershare. lic of ourcommon stock to ataprice thepub- 25.0 millionshares of Class Bpreferred stock 10% preferred declared dividends as follows: in May 2005. theClassBpreferred stock theoutstandingshares of We redeemed allof in August2004. theClass A preferred stock theoutstandingshares of We redeemed allof Stockholders Rights Plan. we have theoption 2009, 2006andJune 2, After March 27, Preferred Stock. 2.1millionConvertible theholdersof 2005, During Common Stock andOPUnits. common and The tablebelow presents theamountof ecretyhv w lse fpublicly- We currently have two classesof 7 ⁄ 8 % (2) (1) the common stock andtheauthor- n19,teBado Directors theBoard of In 1998, uigJn 04 we sold JuneDuring 2004, .41 $ 0520 2003 2004 2005 2.50 2.22 .87 — 0 — $ .05 $ .02.50 2.50 .02.50 2.50 .7— 1.37 .82.50 1.38 7 ⁄ 8 % ClassE Deferred taxliabilities Deferred Valuation allowance Less: taxassets Deferred (IN MILLIONS) and 2004are asfollows: income andtaxplanningstrategies. future projected taxable differences, ing taxabletemporary exist- includingfuture reversals of available evidence, of eration more berealized likely will basedonconsid- thannotthatthey taxassetsaredeferred recognized onlyto theextent thatitis However, in effectwhensuch amountsare realized orsettled. basedonenacted taxrates expected to be credit carryforwards and theirrespective lossandtax taxbasesandforoperating assetsandliabilities basesof between thefinancialreporting incomedeferred taxes differences are recognized fortemporary Under thismethod, method. using theassetandliability theirrespective subsidiaries. aswell aseach of partnership andforeign taxes partnership paidbyoperating theoperating state taxes paidby Host andthe the taxableREITsubsidiaries, benefit includesthetaxprovision related toof theoperations Theconsolidated income taxprovision or foreign income tax. state and are toour taxableREITsubsidiaries subject federal, Additionally, assets. certain on salesof taxes on “built-in-gains” we are to subject andstatefederal taxes onany retained income, In additionto paying income to itsshareholders. distributed not subjectto andstate federal income taxationonitsoperating itsrevenues) isgenerally itsassetsandthesources of nature of otherrequirements certain to the plies with (relating primarily its stockholders asprescribedby applicabletaxlaws andcom- itstaxableincome to requirements regarding of thedistribution taxlaw thatelectsREITstatusandmeetscertain a corporation In general, asamended. 1986, Internal Revenue Code of the U.S. pursuantto 1999, asaREITeffectivefor treatment 1, January we restructured ourselves to enableusto qualify 1998, During theright. of theexercise twice price pany ortheacquiror having avalueof eitherourcom- to purchase common stock of person orgroup, otherthantheacquiring entitlesitsholder, each right Directors, other businesscombinations notapproved by theBoard of we were involved inamergerorcertain If us for$.005each. unlessexercised redeemed by orpreviously 2008, November 22, are non-voting Therights andexpire on plan. under therights determining beneficialownership are exempt of forpurposes net operating loss or capital loss carryforward will berecorded will lossorcapitalcarryforward net operating subsequent reduction inthe valuationallowance related to a Any losscarryforwards. ourCanadiannetoperating 30% of andapproximatelyMexican losscarryforward netoperating our have recorded avaluationallowance equalto 100%of we In addition, ourforeign capitallosscarryforward. 50% of and ourdomesticcapitallosscarryforward equal to 100%of 6 Subtotal Net taxasset deferred oa eerdtxast n iblte tDcme 1 2005 Total taxassetsandliabilitiesatDecember deferred 31, income deferred taxes are accounted for Where required, We have recorded avaluationallowance underSFAS 109 INCOME TAXES $5 $119 052004 2005 100 (95) (19) $31 $125 111 (80) (14) 61 host hotels & resorts 2005 53005_FinancialsX2 4/10/0615:35Page62 62 host hotels & resorts 2005 Tax contingencies taxbenefit federal of net State income taxes, eerd—Federal — Deferred Tax onforeignsource income REIT Nontaxable income (loss)of tax(provision) benefit federal Statutory (IN MILLIONS) Federal — Current (IN MILLIONS) Notes receivable andaccrued interest Investment inhotel leases (IN MILLIONS) 2005and2004are asfollows: December 31, asof tion allowances, valua- netof taxassetsandliabilities, deferred of nificant portion thatgives to asig- rise difference andcarryforward temporary of each type Thetaxeffectof income taxexpense. reduction of a as respectively. 2004and2003, $10millionand$21in2005, $8 million, follows: operations benefit to ourincome tax(provision) benefit forcontinuing respectively. and 2003, 2004 $10millionand$9in2005, $(25) million, were discontinuedamounts associated with operations, consistsoperations of: for international purposes. andhavethrough 2010fordomesticpurposes anunlimited life which expire 2005, December 31, approximately $6million asof avaluationallowance of netof approximately $2million, of aggregate domesticandinternational capitallosscarryforwards we have In addition, which expire through 2024. $55 million, approximately avaluationallowance of netof $107 million, approximately of losscarryforwards international netoperating lentv iiu a rdt 2 3 Investments inaffiliates andequipmentdepreciationProperty leaseinvestmentsSafe harbor Alternative minimum taxcredits Net lossandcapitalcarryforwards operating Accrued interest related party incentiveDeferred management fees gains Deferred Income tax(provision) benefit Net taxasset deferred ahpi o noetxs e frfnsrcie,was refunds received, of net Cash paidforincome taxes, tax(provision) federal thestatutory A reconciliation of includingthe The (provision) benefitforincome taxes, The (provision) benefitforincome taxes forcontinuing we have aggregate domesticand 2005, At December 31, —Foreign —Foreign State — State — $— $(24) 0520 2003 2004 2005 (18) (17) $(24) $(57) (5) (7) (2) (2) 0520 2003 2004 2005 3 35 (2) (5) 5 —$— $— 1 $13 $10 1 $13 $10 2 $83 $26 052004 2005 $5 $17 1)$(69) (12) 616 16 919 19 7 (4) (7) 9 (6) (9) 2 (2) (2) (69) (19) 6 (3) (6) 11 22 — — 43 25 12 (7) 1— 12 $31 $29 (56) (20) 44 18 10 (4) 7 1 to usundernon-cancelable subleases. $16 millionand$481mil Sublessee of aggregate minimum subleaserentals from restaurants andthe leaseshavepayments fortheoperating notbeenreduced by Minimum 2005. December 31, which we are thelesseeasof rental commitments required undernon-cancelable leasesfor operations. consolidated statements of leases isincludedindepreciation expense intheaccompanying charge applicableto capitalized Theamortization arrangement. lease theparticular of dependingonthecharacteristics leases, ment leasesare accounted orcapital foraseitheroperating Therestaurant andequip- vehicles andtelephone systems. ment, such ascomputer equip- equipment, of types hotels forvarious alsoincludeleasesentered Ourleaseactivities into by our ods. forfive generally or10-year peri- one ormore renewal options, Theseleasesandsubleasescontain we subsequentlysubleased. which someof restaurant business, facilities usedinourformer We alsohave leaseson stipulated amounts. sales inexcess of contingent rentals basedonapercentage of for thepayment of theseleasescontain provisions of Certain leases. for asoperating which are accounted of all multiple renewal with options, ally gener- ourhotels are subjectto ground leases, 34of of portion HPTproperties. between thetwo poolsof which isallocated $30million, to amaximum amountof up payable undertheSubleases isguaranteed by theSublessee, Therent any with excess beingretained by us. HPT lease, sufficientto coveris generally theadditionalrent dueunderthe Thepercentage rent payable by theSublessee rent payable to us. rent payable undertheHPTleaseandanadditional percentage theminimum by theSublessee undertheSublease consists of Rent payable and onefortheResidenceerties Inn properties). prop- (onefortheCourtyard HPTproperties pool of particular theSubleases ina canelectto terminate fewerparty thanallof thatneither however, elect notto renew theSublease provided, unlesseitherwe orthesublessee term undertheHPTlease, relates andautomatically renews forthecorresponding renewal theHPTleaseto which it theinitialterm of of the expiration each Sublease expires simultaneously with Theterm of lease. theapplicableHPT subjectto theterms of (the “Sublessee”), Barceló Crestline Corporation of separate sublesseesubsidiaries the leases. based uponsaleslevels are payable to HPTundertheterms of andadditionalrent annually fortheResidence Inn properties, and$19million lion annually properties fortheCourtyard Minimum rent payments are $55mil- renewable atouroption. andare and2010fortheResidenceproperties Inn properties, have initialterms through 2012fortheCourtyard expiring below, accounted leasesandare forasoperating includedinthetable which are Theseleases, Hospitality Properties Trust (“HPT”). Residence Inn by (“Residence Marriott Inn”) to properties by (“Courtyard”)53 Courtyard Marriott and18 properties we soldandleasedback in1995and1996, related transactions ahotel. derive revenue directly from of theoperation due to income onaREIT’s federal taxrestrictions to ability thatqualifiesasataxableREITsubsidiary subsidiary owned Hotel Leases. 