4. Debt

Debt consists of the following (in millions):


	As of December 31,
	2012		2011
Series O senior notes, with a rate of 6³/₈% due March 2015	$	—	$	650
Series Q senior notes, with a rate of 6³/₄% due June 2016		550		800
Series S senior notes, with a rate of 6⁷/₈% due November 2014		—		498
Series T senior notes, with a rate of 9% due May 2017		391		390
Series V senior notes, with a rate of 6% due November 2020		500		500
Series X senior notes, with a rate of 5⁷/₈% due June 2019		497		496
Series Z senior notes, with a rate of 6% due October 2021		300		300
Series B senior notes, with a rate of 5¹/₄% due March 2022		350		—
Series C senior notes, with a rate of 4³/₄% due March 2023		450		—
2004 Exchangeable Senior Debentures, with a rate of 3¹/₄% due April 2024		175		175
2007 Exchangeable Senior Debentures, with a rate of 2⁵/₈% due April 2027		—		385
2009 Exchangeable Senior Debentures, with a rate of 2¹/₂% due October 2029		356		342
Senior notes, with rate of 10.0% due May 2012		—		7

Total senior notes		3,569		4,543
Credit facility revolver		263		117
Credit facility term loan due July 2017		500		—
Mortgage debt (non-recourse) with an average interest rate of 4.5% and 5.0% at December 31, 2012 and 2011, maturing through November 2016		993		1,006
Other		86		87

Total debt	$	5,411	$	5,753

Senior Notes

General. Under the terms of our senior notes indenture, which includes our Exchangeable Senior Debentures, our senior notes are equal in right of payment with all of our unsubordinated indebtedness and senior to all of our subordinated obligations. The face amount of our senior notes as of December 31, 2012 and 2011 was $3.6 billion and $4.6 billion, respectively. The senior notes balance as of December 31, 2012 and 2011 includes discounts of approximately $56 million and $77 million, respectively. We pay interest on each series of our senior notes semi-annually in arrears at the respective annual rates indicated in the table above.

Under the terms of the senior notes indenture, our ability to incur indebtedness and pay dividends is subject to restrictions and the satisfaction of various conditions. As of December 31, 2012, we are in compliance with all of these covenants.

We completed the following senior notes transactions during 2012 and 2011:

•

On December 31, 2012, we redeemed $100 million of 6³/₄% Series Q senior notes due 2016 for a redemption price of $102 million.

•

On August 9, 2012, we issued $450 million of 4³/₄% Series C senior notes due 2023 for net proceeds of approximately $443 million. On September 5, 2012, a portion of the proceeds were used to redeem the $250 million of 6³/₈% Series O senior notes due 2015 for a redemption price of $253 million and $150 million of 6³/₄% Series Q senior notes due 2016 for a redemption price of $153 million.

•

On August 27, 2012, we redeemed $400 million of our 6³/₈% Series O senior notes due 2015 with proceeds from our credit facility term loan at a redemption price of $404 million.

•

On April 16, 2012, the holders of $386 million face amount of 2⁵/₈% exchangeable senior debentures due 2027 (the “2007 Debentures”) exercised their option to require us to repurchase their debentures at par. We redeemed the remaining $2 million in October 2012.

•

On April 13, 2012, we redeemed $250 million of our 6⁷/₈% Series S senior notes due in 2014, and on May 29, 2012, we redeemed the remaining $250 million Series S notes for a total redemption price of $508 million.

•

On March 22, 2012, we issued $350 million 5¹/₄% Series A senior notes due 2022. Net proceeds of the offering of approximately $344 million, and available cash, were used to repay the $113 million loan with a 7.5% interest rate secured by the JW Marriott, Washington, D.C. on April 2, 2012, and to redeem $250 million of our 6⁷/₈% Series S senior notes, as noted above. The Series A senior notes were exchanged for Series B senior notes in October 2012. The terms are substantially identical in all respects, except that the new series are registered under the Securities Act of 1933 and are, therefore, freely transferable by the holders.

•

In November of 2011, we issued $300 million of 6% Series Y senior notes due October of 2021. We received proceeds from the issuance of approximately $295 million, net of underwriting fees and expenses. The Series Y senior notes were exchanged for Series Z senior notes in June 2012.

