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 4/10/06 13:39 Page 2 TO OUR STOCKHOLDERS We had an outstanding 2005, delivering significant increases in operating results, earnings and dividends and executing on strategic initiatives that will help distin- guish our company as a global player in the lodging industry. Throughout the year we maintained our stra- tegic focus, aggressively managing our existing portfolio and practicing a systematic and disciplined approach to capital allocation. Our focus and the continued improve- ment of lodging fundamentals have enhanced our lodg- ing portfolio and strengthened our financial position for host hotels & resorts hotels host 2005 the future. Some of the more significant recent accom- 2 CHRISTOPHER J. NASSETTA plishments include: President and Chief Executive Officer RICHARD E. MARRIOTT ◆ Our operating results improved significantly over Chairman of the Board 2004 in nearly every measure of performance. The RevPAR increase of 9.5% in 2005 was the highest full-year improvement since 1998, helping to drive signifi- cant increases in operating margins and cash flow; ◆ On November 14, 2005, we entered an agreement to acquire an outstanding portfolio of hotels from Starwood Hotels & Resorts Worldwide, Inc. On April 10, 2006, we completed the purchase of 28 of the properties and expect to close on the remaining seven properties by the end of the second quarter. This $3.8 billion acquisi- tion delivers on all of our qualitative and quantitative acquisition parameters and forges a new partnership with one of the most innovative brand and management companies in the lodging industry; ◆ We formed a joint venture on March 24, 2006 to own the Starwood hotels in Spain, Italy, Poland and the United Kingdom and to serve as a platform for further European expansion, as well as provide approximately $560 million of financing for the acquisition of the European hotels from Starwood; ◆ On September 30, 2005, we purchased the 834-room Hyatt Regency Washington on Capitol Hill for $274 mil- lion, the seventh Hyatt-managed property in our portfolio; ◆ We have pursued opportunities to unlock the inherent real estate value in our portfolio where it exceeds the value of the properties as hotels, such as in the sales in 2006 of the Fort Lauderdale Marina Marriott and the Swissôtel The Drake, New York for approximately $580 million; 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.