7 The following tablepresentsThe following thefuture minimum annual Information. Lease Other we (the sublettheHPTproperties “Subleases”) to In 1998, TrustHospitality Properties Relationship. LEASES We leaseourhotels (the “Leases”) to awholly so eebr3,20,allora 2005, December 31, As of in epciey payable respectively, lion, In a series of In aseries 53005_FinancialsX2 4/10/0615:35Page63 aac,a n fyear at endof Balance, Options exercisable atyear-end Forfeited/expired Exercised Granted year of atbeginning Balance, subleaserentals Less: Additional rentals basedonsales 100 Minimum rentals leases onoperating 102 1,018 106 (IN MILLIONS) 109 — 112 — — $ 1 1 $1,547 2 $ (1) 4 amountrepresenting interest Less: Total minimum leasepayments Thereafter 2010 2009 2008 2007 2006 (IN MILLIONS) 05 hrfr,noexpense related to theseawards be will therefore, 2005; December 31, fiscal years to 2002were prior fullyvested asof in granted Options 2002only. onorafter 1, January granted SFAS 123foremployee stock options recognition provisions of we adopted theexpense 2002, Effective January 1, purchase plan. Comprehensive Planorstock iss expense wasrecognized forstock optionsissuedunderthe nocompensation Consequently, and related interpretations. 25 Accounting Principles Board OpinionNo. the provisions of and available forissuance undertheComprehensive Plan. common stock reserved approximately 10.6millionshares of there were 2005, At December 31, employee stock purchase plan. andthe ourcommon stock, and (iii)restricted shares of ourcommon stock shares (ii)deferred of our common stock, may award employees to participating (i)optionsto purchase wherebyhensive we stock plan(the “Comprehensive Plan”), thecompre- We maintain two stock-based compensation plans, related to theseleasesto beremote. any funding material agement considers thelikelihood of man- However, 2005. aggregated $27millionatDecember 31, Such contingent liabilities divested properties. non-lodging 8 rsn au fmnmmlaepyet 3 $ minimum leasepayments Present valueof ro o20,theseplanswere accounted foraccording to Prior to 2002, Rent expense consists of: We remain contingently leasesrelating liable oncertain to EMPLOYEE STOCK PLANS ued undertheemployee stock (IN MILLIONS) HRSEECS HRSEECS HRSEXERCISE SHARES EXERCISE SHARES EXERCISE SHARES 11 6 (1.1) $119 $53 0520 2003 2004 2005 . 6 1.4 1.2 $6 2.6 .)6 (.1) —— AIA OPERATING CAPITAL (85) ESSLEASES LEASES 19 0520 2003 2004 2005 5 $61 $58 13$127 $123 8)(79) (83) 813 18 WEI VRG VRG AVERAGE AVERAGE AVERAGE PRICE HE EGTDWEIGHTED WEIGHTED GHTED option plansthathave notbeenapproved by ourstockholders. We donothave stock 2005. the three years endedDecember 31, option plansthathave beenapproved by ourstockholders for 2002. sents theexpense during forstock optionsgranted which repre- 2004and2003, for 2005, $274,000 respectively, $280,000and $244,000, recorded compensation expense of We 2002was$1.41. during age fairvalueperoptiongranted weighted The aver- basisoverstraight-line thevesting period. Compensation expense forthestock optionsisrecognized ona There were presented. fortheperiods nostock options granted model. usinganoption-pricing grant mated onthedate of each hasbeenesti- stock optiongranted thefairvalueof 123, balance sheets. is includedinotherassetstheaccompanying consolidated which respectively, was approximately $2millionand$4million, thereceivable balance 2005and2004, December 31, As of stock. indicated thatthereceivable notbesettledin will Autogrill SpA has asHMServices future bemadeincash, payments to uswill all isnolongerpubliclytraded, Since HMServices HM Services. acquired Italy, Autogrill SpAof of subsidiary awhollyowned Co., Autogrill Acquisition 1999, On August 27, International. Marriott andcurrent employees theoptionsheldby former certain of of common stock oranequivalent HMServices’ to receivehad theright upto 1.4millionshares of we originally betweenbution agreement usandHMServices, Pursuant to thedistri- thetwo companies. the common stock of shares of were adjusted basedontherelative of prices trading theoptions stock andtheexerciseand HMServices of prices employeescurrent andformer were redenominated inbothour outstandingoptionsheldby our in1995, spin-off Services”) thegrant. the firstfouryears thedate following of Most optionsvest over ratably each of grant. after thedate of Non-qualified expire optionsgenerally upto 15years grant. of thecommon stock onthedate less thanthefairmarket valueof to officersgranted andkey employees anexercise with not price under deferred stockunder deferred andrestricted stock plans. compensation expense forshares granted on thecalculationof SFAS 123hadnoeffect Theimplementationof purchase plan. pensation expense forshares issuedunderouremployee stock We alsorecord com- grant. theoptionsatdate of value of sation expense foremployee stock optionsbasedonthefair we record compen- thechange inaccounting method, result of As a SFAS 123(revised). recorded upontheimplementationof (IN MILLIONS) h olwn al sasmayo h ttso ourstock thestatusof of table isasummary The following disclosures thefollowing required by SFAS For of purposes In (“HM connection theHost Services with Marriott Employee Stock Options. 16 .)6 (.6) 7 (1.6) . . 6 4.5 6 2.6 . 3.2 $6 5.4 2.0 $6 4.5 .)8(3 9 (.3) 8 (.3) ——— —— PRICE Employee stock optionsmay be cash valuesubsequentto exercise (IN MILLIONS) PRICE 63 host hotels & resorts 2005 53005_FinancialsX2 4/10/0615:35Page64 64 host hotels & resorts 2005 egtdaeaegatdt arvleo 1.5 Approximately $16.25. weighted average date fairvalueof grant were undertheseterms andconditions granted thathada approximately 90,000shares 2005, During formance criteria. per- attainmentof sharesisadjusted forthelevel granted of of Thenumber issuance. theshares onthedate of market valueof compensation expense over thevesting equalto thefair period We recognize subject to continued employment. over two years, andtheremaining 60% vesting date, vestingcally onthegrant theshares automati- upper-middle 40%of managementwith 2005. outstanding atDecember 31, 1.1millionshares were Under theseawards, and $8.82in2003. $12.50in2004 each year during was$16.53in2005, granted Theweighted average date share fairvalueper grant awards. 