•

In December and August of 2011, we repurchased a total of $138 million face amount of the 2007 Debentures, with a carrying value of $134 million, and recorded a loss of approximately $5 million on the transaction.

•

In June of 2011, we redeemed $150 million of our 3.25% exchangeable senior debentures (the “2004 Debentures”). Approximately $134 million face amount was exchanged for 8.8 million shares of Host Inc. common stock and $16 million face amount was redeemed for cash.

•

On May 11 and May 25, 2011, we issued $425 million and $75 million, respectively, of 5⁷/₈% Series W senior notes due June 15, 2019. We received proceeds from these issuances of approximately $489 million, net of discounts, underwriting fees and expenses. A portion of the proceeds were used to redeem the remaining $250 million of the 7¹/₈% Series K senior notes due November of 2013, plus $3 million premium on the redemption. The Series W senior notes were exchanged for Series X senior notes in January of 2012.

Exchangeable Debentures. As of December 31, 2012, we have two issuances of exchangeable senior debentures outstanding: $400 million of 2¹/₂% debentures that were issued on December 22, 2009 and $175 million of 3¹/₄% debentures that were issued on March 16, 2004, collectively, the “Debentures.” The Debentures are equal in right of payment with all of our other senior notes. Holders have the right to require us to purchase the Debentures at a price equal to 100% of the principal amount outstanding, plus accrued interest (the “put option”), on certain dates subsequent to their respective issuances. Holders of the Debentures also have the right to exchange the Debentures prior to maturity under certain conditions, including at any time at which the closing price of Host Inc.’s common stock is more than 120% (for the 2004 Debentures) or 130% (for the 2009 Debentures) of the exchange price per share for at least 20 of 30 consecutive trading days during certain periods or at any time up to two days prior to the date on which the Debentures have been called for redemption. We can redeem for cash all, or a portion, of any of the Debentures at any time subsequent to each of their respective redemption dates at a redemption price of 100% of the principal amount plus accrued interest. If, at any time, we elect to redeem the Debentures and the exchange value exceeds the cash redemption price, we would expect the holders to elect to exchange the Debentures at the respective exchange value rather than receive the cash redemption price. The exchange value is equal to the applicable exchange rate multiplied by the price of Host Inc.’s common stock. Upon exchange, the 2004 Debentures would be exchanged for Host Inc.’s common stock and the 2009 Debentures would be exchanged for Host Inc.’s common stock, cash or a combination thereof, at our option. Based on Host Inc.’s stock price at December 31, 2012, the 2004 Debentures and 2009 Debentures’ if-converted value would exceed the outstanding principal amount by $10 million and $57 million, respectively. Currently, none of the Debentures are exchangeable by holders.

The following table details our outstanding Debentures:

As of December 31, 2012

Maturity
date

Next put
option
date

Redemption
date

Outstanding
principal
amount

Current exchange
rate for each
$1,000 of principal

Current
equivalent
exchange price

Exchangeable
share
equivalents

(in millions)

(in shares)

2009 Debentures

10/15/2029

10/15/2015

10/20/2015

400

72.8701

13.72

29.1 million

2004 Debentures

4/15/2024

4/15/2014

4/19/2009

175

67.4215

14.83

11.8 million

Total

575

We account separately for the liability and equity components of our Debentures in order to reflect the fair value of the liability component based on our non-convertible borrowing cost at the issuance date. Accordingly, for the Debentures, we record the liability components thereof at fair value as of the date of issuance and amortize the resulting discount as an increase to interest expense over the expected life of the debt; however, there is no effect of this discount on our cash interest payments. We measured the fair value of the debt components of the 2009 Debentures and the 2004 Debentures at issuance based on effective interest rates of 6.9% and 6.8%, respectively. As a result, we attributed $158 million of the aggregate proceeds received to the conversion feature of the Debentures. This amount represents the excess proceeds received over the fair value of the debt at the date of issuance and is included in Host Inc.’s additional paid-in capital and Host L.P.’s capital on the consolidated balance sheets. The following table details the initial allocations between the debt and equity components of the Debentures, net of the original issue discounts, based on the effective interest rate at the time of issuance, as well as the debt balances (in millions):