2004and2003related to these in 2005, respectively, million, and$15 $23million, approximately $20million, expense of We recorded compensation shares were forfeited in2004. andno were forfeited in2005and2003, respectively, shares, Approximately 59,000and1,006,000 terms andconditions. were to key certain granted employees underthese respectively, 11,000and3,203,000shares, approximately 25,000, and 2003, 2004 In 2005, performance criteria. attainmentof the level of andwhere appropriate, shares issuedisadjusted forforfeitures, Thenumber of ourcommon stock. the fairmarket valueof which isadjusted forfluctuationin theshares issued, value of tion expense equalto over thefairmarket period therestriction We recognize compensa- criteria. performance certain ment of installments basedoncontinued employment andtheattain- executives over to bedistributed thenext three years inannual stock shares undertheComprehensive Planto officers andkey pensation expense stock forthe deferred incentive plan. com- 123hadnoimpactonthecalculationof SFAS No. tion of Theimplementa- 2003was$8.00. value pershare during granted weighted The average fair presented. forallperiods not material cost thathasbeencharged againstincome stock fordeferred was Thecompensation were underthisplanin2004or2005. granted No shares 45,000shares were underthisplan. granted In 2003, lessestimated forfeitures. grant, theshares onthedate of value of basisovera straight-line thevesting forthefairmarket period We accrue compensation expense on termination orretirement. employees Certain may electto deferpayments until grant. of years inannual installmentscommencing oneyear after thedate to officers andkey employees vest after 1990generally over 10 EXERCISE PRICES In 2003, we also started arestricted we stock forour alsostarted program In 2003, Stock.Restricted Deferred Stock. Deferred 2005: aboutstock information optionsatDecember tablesummarizes The following 31, AG F HRSRMIIGAEAESAE AVERAGE SHARES AVERAGE REMAINING SHARES RANGE OF 6$1$3. 3 $ .6 3 $ 1 $ .6 $ 1–3 3–1 8—18 11 — .1 18 11 7 10 — .1 13 –19 10 –12 61 48 6 .4 .1 8 6 10 3 .6 .1 7 –9 4 –6 Deferred stockDeferred incentive planshares granted rmtm otm,we award restricted From timeto time, (IN MILLIONS) . 1.2 1.4 PIN USADN OPTIONSEXERCISABLE OPTIONS OUTSTANDING OTATA IEEXERCISE PRICE CONTRACTUAL LIFE WEIGHTED VRG EGTDWEIGHTED WEIGHTED AVERAGE ne eebr3,2005. ended December 31, Payments fortheseitems were forthethree not material years retired employees requirements. meetingrestrictive eligibility We provide medicalbenefits to alimited number of Directors. matched by usisdetermined annually by theBoard of amountto be Thediscretionary intheplans. participation requirementsemployees andelecting eligibility meetingcertain We contribute to plansforthebenefitof definedcontribution All outstanding SARswere exercised in2005. respectively. lion, $.4millionand$1.6mil- $.1million, ourcommon stock of of fluctuations inthemarket price outstanding SARsasaresult of we recognized compensation expense for 2004and2003, 2005, In 2004. December 31, $1.88asof a weighted average of price fromvested ranged prices $1.20to $2.71andhad andthegrant SARswere The fully applicable to usuponconversion to aREIT. SARs wascompleted inorder to limits ownership comply with conversion The to options thatwere theyear. cancelled during to directors certain asareplacement issued forpreviously (“SARs”)tion rights were issuedundertheComprehensive Plan presented.income forallperiods wasnotmaterial compensation The expense reflected innet respectively. $2.20, $3.02and 2004and2003was$4.27, in2005, granted rights thosepurchase Theweighted average fairvalueof were issued. respectively, 16,000and21,000shares, approximately 14,000, 2004and2003planyears, For the2005, year vesting period. are theone asnodividends accrued during 0% forthesegrants, We of yield assumeadividend oneyear forallperiods. life of expected 34%and36%, 34%, volatility of 2.9%and1.3%, 4.3%, Risk-free interest rate of respectively: 2004and2003, for 2005, assumptions thefollowing modelwith using anoption-pricing which isestimated purchase rights, theemployees’ fair valueof tion expense fortheemployee stock purchase planbased onthe We record compensa- 1through 31. January fromruns February which theplanyear, orendof market valueatthebeginning of thelower common stock through payroll deductionsat90%of employees eligible may purchase employee stock purchase plan, 300sae eeottniga eebr3,2005. 73,000 shares were outstandingatDecember 31, approximately Under thisaward, expense related to theseshares. compensation We recorded approximately $1.4million of 2005. 58,000 shares were issuedand5,000shares were forfeited during 9 Stock Appreciation Rights. Employee Stock Purchase Plan. BENEFIT PLANS PROFIT SHARING AND POSTEMPLOYMENT (IN MILLIONS) n19,568,408stock apprecia- In 1998, ne h em fthe Under theterms of EXERCISE PRICE 53005_FinancialsX2 4/10/0615:35Page65 eebr3,2005: December 31, thesoldhotels fortheyears ended of andtheoperations 2005, includingthetwo hotels heldforsaleatDecember 31, presented, fortheperiods operations in theconsolidated statements of hotels which have the beenreclassified to discontinued operations of tax, netof andthegainondispositions, before taxes, income therevenues, tablesummarizes Thefollowing 2003. hotels in2003andabandonedonehotel andeight in 2004, (1) tax netof Gain ondisposals, Revenues (IN MILLIONS) Other liabilities Other assets net andequipment, Property (IN MILLIONS) h ttmn foperations. the statement of recorded oninsurance settlementon asgain the$9million we have Accordingly, contingenciesall have beenresolved. theNew forwhich OrleansMarriott of operations quarter proceeds businessinterruption related to thefourth lion of we received approximately $9mil- 2005, of quarter the fourth During becovered damagewhich will hurricane by insurance. the repairs and andclean-upcosts asaresult incurred of off andequipmentwritten theproperty reflects thebookvalue of approximately $35millionwhich insurance receivable of we have recorded an 2005, December 31, As of are resolved. ance proceeds notberecognized will untilallcontingencies Gainsresulting from insur- ments forbusinessinterruption. aswell aspay- receive recoveries fordamage to thehotels, Our insurance coverage entitlesusto fortheproperties becovered which will by insurance. of all substantially lion, isapproximately theproperties $80millionto $100mil- all of estimates to repair thedamageat of Thecurrent range hotels. these which required of usto closeallorpart temporarily having extensive damage Fort Lauderdale Marina Marriott, theNew andthe OrleansMarriott two, with 2005, during sustaineddamagefrom ourproperties hurricanes Five of table: detailed inthefollowing as respectively, 2005and2004, December 31, ance sheetsasof relating to thesehotels asheldforsaleinourconsolidated bal- We reclassified theassetsandliabilities 2004. December 31, of approximately related $.7million to thesehotels as charges of We recorded impairment which were allsoldinJanuary 2005. to bindingagreement sellfourhotels, entered into adefinitive, we December During 2004, 2006. subsequently soldinJanuary which were to bindingagreements selltwo hotels, definitive, HeldAssets For Sale. Income before taxes 11 10 Center hotel settlement. $170millionrelated to theNew York Marriott Worldproceeds of Trade Revenues andincome before taxes in2003includebusinessinterruption Total liabilities Total assets Dispositions. GAIN ONINSURANCESETTLEMENT DISCONTINUED OPERATIONS (1) esl iehtl n20,ninehotels in We soldfive hotels in2005, (1) uigDcme 05 we entered into DecemberDuring 2005, 0520 2003 2004 2005 $61 19 9 16$500 $196 052004 2005 $62 $73 $— 2200 22 265 52 — 11 $26 $111 $113 26 2 the acquisitions isnotsignificant. for theacquisitions completed of in2004and2005astheeffect Hyatt Regency Maui Resort andSpafor$321million. we acquired the806-room November During 2003, $89 million. Downtown-Lakefront forapproximately Chicago EmbassySuites, we purchased the455-suite 2004, On April 27, $355 million. acquired the450-suite Fairmont Kea LaniMaui forapproximately we 2004, OnJuly 15, debtonthehotel. mortgage $34 millionof approximately includingtheassumptionof mately $58million, approxi- atMcDowellMarriott Mountains forapurchase of price or losswasrecognized onthistransaction. No gain interestsfor theremaining inthepartnership. minority and we alsopaidapproximately $14millionto asecond partner interest, hispartnership inredemption of partner, the minority were to thesesecurities transferred 2005, 3, OnJanuary sheet. in otherassetsattheircost basisinourconsolidated balance we have recorded them Preferred Units are notpubliclytraded, As the Vornado 2004. December 31, which we heldasof Vornado Realty Trust (the units of “Vornado Preferred Units”), purchased preferred thepartnership partner, theminority of At therequest two thatowns a consolidated hotels. subsidiary in anote receivable partner from aminority lion inpayment of approximately $274million. purchase of price for a Regency Washington D.C. onCapitol Hill in Washington, companies have approved theproposed transaction. both directors of Theboards of well asotherclosingconditions. as ourstockholders, andissubjectto theapproval of 2006, ter of isexpected to closeinthesecond Thetransaction quar- in cash. thepurchase bepaid will price Theremainder of stockholders. $17.00pershare) to Starwood shares attheexchange of price (133,529,412common equity issue approximately $2.3billionof debtandto expect to assumeapproximately $554millionof we thistransaction, of As part Regis brands. andSt. Collection TheLuxury WHotels, Sheraton, managed underthe Westin, 18,964rooms primarily andatotal13 international properties of 25domesticand consists of Theportfolio mately $4.04billion. (“Starwood”) forapproxi- Inc. Hotels andResorts Worldwide, to andupper-upscale acquire hotels 38luxury from Starwood adefinitive 2005we signed mergeragreement On November 14, operations. gain oninsurance settlementonthestatement of approximately $3millionin2003as proceedsinterruption of we recorded business asaresult, damaged intheattacksand, theNew York Additionally, FinancialCenter hotel was tions. asdiscontinuedon dispositionandbusinessinterruption opera- we have reclassified thegain In accordance SFAS with 144, 2003. approximately $212millionin and againonthesettlementof $14 millionfortheNew York Marriott World Trade Center hotel we recorded proceeds businessinterruption of existing mortgage, the After payment of approximately $372million. proceeds of World Trade Center andFinancialCenter hotels andreceived net ourinsurer fortheMarriott 2001with September 11, attacks of Severe Acute Syndrome Respiratory (SARS). to theoutbreak of businessatourToronto hotels due thelossof connection with proceeds businessinterruption thatwe received in lion of 12 No pro forma statements of operations have operations beenprovided No pro statements of forma we acquired the270-suite Scottsdale 2004, On September 22, we received approximately $47mil- 2004, On December 30, we acquired the834-room Hyatt 2005, On September 30, we settledalloutstandingissuesrelated to the terrorist In 2003, thegain oninsurance settlementincludes$3mil- In 2004, ACQUISITIONS 65 host hotels & resorts 2005 53005_FinancialsX2 4/10/0615:35Page66 66 host hotels & resorts 2005 (1) FINANCIAL LIABILITIES FINANCIAL ASSETS (IN MILLIONS) The fair value of certain financial assets and liabilities and other financial instruments are below: shown financialassetsandliabilitiesotherinstruments certain The fairvalueof ecagdt l fthehotels intheprogram. thatparticipate be charged to allof have generally managers will aguestrewards which program will our In addition, by themanageronafair andequitablebasis. orleased owned are allocated amongthehotelsservices managed, Costs andexpenses inproviding incurred such centralized basis. ices as neededwhich may bemore ona efficientlyperformed andsuch additionalserv- payrollerized andaccounting services, national advertising andpromotion, training, includecentral Chain services manager’s hotel system. ally provided basisto orregional onacentral allhotels inthe which are chain gener- certain services thehotelsfurnishes with themanager themanagementagreements, of As part tively. respec- agement feesbasedonhotel profit, salesandoperating provide generally forbothbaseandincentiveagreements man- The amanagementfee. ourhotelsoperate forthepayment of Fairmont and Westin, Four Seasons, Hilton, Swissôtel, Hyatt, Ritz-Carlton, International, includingMarriott operators, various Our hotels are subjectto underwhich managementagreements Residence Inn Management Corporation. Management and Courtyard Corporation (Ritz-Carlton), LLC paid are amountspaidto TheRitz-Carlton Hotel Company, Included inthemanagementfees fees. infranchise respectively, and$4million, $2 million management feesand$1million, $129millionand$136millio million, administrative services. CBM Joint Venture LLC (seeNote limited 3)andcertain Mexico andthe2000acquisition of 2004)inMexico City, 30, which wassoldonJanuary (oneof properties two full-service includingtheacquisition in1996of ventures orpartnerships, financingforjoint aswell properties; asfranchised our hotels, of themajority includingthemanagementof International, We have Marriott entered with agreements into various amounts. equal to theircarrying notincludedinthistableare estimatedcial instruments to be finan- fairvaluesof The valued basedonquoted market prices. Senior notes andtheConvertible Subordinated Debentures are expected future payments discounted rates. atrisk-adjusted Valuations forsecured debtare determined basedonthe rates. on theexpected future cashflows discounted atrisk-adjusted 15 14 13 that was classified as held for sale at December 31, 2004. The hotel was sold and the mortgage debtwasassumedby Thehotel thebuyer wassoldandthemortgage onJ 2004. related to theHartford M that wasclassifiedasheldforsaleatDecember 31, debt, mortgage excluded $20millionof 2004, capitalleasesatDecember 31, netof Mortgage debtandother, Convertible Subordinated Debentures capitalleases netof Mortgage debtandother, Exchangeable SeniorDebentures swaps) Senior notes (excluding fairvalueof Notes receivable n20,20 n 03 we International paidMarriott $148 2004and2003, In 2005, Notes receivable andotherfinancialassetsare valuedbased FAIR VALUE OFFINANCIAL INSTRUMENTS HOTEL MANAGEMENT AGREEMENTS INTERNATIONAL RELATIONSHIPMARRIOTT WITH eevto ytm,comput- systems, reservation ,rsetvl,inhotel respectively, n, (1) a rnhs e ae napretg froom salesand pay feebasedonapercentage afranchise of we generally Pursuant to agreement, thefranchise for onehotel. atermination fee. without affiliation theirexisting brand also besoldfree andclearof thesehotels may percentage a of Additionally, chise agreement. affiliationthrough afran- hotels brand maintaintheMarriott provided the atermination fee, thepayment of ments without theirexisting managementagree- may besoldfree andclearof thispool(asmeasured by EBITDA), percentSeventy-one of Theremaining poolincludes26hotels. restrictions. certain to subject termination fees, thepayment of without agreement ments may besoldunencumbered by management aMarriott hotels currently subjectto existing managementagree- a poolof inthesepartnerships. properties cancellation agreement, single undera operate properties eight atotal of with partnerships consolidated Certain any otheragreement. cancellation of the nottrigger such cancellation although will conditions, may agreement Asingle becanceled undercertain satisfied. specifiedperformance orextension thresholds are not ments if We have theoptionto terminate managementagree- certain term andexpected future baseandincentive managementfees. receiveInternational will additionalfeesbasedontheunexpired Marriott theagreements, early termination of the event of cur or20%of profit, operating cumulative incentive managementfeesnotto exceed 20%of total with return(asdefined)to us, overagreements) apriority profit operating (asdefinedinthe ally equalto 20%to 50%of salesandincentive managementfeesgener- are three percent of basemanagementfeesthatgenerally provide forpayment of generally Theagreements up to anadditional16to 30years. International Marriott of renewal termswith attheoptionof 15to 20years foraninitialterm of generally ages thehotels, man- theirsubsidiaries Internationalwhich Marriott oroneof 74are subjectto under managementagreements ourhotels, Of International Marriott the agreements. escrow accounts underterms outlinedin forsuch purposes berequired we will to establish Under circumstances, certain fixtures andequipment. furniture, and renewals to thehotels’ and(b)replacements the hotels which are capitalized; normally non-routine (a)certain repairs andmaintenance to the cost of to cover revenue atthehotel, generated 5%of generally funds, We have International Marriott with agreement afranchise we have International Marriott that agreed with Additionally, We are obligated to sufficient provide themanagerwith ARIGFI ARIGFAIR CARRYING FAIR CARRYING MUTVLEAON VALUE AMOUNT VALUE AMOUNT 7$7 $7 ,6 2,621 2,562 ,3 2,068 1,930 8 473 582 387 493 052004 2005 fwhich would affectallthe of etya prtn rft In rent year profit. operating nay6 2005. 