							As of December 31, 2012
	Initial Face Amount		Initial Debt Value		Initial Equity Value		Face Amount Outstanding		Debt Carrying Value		Unamortized Discount
2009 Debentures	$	400	$	316	$	82	$	400	$	356	$	44
2004 Debentures		500		413		76		175		175		—

Total	$	900	$	729	$	158	$	575	$	531	$	44

Interest expense recorded for the Debentures consists of the following (including interest expense for our 2007 Debentures that were redeemed in 2012) (in millions):


	Year ended December 31,
	2012		2011		2010
Contractual interest expense (cash)	$	19	$	31	$	34
Non-cash interest expense due to discount amortization		17		31		32

Total interest expense	$	36	$	62	$	66

Losses on the repurchased debentures are recorded in interest expense in the consolidated financial statements. We evaluated the fair value of the repurchased debentures based on the fair value of the cash flows at the date of the repurchase, discounted at risk adjusted rates. Based on this calculation, the fair value of our repurchased debentures generally has been greater than the conversion price; therefore, substantially all of the repurchase price was allocated to the debt portion of the debentures.

Authorization for Senior Notes and Exchangeable Senior Debentures Repurchase. Host Inc.’s Board of Directors had authorized repurchases of up to $500 million of senior notes, exchangeable debentures and mortgage debt (other than in accordance with its terms). Any further redemption of the 2004 Debentures will not reduce the $500 million of Board authority noted above to repurchase other debt securities. On February 6, 2013, the Board reauthorized repurchases of up to $500 million of debt and terminated the previous authorization.

Credit Facility. On November 22, 2011, we entered into a new senior revolving credit facility with Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., as syndication agent, Wells Fargo Bank, N.A., Deutsche Bank AG New York Branch and The Bank of Nova Scotia as co-documentation agents, and certain other agents and lenders. The amounts outstanding under the prior credit facility were transferred and remain outstanding. Based on our draws at December 31, 2012, we have $737 million of available capacity under our credit facility. The credit facility allows for revolving borrowings in an aggregate principal amount of up to $1 billion, including a foreign currency subfacility for Canadian dollars, Australian dollars, New Zealand dollars, Japanese yen, Euros and British pound sterling of up to the foreign currency equivalent of $500 million, subject to a lower amount in the case of New Zealand dollar borrowings. The credit facility also provides a subfacility of up to $100 million for swingline borrowings and a subfacility of up to $100 million for issuances of letters of credit. Host L.P. also has the option to increase the aggregate principal amount of the credit facility by up to $500 million, subject to obtaining additional loan commitments and satisfaction of certain conditions. The credit facility has an initial scheduled maturity date of November 2015, with an option for Host L.P. to extend the term for one additional year, subject to certain conditions, including the payment of an extension fee.

We had the following transactions under this credit facility during 2012 (draws used for bridge financing to facilitate transactions are not included in the below discussion):

•

We drew $100 million in net proceeds on the revolver portion of our credit facility to facilitate the acquisition of the Grand Hyatt Washington.

•

We drew $42 million in net proceeds, in various currencies, including the Euro, Canadian dollars and Australian dollars, on the revolver portion of our credit facility, primarily to facilitate acquisitions through investments in our joint ventures.

•

On July 25, 2012, we entered into a $500 million term loan (“Term Loan”) through an amendment of our credit facility. The Term Loan has a five-year maturity and a floating interest rate of LIBOR plus 180 basis points based on our leverage ratio, as defined in our credit facility, at December 31, 2012 (or approximately a 2.0% all-in interest rate).

Under the previous senior revolving credit facility, we had the following transactions during 2011:

•

On June 28, 2011, we used the proceeds received from the transfer of the Le Méridien Piccadilly to the Euro JV Fund II to repay £25 million ($40 million) under the credit facility.

•

On March 1, 2011, we repaid the C$129 million ($132 million) mortgage debt on our portfolio of four hotels in Canada. We drew C$100 million ($103 million) from our credit facility in the form of bankers’ acceptances in order to fund a portion of this repayment. The bankers’ acceptances had an initial average interest rate of 2.18%, based on the 30-day Canadian bankers’ acceptances rate, plus 90 basis points.