6, anuary 7$7 $7 arriott Farmington, arriott ,8 2,517 2,380 ,3 2,197 2,130 9 563 578 492 491 53005_FinancialsX2 4/10/0615:35Page67 Canada Mexico United States (IN MILLIONS) either 10to renewal 20years terms with attheoptionof term of provide generally foran initial Theseagreements ourhotels. 18 of Fairmont and Westin for Four Seasons, companies such asHilton, We hotel management with alsoholdmanagementagreements Other Managers as definedintheagreements. available cashflow profit, oroperating equalto 20%of generally are any, if salesandincentive managementfees, five percent of from two to Basemanagementfeesvary additional 10to 40years. upto an Ritz-Carlton of renewal termswith attheoptionof 15to 25years have Theseagreements aninitialterm of hotels. our to manageten of International, Marriott of subsidiary owned wholly- a We Ritz-Carlton, with holdmanagementagreements Ritz-Carlton 30years. has aterm of agreement Thefranchise sales. are approximately three percent of whilefeesforfoodandbeverage sales sales, mately sixpercent of Franchise feesforroom salesare approxi- ing andreservations. aswell otherfeesforadvertis- ascertain food andbeverage sales, hs urnest ermt.Theguarantees are listed below: these guarantees to beremote. any payments under material We consider thelikelihood of circumstancescertain includingdefaultby anunrelated party. butthatwe have agreedto pay intheevent of arrangements, spin-offsandcontractual dispositions, books dueto various have madeto forleasesordebtthatare third notonour parties commitments we We have guarantees which consist certain of 17 Total ■ ■ GUARANTEES we fthefacility. of owner isindemnifiedby thecurrent inturn, who, Corporation, we have beenindemnifiedby Barceló Crestline antee, we are required to make any payments undertheguar- to theextent However, in2027. through theirmaturity by theNew Jersey Economic Development Authority municipal bondsissued regardwith to $14.7millionof interest andprincipal obligated underaguaranteeof but we remain intheREITconversion, Corporation, Crestline formerly Capital Crestline Corporation, Barceló of aspart thepartnership We spun-off facility. andoperates aseniorliving which owns Partnership, we Leisure owned Park Venture LimitedIn 1997, 2005. December 31, mately $27millionasof thesefuture rental payments isapproxi- gate amountof Theaggre- thefuture rental payments. our guarantee of represent divested restaurants thatwere soldsubjectto Theseprimarily divestedcertain properties. non-lodging We remain contingently liableforrental payments on EEUSAST EEUSAST EEUSASSETS REVENUES ASSETS REVENUES ASSETS REVENUES 373$7,286 $3,763 381$7,434 $3,881 4110 94 438 24 0520 2003 2004 2005 OGLVDLN-IE LONG-LIVED LONG-LIVED LONG-LIVED prxmtl 11mlinad$2 ilo,respectively. approximately $121millionand$127million, were interests inthesepartnerships theminority values of thefair 2005and2004, At December 31, settlement alternatives. donothave thesepartnerships any Two of respectively. lion, the OPunitsissuablewere valuedat$39millionand $29mil- 2005and2004, At December 31, agreements. their partnership percentages basedontheirownership asstipulated in tively, respec- couldthey beissued199,597and1,860,000 OPunits, have the partnerships settlementalternatives in which two of between 2061and2097. have finite lives from 77to ranging 100years thatterminate which of all Mexicoand theMarriott Partnership City G.P., theLauderdale Beach Association; Ltd; the Pacific Gateway, Philadelphia Market Street HMCHost Limited Partnership; the We partnerships, consolidate fourmajority-owned areas inwhich we thegeographical operate: each of tablepresentsThe following revenues andlong-lived assetsfor were nointercompany salesbetween usandtheforeign properties. There located inMexico. located inCanadaandoneproperty fourproperties consist Ourforeignoperations of hotel ownership. we onebusinesssegment: report andthus, areings) immaterial, leasedhotels andoffice ourlimited-service build- ties (primarily hotel activi- ournon-full-service Allof hotels. based onindividual We alsoallocate resources performance andassessoperating ment. which meetsthethreshold seg- forareportable noneof segment, hotels to beanoperating ourfull-service We consider each oneof as definedintheagreements. pr operating available cashflow, of for incentive equalto managementfeesgenerally 10to 30percent alsoprovide agreements theeighteen Seventeen of sales. cent of basemanagementfeesequalto oneto fourper- for payment of provide generally Theagreements an additionaloneto 15years. upto thehotel managementcompany of insomecases, or, party 16 18 343$,4 317$6,907 $3,107 $7,148 $3,463 354$,9 323$7,085 $3,223 $7,298 $3,574 As of December 31, 2005, the minority interest holdersin theminority 2005, December 31, As of ■ CONTROLLING INTERESTS OF ALL ENTITIES MANDATORILY REDEEMABLE NON- INFORMATION GEOGRAPHIC AND BUSINESS SEGMENT ehv enidmiidb h ucae fthehotel. we have beenindemnifiedby thepurchaser of andineach case, related to theseground leasesisremote, We believe thatany liability including renewal options. theleases, mately $20millionthrough thefullterm of The future minimum leasepayments are approxi- leases. liable fortheamountsdueunderrespective ground we remain contingently 2005, 2004andJanuary of quarter three hotels inthefourth In connectionthesaleof with 7117 107 70 111 87 43 671 46 39 24 ofit, or net operating income, ornetoperating ofit, 67 host hotels & resorts 2005 53005_FinancialsX2 4/10/0615:35Page68 68 host hotels & resorts 2005 e noe(os 3)1 4)6 — $3,574 61 74 $1,159 (47) 39 (41) (74) $772 17 $883 52 22 2 (31) $760 (60) (49) 25 (8) 7 8 (39) (40) common (loss)per Basic anddiluted share: earnings Net income (loss)available to common stockholders Net income (loss) Income from discontinued operations Income (loss)from continuing operations Revenues EXCEPT PERSHARE AMOUNTS) (IN MILLIONS, common (loss)per Diluted share: earnings common (loss)per Basic earnings share: Net income (loss)available to common stockholders Net income (loss) Income from discontinued operations Income (loss)from continuing operations Revenues EXCEPT PERSHARE AMOUNTS) (IN MILLIONS, nated thesecond inconjunction 2006redemption. quarter with Subordinated Debentures beelimi- notheldby will third parties Convertible the$17millionof Additionally, 2006. of quarter outstandingConvertible Preferred thesecond during Securities of We intend to redeem theremaining $2million common shares. Convertible Preferred were Securities converted into 24million Convertible Subordinated Debentures andcorresponding our $368millionof 2006, 10, 2006andFebruary 1, January Between 2006. Preferred to expire Securities effective 10, February theremaining Convertible option to causetheconversion of rights we announced ourintention to exercise our 2006, 11, On January from common per theannual share earnings dueto the mon share inallyears forthefourquarters presented differs 20 19 icniudoeain 0 0 0 1 .22 (.34) .11 .04 .01 (.18) .08 (.06) .03 (.15) Discontinued operations Continuing operations Discontinued operations Continuing operations Net income (loss) Discontinued operations Continuing operations e noe(os .2 0 .7 1 (.12) .15 (.17) .02 (.12) Net income (loss) Net income (loss) The sum of the basic and diluted earnings (loss) per com- (loss)per thebasicanddiluted earnings The sumof QUARTERLY FINANCIAL DATA (UNAUDITED) SUBSEQUENT EVENTS URE URE URE URE YEAR QUARTER QUARTER QUARTER QUARTER URE URE URE URE YEAR QUARTER QUARTER QUARTER QUARTER IS EODTIDFUT FISCAL FOURTH THIRD SECOND FIRST IS EODTIDFUT FISCAL FOURTH THIRD SECOND FIRST 82$7 81$,7 $3,881 $1,272 $831 $976 $802 .5 2 .3 1 .30 .38 .30 .17 .19 .17 (.03) (.03) .21 (.03) .23 (.05) .22 (.01) (.05) .1 2 .3 1 .38 .19 (.03) .22 (.01) 1)8 6 6138 66 (6) 88 (10) 0 0 0 .08 .08 .02 .02 — — .01 .01 .04 .04 631828 8 1 3 16 2 0(1 8135 68 (11) 80 (2) forCnda rprisadmtrso ac ,2011. andmatures ourCanadianproperties onMarch 1, of which issecured by four 5.195%, afixedwith interest rate of issuance) basedontheexchangeDollars onthedate rate of $135millionCanadianDollars($116US amount of mately $18million. approxi- resulting inagainof approximately $55million, of $132 million. approximately resulting of inagain mately $204million, approxi- fortotal proceeds of 2005, for saleatDecember 31, shares intherespective periods. computing theweighted average number of required methodof 1()7 166 74 (5) 91 6 During January 2006, we issued mortgage debtinthe we issuedmortgage January 2006, During we soldtwo hotels fortotal proceeds 2006, February During we soldtwo hotels classifiedasheld January 2006, During 2005 2004 53005_FinancialsX2 4/10/0615:35Page69 mrprmngmn vrie eas fsuch limitations, of Because improper managementoverride. alsocanbecircumventedfinancial reporting by collusion or Internal control over resultingdowns from human failures. compliance andbreak- andissubjectto lapsesinjudgment isaprocesscial reporting thatinvolves human diligence and Internal control over finan- itsinherent limitations. because of objectives financialreporting achieving absolute assurance of and procedures that: andincludesthosepolicies accepted accounting principles, statements inaccordance forexternal purposes generally with financial andthepreparation of financialreporting of ability to provide reasonable assurance regarding thereli- personnel, managementandother directors, effected by ourboard of and FinancialOfficer, Executive Officer andChief Chief our of, or underthesupervision the process by, designed Internal control over refers financialreporting to company. adequate internal control over forthe financialreporting Management isresponsible forestablishingandmaintaining acceptedgenerally intheUnited States. accounting with financial positioninconformity principles consolidated financialstatements present fairlythecompany’s astoexpresses whethermanagement’s judgment aninformed Theirreport independentpublicaccountants. KPMG LLP, accepted generally principles intheUnited States. thefinancialstatements inaccordance accounting with tion of quately safeguard thecompany’s prepara- assetsandto permit are properly andrecordedthat transactions authorized to ade- Management believes thissystem provides reasonable assurance itscontrol system. evaluates theadequacyandeffectiveness of andcontinually andprocedures, policies, internal controls, the company developed system maintainsahighly of sibility, In meetingthisrespon- mation presented inthisannual report. the consolidated financialstatements andotherfinancialinfor- of Management andobjectivity isresponsible fortheintegrity Internal control over cannotprovide financialreporting Provide reasonable assurance regarding prevention or (3) Provide are reasonable assurance thattransactions (2) records thatinreasonable Pertain to themaintenance of (1) The consolidated financialstatements have beenaudited by material effectonthefinancialstatements.material thecompany’s assetsthatcould have a disposition of useor acquisition, unauthorized of timely detection and company; the managementanddirectors of of authorizations with thecompany are beingmadeonlyinaccordance of andthatreceipts andexpenditures accounting principles, statements inaccordance accepted generally with financial recorded to preparation of permit asnecessary thecompany; theassetsof dispositions of and detail accurately andfairlyreflect thetransactions MANAGEMENT’S REPORT ON INTERNAL CONTROL MANAGEMENT’S REPORT OVER FINANCIAL REPORTING MARCH XCTV IEPRESIDENT VICE EXECUTIVE XCTV IEPRESIDENT VICE EXECUTIVE Edward Walter W. PRESIDENT hitpe .Nassetta J. Christopher financial reporting. thecompany’s internal control over ment’s assessmentof KPMGLLPhasissuedanattestation onmanage- report year. themostrecent fiscal theendof waseffectivereporting asof has concluded thatthecompany’s internal control over financial Management company’s internal control over financialreporting. the the Treadway Commission to evaluate theeffectiveness of (“COSO”) Organizations Sponsoring of by theCommittee of published Framework” entitled “Internal Control—Integrated reasonable assurance level. that thedisclosure controls andprocedures are effective atthat pal executive financialofficer officer concluded andprincipal TheCompany’s princi- theirobjectives. achieving assurance of controls andprocedures areto provide designed reasonable TheCompany’s disclosure thisrisk. noteliminate, though intopossible to theprocess design safeguards to reduce, itis Therefore, process. thefinancialreporting features of theseinherent limitations are known However, reporting. or detected onatimelybasisby internal control over financial misstatements thatmaterial there may isarisk notbeprevented .Edward Walter W. management. thepresenceCommittee orwithout of with internal auditors have access unrestricted to the Audit Theindependentpublicaccountants and tional controls. andfinancialopera- ciples appliedinfinancialreporting, theaccounting prin- theinternal andexternal audits, results of management andtheinternal auditors thescope to review and representatives of theindependentpublicaccountants, with theyear fourtimesduring committee meetsaminimum of The three employed directors by nototherwise thecompany. composed of financial statements through its Audit Committee, Management has used the framework set forth inthereport Management setforth hasusedtheframework h or fDirectors forthe pursuesitsresponsibility The Board of ,2006 3, , HE XCTV OFFICER EXECUTIVE CHIEF , , HE IACA OFFICER FINANCIAL CHIEF HE IACA OFFICER FINANCIAL CHIEF 69 host hotels & resorts 2005 53005_FinancialsX2 4/10/0615:35Page70 70 host hotels & resorts 2005 bv rsn ary inallmat above present fairly, believe thatourauditsprovide areasonable basisforouropinion. We theoverallwell asevaluating financialstatement presentation. as estimates madeby usedandsignificant management, principles An auditalsoincludesassessingtheaccounting financial statements. theamountsanddisclosures inthe supporting evidence test basis, on a An auditincludesexamining, misstatement. material are free of obtain reasonable assurance aboutwhetherthefinancialstatements Those standards require theauditto thatwe planandperform the Public Company Accounting Oversight Board (United States). based onouraudits. to express an opinionontheseconsolidated financialstatements is Ourresponsibility theCompany’s management. of responsibility Theseconsolidated financialstatements are the 2005. December 31, theyears inthethree-year ended period cash flows foreach of and equity stockholders’ tions, opera- andtherelated consolidated statements of 2005 and2004, December 31, asof Host andsubsidiaries Corporation Marriott We have audited theaccompanying consolidated balance sheetsof Host Corporation: Marriott Directors andStockholders The Board of financialstatements recorded to preparation of permit asnecessary are (2)provide reasonable assurance thattransactions company; the theassetsof anddispositionsof fairly reflect thetransactions accurately and inreasonable detail, records that, the maintenance of includesthosepoliciesandproceduresreporting to that(1)pertain Acompany’s internal control over financial accounting principles. ments forexternal inaccordance purposes accepted generally with financial state- andthepreparation of financialreporting of ability process to provide designed reasonable assurance regarding thereli- our auditprovides areasonable basisforouropinion. We believe that as we considered inthecircumstances. necessary such otherprocedures andperforming internal control, tiveness of effec- andoperating testing thedesign andevaluating assessment, management’s evaluating nal control over financialreporting, inter- Ourauditincludedobtaininganunderstandingof respects. trol over wasmaintainedinallmaterial financialreporting obtain reasonable assurance aboutwhethereffective internal con- Those standards require theauditto thatwe planandperform the Public Company Accounting Oversight Board (United States). trol over