Financial Covenants. The credit facility contains covenants concerning allowable leverage, fixed charge coverage and unsecured interest coverage (as defined in our credit facility). Currently, we are permitted to borrow and maintain amounts outstanding under the credit facility so long as our leverage ratio is not in excess of 7.25x, our unsecured coverage ratio is not less than 1.75x and our fixed charge coverage ratio is not less than 1.25x. The financial covenants for the credit facility do not apply when there are no borrowings under the credit facility. Therefore, so long as there are no amounts outstanding, we would not be in default if we do not satisfy the financial covenants and we do not lose the potential to draw under the credit facility in the future if we were to regain compliance with the financial covenants. These calculations are performed based on pro forma results for the prior four fiscal quarters, giving effect to transactions such as acquisitions, dispositions and financings as if they had occurred at the beginning of the period. Under the terms of the credit facility, interest expense excludes items such as gains and losses on the extinguishment of debt, deferred financing charges related to the senior notes or the credit facility, amortization of debt premiums or discounts that were recorded at acquisition of a loan in order to establish the debt at fair value and non-cash interest expense due to the implementation in 2009 of accounting standards related to our exchangeable debentures, all of which are included in interest expense on our consolidated statement of operations. Additionally, total debt used in the calculation of our leverage ratio is based on a “net debt” concept, under which cash and cash equivalents in excess of $100 million are deducted from our total debt balance. As of December 31, 2012, we are in compliance with the financial covenants under our credit facility.

Collateral and Guarantees. The credit facility initially does not include any subsidiary guarantees or pledges of equity interests in our subsidiaries, and the guarantees and pledges are required only in the event that Host L.P.’s leverage ratio exceeds 6.0x for two consecutive fiscal quarters at a time that Host L.P. does not have an investment grade long-term unsecured debt rating. In the event that such guarantee and pledge requirement is triggered, the guarantees and pledges ratably would benefit the credit facility, as well as the notes outstanding under Host L.P.’s senior notes indenture, interest rate and currency hedges and certain other hedging and bank product arrangements with lenders that are parties to the credit facility. Even when triggered, the guarantees and pledges only would be required by certain U.S. and Canadian subsidiaries of Host L.P. and a substantial portion of our subsidiaries would provide neither guarantees nor pledges of equity interests. As of December 31, 2012, our leverage ratio was 4.2x.

Interest and Fees. We pay interest on revolver borrowings under the credit facility at floating rates equal to LIBOR plus a margin (i) ranging from 175 to 275 basis points (depending on Host L.P.’s consolidated leverage ratio), or (ii) following the date on which Host L.P.’s long-term unsecured debt rating is investment grade and Host L.P. elects ratings-based pricing, ranging from 100 to 160 basis points (depending on Host L.P.’s unsecured long-term debt rating). Based on our leverage ratio at December 31, 2012 of 4.2x, we would be able to borrow at a rate of LIBOR plus 200 basis points. While we are using leverage-based pricing, to the extent that amounts under the credit facility remain unused, we pay a quarterly commitment fee on the unused portion of the loan commitment of 25 to 35 basis points, depending on our average revolver usage during the applicable period. Upon attainment of an investment grade unsecured debt rating and our election of ratings-based pricing, in lieu of paying an unused commitment fee, we would instead pay a facility fee ranging from 15 basis points to 40 basis points, depending on our rating and regardless of usage. The interest rate margin on the Term Loan can range from 165 to 265 basis points (depending on Host L.P.’s consolidated leverage ratio) or, under certain circumstances, in the event that Host L.P.’s long-term unsecured debt rating is investment grade, from 115 to 200 basis points.

Other Covenants and Events of Default. The credit facility contains restrictive covenants on customary matters. Certain covenants become less restrictive at any time that our leverage ratio falls below 6.0x. In particular, at any time that our leverage ratio is below 6.0x, we will not be subject to limitations on capital expenditures, and the limitations on acquisitions, investments and dividends contained in the credit facility will be superseded by the generally less restrictive corresponding covenants in our senior notes indenture. Additionally, the credit facility’s restrictions on the incurrence of debt and the payment of dividends generally are consistent with our senior notes indenture. These provisions, under certain circumstances, limit debt incurrence to debt incurred under the credit facility or in connection with a refinancing, and limit dividend payments to those necessary to maintain Host Inc.’s tax status as a REIT. The credit facility also includes usual and customary events of default for facilities of this nature, and provides that, upon the occurrence and continuance of an event of default, payment of all amounts owed under the credit facility may be accelerated, and the lenders’ commitments may be terminated. In addition, upon the occurrence of certain insolvency or bankruptcy related events of default, all amounts owed under the credit facility will become due and payable and the lenders’ commitments will terminate.