basedonouraudit. financialreporting theCompany’s internal con- and anopinionontheeffectiveness of istoresponsibility express anopiniononmanagement’s assessment Our internal control over financialreporting. the effectiveness of internal control over andforitsassessmentof financialreporting Company’s managementisresponsible formaintainingeffective The theTreadway Commission (COSO). of Organizations Framework —Integrated establishedin basedoncriteria 2005, December 31, tained effective internal control over asof financialreporting Host that (theCompany) Corporation Marriott main- Reporting, panying Management’s Report onInternal Control Over Financial includedintheaccom-We have audited management’s assessment, Host Corporation: Marriott Directors andStockholders The Board of REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM noroiin theconsolidated financialstatements referred to In ouropinion, We conducted ourauditsinaccordance thestandards of with A company’s internal control over isa financialreporting We conducted ourauditinaccordance thestandards of with sudb h omte fSponsoring issued by theCommittee of ra epcs thefinancialposition respects, erial opeesv noe(os,and comprehensive income (loss), Internal Control ac ,20,expressed anunqualifiedopinion. 2006, March 3, dated andourreport Host andsubsidiaries Corporation Marriott 2005of the years inthethree-year endedDecember period 31, andcomprehensiveequity income (loss)andcashflows foreach of stockholders’ operations, the related consolidated statements of 2005and2004 December 31, consolidated balance sheetsasof the Public Company Accounting Oversight Board (United States), Framework Internal Control—Integrated establishedin basedoncriteria 2005, December 31, asof reporting effective internal control over financial respects, in allmaterial theCompany maintained, Also inouropinion, issued by theCOSO. establishedin criteria isfairlystated, 2005, December 31, maintained effective internal control over asof financialreporting policies orprocedures may deteriorate. compliance the with orthatthedegree of changes inconditions, thatcontrolssubject to therisk may become inadequate becauseof effectiveness to future are periods any of evaluation jections of pro- Also, maycial reporting notprevent ordetect misstatements. the financialstatements. thecompany’s assetsthatcould have on effect amaterial position of ordis- use, acquisition, unauthorized vention of ortimelydetection and(3)provide reasonable assurance regarding pre- the company; managementanddirectors of in accordance of authorizations with thecompany are beingmadeonly that receipts andexpenditures of and in accordance accepted generally with accounting principles, MARCH MARCH MCLEAN MCLEAN nepeainN.46(R) Interpretation No. accounting principles. accepted generally U.S. with in conformity 2005, December 31, theyears inthethree-year ended period flows foreach of andtheircash theiroperations andtheresults of 2005 and2004, December 31, asof andsubsidiaries Host Corporation Marriott of fetv prto f internal control over financialreporting. effective of, operation andthe an unqualifiedopiniononmanagement’s assessmentof, 2006expressed dated andourreport March 3, Commission (COSO), theTreadway of Organizations Sponsoring the Committee of established in basedoncriteria 2005, December 31, over asof financialreporting Host Corporation’s Marriott internal control the effectiveness of Public Company Accounting Oversight Board (United States), in 2004. ehv loadtd nacrac ihtesadrso the inaccordance thestandards of with We have alsoaudited, management’s assessmentthattheCompany In ouropinion, internal control over finan- itsinherent limitations, Because of The Company adopted Financial Accounting Standards Board eas aeadtd nacrac ihtesadrso the inaccordance thestandards of with We alsohave audited, ,2006 3, 2006 3, , , VIRGINIA VIRGINIA Internal Control—Integrated Framework Internal Control—Integrated Internal Control—Integrated Framework Internal Control—Integrated osldto fVariable Interest Entitie of Consolidation nalmtra epcs basedon respects, in allmaterial issued by theCOSO. issued by s 53005_FinancialsX2 4/10/0615:35Page71 (2) (1) BALANCE SHEETDATA: INCOME STATEMENT DATA: (IN MILLIONS) 2005. statements forthefive years endedDecember 31, tablepresentsThe following selected historical certain andExchange theSecurities onFormreport 10-Kfiledwith includedasexhibit 31to ourannual In addition, standards. theNYSE’s Governance Corporate listing by thecompany of any violation thatdate hewasnotaware of thatasof certifying theNYSE Governance Corporate standards, 303A.12(a) of Executive Officer required certification by Section the Chief we submitted to theNew York Stock Exchange 2005, On June 7, orde h eann 2mlino outstandingConvertible Prefer to redeem theremaining $2millionof Convertible Subordinated Debentures beeliminated inconjunction thesecond notheldby will 2006re third with quarter parties Convertible Convertib Preferred (andtheunderlying Securities we converted $473 2006, 12, Between December 2005andFebruary share orthefinancial covenants underourseniornotes indentures. ear onournetincome FIN46Rhadnoeffect (loss), Theadoptionof didnotrestate periods. prior therefore, 46R prospectively and, approximately $32millionfor2004and2005 payment of dividend on ourconsolidated which isincludedin “Investments $17millionisourinvestment inaffiliates” intheTrust, The difference of ourconsolidated balance sheetprio Convertible Preferred thatwere classifiedinthemezzaninesectionof Securities previously we recorded indebentures the$492million (Convertible Subordinated Debentures) issuedby theTrustAs aresult, andeliminated F theConvertible Preferred Trust Securities We (the adopted theprovisions“Trust”). of required to deconsolidate theaccounts of underFIN46. beneficiary 2003since we were theprimary December 31, (the to securities thatwasformed issuetrust-preferred subsidiary “Convertible Preferred Securities”) wasaccounted forona ourlimited Under FIN46, (FIN46)in2003. Variable Interest Entities” 46 We“Consolidation of adopted FinancialInterpretation No. approximately $212million. of theNew York Marriott W Results proceeds ondispositionandbusinessinterruption in2003includethegain of those dispositions. Discontinued reflects operations theop Debt Income (loss)from continuing operations Net income (loss) available to common stockholders Net income (loss) Preferred stock Total assets Income from discontinued operations Revenues Convertible Preferred Securities Basic and diluted earnings (loss) per common (loss)per Basic anddiluted share: earnings Cash dividends declaredCash dividends percommon share In December 2003, the FASB issued a revision to FIN 46, which we refer to as FIN 46R. Under FIN 46R, we are not the primary benefic we are nottheprimary Under FIN46R, which we refer to asFIN46R. theFASB to FIN46, issuedarevision In December 2003, Net income (loss) Income from discontinued operations Income (loss)from continuing operations (2) MANAGEMENT CERTIFICATIONS (2) erations of properties classifiedasheldfor properties of erations SELECTED FINANCIAL DATA (1) financial datawhic le Subordinated Debentures) into approximately commo 30.8million is required to beclassifiedasinterest expense effective Janua e euiisdrn h eodqatro 06 Additionally 2006. thesecond of during red quarter Securities www.hosthotels.com. isavailable onourwebsite at: including thesecertifications, ourannual onForm report 10-K, copy A of public reporting. 2002regarding our Act theSarbanes-Oxley of Section 302of FinancialOfficer required certifications by Officer andChief Executive 2006were theChief Commission onMarch 10, sale, the results of operations of properties properties of operations theresults of sale, $8,245 $3,881 5,370 0520 0320 2001 2002 2003 2004 2005 h hasbeen derived from audited consolidated financ 138 135 166 241 .38 .08 .30 .41 — 28 841$,9 836$8,338 $8,316 $8,592 $8,421 $3,316 $3,282 $3,223 $3,574 ,2 ,8 ,3 5,602 5,638 5,486 5,523 .2 .7 .9 .08 (.14) (.19) (.45) (.07) (1.00) (.12) (.34) 3 3 3 339 339 339 337 7)(4)(3 (4) (83) (247) (74) 4)(1 5)19 (51) (21) (41) 2 9 2 .22 .26 .93 .22 0 .78 — — .05 7 7 475 475 475 — 4(6 51 (16) 14 — 4216 55 67 261 74 FISCAL YEAR consolidated basisasof sold and the gain orlosson sold andthegain oJnay1 2004. r to 1, January y1 04 We adopted FIN 2004. 1, ry balance sheet. The related The balance sheet. N4Ro aur ,2004. 1, IN 46RonJanuary demption. the$475millionof orld Trade Center hotel the$17millionof , nings (loss) per diluted (loss)per nings hrs We intend n shares. purpose trust trust purpose mlino our of million iary andwe are iary ial 71 host hotels & resorts 2005 53005_FinancialsX2 4/10/0615:35Page72 72 host hotels & resorts 2005 orSaosHtl tat 244 438 HyattGrand Atlanta inBuckhead Atlanta Four SeasonsHotel, Atlanta Perimeter Marriott Center 463 295 444 Naples Resort, The Ritz-Carlton Golf Naples The Ritz-Carlton, Amelia Island The Ritz-Carlton, Tampa Marriott Waterside Hotel TampaMarriott Airport 223 Hilton Singer Island Oceanfront Resort Orlando World Center Marriott Miami Biscayne Marriott Bay Marriott Miami Airport 628 Denver Marriott West Denver Tech Marriott Center 336 Francisco San The Ritz-Carlton, Marina delRey The Ritz-Carlton, Marriott Santa Clara 89 254 HotelSan DiegoMarriott HotelSacramento Host Airport 532 Beach Bayview Marriott Newport Beach HotelNewport Marriott &Spa Marina delRey Marriott 253 789 Manhattan Beach Marriott Francisco San Airport Hyatt Regency, Resort aJWMarriott Springs, Desert Costa Mesa Suites Marriott 281 Scottsdale at Marriott 251 Phoenix The Ritz-Carlton, Scottsdale Suites Marriott OldTown San RamonMarriott San Francisco Marriott 685 San Francisco Marriott 350 San Francisco Marriott Airport MissionSan DiegoMarriott Valley tat arotMrus1,675 Atlanta Suites Marriott Midtown Atlanta Marquis Marriott GEORGIA Harbor Beach Resort Marriott FLORIDA RockyHartford Marriott Hill CONNECTICUT Four Points by Sheraton COLORADO ROOMS LOCATION ROOMS LOCATION Coronado Island Resort Marriott CALIFORNIA ROOMS MountainMarriott Shadows ARIZONA LOCATION Each hotel nameindicated. isoperated underthebrand 2006. March 31, Hotel Properties. n aia717 and Marina 2,000 Resort and Convention Center and Marina 884 Palm Desert and Resort &Spa, 270 McDowell Mountains ihra’ hr 285 Fisherman’s Wharf and Spa Denver Southeast Club Resort andGolf (1)(2) (1)(2) The following table sets forth thelocationandn tablesetsforth The following (1) (1) (1) (1) (1) (1) (1) (3) (1) (1) (1) (1) (1) (1) (1) (1) 1,498 1,362 HOST MARRIOTT PORTFOLIO 400 254 296 601 772 637 251 305 475 304 755 368 370 385 300 337 aeg arotCate aly375 Crabtree Marriott Raleigh Valley Park RidgeMarriott 321 Minneapolis Southwest Marriott h izCrtn uked553 444 365 Buckhead The Ritz-Carlton, Atlanta The Ritz-Carlton, 371 The WestinBuckhead Atlanta HotelJW Marriott Buckhead Atlanta e ren arot1,290 298 632 MARYLAND New OrleansMarriott LOUISIANA 681 South BendMarriott 256 INDIANA Chicago Swissôtel, SuitesChicago Marriott O’Hare O’Hare Chicago Marriott 337 Embassy Suites ChicagoHotel, ChicagoDowntown Courtyard 450 SuitesChicago Marriott 806 ILLINOIS Hyatt Regency Maui Resort andSpa Maui The Fairmont Kea Lani, HAWAII atnMrit 399 Dayton Marriott OHIO Greensboro-Highpoint NORTH CAROLINA 353 498 New YorkMarquis Marriott New York FinancialCenter Marriott 245 NEW YORK InternationalNewark Liberty Hanover Marriott NEW JERSEY Nashua Courtyard NEW HAMPSHIRE Kansas Marriott City Airport 224 MISSOURI 308 Center City Minneapolis Marriott MINNESOTA 498 Detroit Livonia Marriott Dearborn The Ritz-Carlton, MICHIGAN 430 1,139 Hyatt Regency Cambridge, Hyatt Regency Boston Boston Copley Place Marriott Boston Newton Marriott MASSACHUSETTS Gaithersburg Marriott ononLkfot455 254 Downtown/Lakefront Grove Downers Marriott Airport Marriott Times Square Marriott Airport 469 Overlooking Boston 284 Washingtonian Center (1) (1) (1) (1) umber of rooms of our 102 full-service hotels asof our102full-service rooms of umber of (1) (1) 1,944 299 289 591 382 583 Toronto Delta Meadowvale Resort Toronto Downtown Marriott 336 253 Westfields Marriott Washington Dulles 518 Washington Suites Marriott Dulles 395 Tysons Corner The Ritz-Carlton, Residence Inn Arlington Key Marriott Bridge Hyatt Regency Reston ParkFairview Marriott 565 Rivercenter Marriott San Antonio HotelJW Marriott on Westheimer Houston Medical Marriott Center Marriott Houston Airport San Antonio Marriott Riverwalk San AntonioMarriott Marriott Philadelphia Airport Washington Marriott Dulles Airport VIRGINIA 592 Dallas/Addison Quorum Marriott TEXAS Memphis Downtown Marriott TENNESSEE 364 DowntownPhiladelphia Marriott Philadelphia Four SeasonsHotel, PENNSYLVANIA Portland Marriott OREGON OA 53,315 (3) (2) (1) TOTAL 384 Mexico City Hotel, JW Marriott MEXICO 456 Toronto Marriott Airport Marriott Calgary CANADA atMetroMarriott Center HotelJW Marriott 459 Hyatt Regency Washington on D.C. WASHINGTON, SeaTacSeattle Marriott Airport WASHINGTON been obtained. 2006these approvals have not April 1, As of required approval formixed-use development. tingent uponthepurchaser obtainingthe We have con- to anagreement sellthisproperty areThese properties term leaseagreements. underoneormorefrom long- athird party The landonwhich thishotel isbuiltleased n ofrneCne 374 and Conference Center Eaton Center 299 Pentagon City 514 by theGalleria by theGalleria 503 Downtown Waterfront aio il834 772 Pennsylvania Avenue Capitol Hill (1) (1) (1) not whollyowned. (2) (1) (2) (1) (1) (2) (1) (1) (1) 1,001 1,408 312 459 424 398 583 368 512 386 548 419 53005_Cv2_3 4/10/06 14:37 Page 2

DIRECTORS, OFFICERS AND MANAGEMENT TEAM

BOARD OF DIRECTORS

RICHARD E. MARRIOTT TERENCE C. GOLDEN1 JOHN B. MORSE, JR.1,3 Chairman of the Board Former President, Chief Executive Officer Vice President, Finance and CHRISTOPHER J. NASSETTA ANN MCLAUGHLIN KOROLOGOS2,3 Chief Financial Officer President, Chief Executive Officer Chair of the The Washington Post Company ROBERT M. BAYLIS1,2 RAND Board of Trustees 1 Audit Committee Retired Vice Chairman JUDITH A. MCHALE2,3 2 Compensation Policy Committee CS First Boston President, Chief Executive Officer 3 Nominating and Corporate Discovery Communications, Inc. Governance Committee

MANAGEMENT TEAM

CHRISTOPHER J. NASSETTA W. EDWARD WALTER GREGORY J. LARSON President, Chief Executive Officer Executive Vice President, Senior Vice President, ELIZABETH A. ABDOO Chief Financial Officer Treasurer and Investor Relations Executive Vice President, JEFFREY S. CLARK MATTHEW L. RICHARDSON General Counsel and Secretary Senior Vice President, Senior Vice President, MINAZ ABJI Tax Chief Development Officer Executive Vice President, LARRY K. HARVEY PAMELA K. WAGONER Asset Management Senior Vice President, Senior Vice President, JAMES F. RISOLEO Chief Accounting Officer Human Resources Executive Vice President, Chief Investment Officer

CORPORATE INFORMATION

CORPORATE HEADQUARTERS REGISTRAR AND TRANSFER AGENT Host Hotels & Resorts, Inc. If you have any questions concerning transfer procedures 6903 Rockledge Drive, Suite 1500 or other stock account matters, please contact the transfer Bethesda, MD 20817 agent at the following address: 240/744-1000 Computershare Limited Shareholder Relations WEB SITE P.O. Box 43010 Visit the company’s web site at: Providence, RI 02940-3010 www.hosthotels.com 800/519-3111

STOCK EXCHANGE LISTINGS New York Stock Exchange COMMON STOCK PRICES Chicago Stock Exchange STOCK Pacific Stock Exchange PRICE DIVIDENDS DECLARED Ticker Symbol: HST HIGH LOW PER SHARE 2004 INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS 1st Quarter $13.00 $11.95 $ — KPMG LLP, McLean, VA 2nd Quarter 12.91 11.37 — 3rd Quarter 14.01 12.23 — STOCKHOLDERS OF RECORD 4th Quarter 17.30 13.50 .05 26,800 at December 31, 2005 2005 ANNUAL MEETING 1st Quarter $17.24 $15.49 .08 2nd Quarter 17.57 16.22 .10 The 2006 annual meeting of stockholders will be held at 3rd Quarter 19.05 17.00 .11 11 a.m., May 18, 2006, at the Hyatt Regency, Reston, 4th Quarter 18.95 16.19 .12 1800 Presidents Street, Reston, Virginia, 20190

DESIGN: VIVO DESIGN, INC., PRINTING: PEAKE DELANCEY PRINTERS, LLC 53005_Cv2_3 4/10/06 14:37 Page 1

6903 ROCKLEDGE DRIVE, SUITE 1500 BETHESDA, MARYLAND 20817