Mortgage Debt

All of our mortgage debt is recourse solely to specific assets, except for environmental liabilities, fraud, misapplication of funds and other customary recourse provisions. As of December 31, 2012, we have 14 assets that are secured by mortgage debt, with an average interest rate of 4.5%, that mature between 2013 and 2016. Interest is payable monthly. As of December 31, 2012, we are in compliance with the covenants under all of our mortgage debt obligations.

We had the following mortgage debt issuances and repayments since January 2011:


Transaction Date	Property	Rate			Maturity Date		Amount
							(in millions)
*Issuances/Assumptions*
June 2012	Hyatt Regency Reston (1)		3.3	%		7/1/2016	$	100
November 2011	Hilton Melbourne South Wharf (2)		6.4	%		11/23/2016		79
February 2011	New Zealand Hotel Portfolio (3)		6.6	%		2/18/2016		80
*Repayments/Transfer*
April 2012	JW Marriott, Washington, D.C. (4)		7.5	%		4/2/2013		(113	)
June 2011	Le Méridien Piccadilly (5)		1.99	%		1/20/2012		(52	)
March 2011	Four Canadian properties		5.2	%		3/1/2011		(132	)

(1)	The floating interest rate is equal to 1-month LIBOR plus 310 basis points. The rate shown reflects the rate in effect at December 31, 2012. We have the option to extend the maturity for one year, subject to certain conditions.

(2)

The floating interest rate is equal to the 3-month BBSY plus 230 basis points. In addition, we entered into separate swap agreements that fix 75% of the loan at an all-in rate of 6.7% and cap the remaining 25% at an all-in interest rate of 9.9%. The rate shown reflects the rate in effect at December 31, 2012.

(3)

The floating interest rate is equal to the 3-month New Zealand Bank Bill Rate plus 120 basis points plus an additional commitment fee of 120 basis points per annum. In addition, we entered into a swap agreement that fixes 75% of the loan at an all-in rate of 7.15%. The rate shown reflects the rate in effect at December 31, 2012.

(4)	We prepaid the mortgage including an exit fee of $1 million.

(5)

In connection with the transfer of Le Méridien Piccadilly to the Euro JV, we transferred the associated mortgage. This floating rate mortgage is based on LIBOR plus 118 basis points and reflects the rate in effect at the time of transfer. The mortgage loan had been assumed at acquisition of the property in June 2010.

Aggregate Debt Maturities

Aggregate debt maturities are as follows (in millions):


	As of December 31, 2012
2013	$	278
2014		642
2015		675
2016		822
2017		940
Thereafter		2,100

		5,457
Unamortized (discounts) premiums, net		(55	)
Fair value hedge adjustment		8
Capital lease obligations		1

	$	5,411

Interest

The following items are included in interest expense (in millions):


	Year ended December 31,
	2012⁽¹⁾			2011⁽¹⁾			2010⁽¹⁾
Interest expense	$	373		$	371		$	383
Interest expense for discontinued operations		—			—			1
Amortization of debt premiums/discounts, net (2)		(18	)		(32	)		(34	)
Amortization of deferred financing costs		(12	)		(11	)		(12	)
Non-cash gains/(losses) on debt extinguishments		(9	)		(4	)		(1	)
Change in accrued interest		4			(4	)		10

Interest paid (3)	$	338		$	320		$	347

(1)	Interest expense and interest paid for 2012, 2011 and 2010 includes cash prepayment premiums of approximately $21 million, $5 million and $20 million, respectively.

(2)	Primarily represents the amortization of the debt discount on our Debentures, which is non-cash interest expense.

(3)	Does not include capitalized interest of $6 million, $4 million and $3 million during 2012, 2011 and 2010, respectively.

Our debt repayments resulted in debt extinguishment costs included in interest expense for 2012, 2011 and 2010 of $30 million, $9 million and $21 million, respectively.

Amortization of property and equipment under capital leases totaled $1 million, $3 million and $1 million for 2012, 2011 and 2010, respectively, and is included in depreciation and amortization on the accompanying consolidated statements of operations.