Upon the issuance of Host Inc.’s common stock under either of the two stock-based compensation plans described below, Host L.P. will issue to Host Inc. common OP units of an equivalent value. Accordingly, these awards and related disclosures are included in both Host Inc.’s and Host L.P.’s consolidated financial statements.

Host Inc. maintains two stock-based compensation plans, the Comprehensive Stock and Cash Incentive Plan (the “2009 Comprehensive Plan”), under which Host Inc. may award to participating employees restricted stock units (“RSUs”), and the Employee Stock Purchase Plan. At December 31, 2018, there were approximately 13 million shares of Host Inc.’s common stock reserved and available for issuance under the 2009 Comprehensive Plan.

We recognize costs resulting from share-based payments in our financial statements over their vesting periods. No compensation cost is recognized for awards for which employees do not render the requisite services. We classify share-based payment awards granted in exchange for employee services as either equity-classified or liability-classified awards. Equity-classified awards are measured based on their fair value as of the date of grant. In contrast, liability-classified awards are re-measured to fair value each reporting period.

During 2018, 2017 and 2016, we recorded stock-based compensation expense of approximately $14 million, $11 million and $12 million, respectively. Shares granted in 2018, 2017 and 2016 totaled 1.2 million, 1.5 million and 2.3 million, respectively, while 0.8 million, 0.6 million and 1.2 million shares, respectively, vested during those years.

During 2018, Host Inc. granted 1.1 million RSU awards under the 2009 Comprehensive Plan, which amount represents the maximum number of RSUs that can be earned during the period of 2018 through 2020 if performance is at the “high” level of achievement and, for time based awards, the executive remains employed. The RSUs vest over a one, two or three-year period and 0.9 million RSUs were unvested at December 31, 2018. Total unrecognized compensation cost related to unvested RSU awards that vest through 2020 is approximately $9 million. Prior to 2017, all restricted stock awards were fully vested.

Vesting of RSUs awarded in 2018 is based on (1) continued employment on the vesting date (“Time-Based Award”); (2) the achievement of relative total shareholder return (“TSR”); and (3) our performance against certain annual strategic objectives. Approximately 33% of the RSUs are Time-Based Awards and vest on an annual basis over three years; approximately 33% of the RSUs are based on the satisfaction of the TSR compared to (i) the NAREIT index, (ii) the Standard & Poor’s index, and (iii) a Selected Lodging Company index that serves as a relevant industry/asset specific measurement to our competitors and vest following a three year performance period; and the remaining 34% are based on our performance against certain strategic objectives and vest on an annual basis. The RSUs granted are considered equity-classified awards. As a result, the fair value of these awards is based on the fair value on the grant date, and such grant date fair value is not adjusted for subsequent movements thereof.

We value the time based awards using the closing stock price on the grant date multiplied by the percentage of shares expected to be released, which is 100% of the time based awards. We also value the strategic objective awards using the closing stock price on the grant date multiplied by the percentage of shares expected to be released; however, as a result of the strategic objective awards’ performance conditions, we reevaluate the percentage based on the probability of meeting the performance conditions each period. We value the TSR awards using the economic theory that is the basis for all valuation models, including Binominal, Black-Scholes, exotic options formulas, and Monte Carlo valuations, with the following assumptions, to determine the fair value of the awards granted in 2018.

	2018 Award Grants
	NAREIT index			Standard & Poor's index			Selected Lodging Company index
Grant date stock price	$	18.75		$	18.75		$	18.75
Volatility		26.2	%		26.2	%		26.2	%
Beta		1.149			1.214			1.016
Risk-free rate - three year award		2.32	%		2.32	%		2.32	%

	2017 Award Grants
	NAREIT index			Standard & Poor's index			Selected Lodging Company index
Grant date stock price	$	18.56		$	18.56		$	18.56
Volatility		25.2	%		25.2	%		25.2	%
Beta		1.178			1.182			1.006
Risk-free rate - one year award		0.82	%		0.82	%		0.82	%
Risk-free rate - two year award		1.20	%		1.20	%		1.20	%
Risk-free rate - three year award		1.48	%		1.48	%		1.48	%

In making these assumptions, we base the expected volatility on the historical volatility over three years using daily stock price observations. The beta is calculated by comparing the risk of our stock to the risk of the applicable peer group index, using three years of daily price data. We base the risk-free rate on the Treasury bond yields corresponding to the length of each performance period as reported by the Federal Reserve.

The payout schedule for the TSR awards is as follows, with linear interpolation for points between the 30^th and 75^th percentiles.

During 2018, 2017 and 2016, we recorded compensation expense of approximately $12 million, $9 million and $10 million, respectively, related to the RSU awards to senior executives. The following table is a summary of the status of our senior executive plans for the three years ended December 31, 2018:

	Year ended December 31,
	2018					2017					2016
	Shares			Fair Value		Shares			Fair Value		Shares			Fair Value
	(in millions)			(per share)		(in millions)			(per share)		(in millions)			(per share)
Balance, at beginning of year		0.7		$	14		—		$	—		—		$	—
Granted		1.1			16		1.4			15		1.6			18
Vested⁽¹⁾		(0.7	)		17		(0.5	)		20		(0.6	)		19
Forfeited/expired		(0.2	)		17		(0.2	)		20		(1.0	)		19
Balance, at end of year		0.9			14		0.7			14		—			—
Issued in calendar year ⁽¹⁾		0.3			20		0.3			19		0.2			15
___________

(1)

Shares that vest at December 31 of each year are issued to the employees in the first quarter of the following year, although the requisite service period is complete. Accordingly, the 0.3 million shares issued in 2018 include shares vested at December 31, 2017, after adjusting for shares withheld to meet employee tax requirements. The shares withheld for employee tax requirements were valued at $4.8 million, $4.9 million and $2.4 million for 2018, 2017 and 2016, respectively.

Beginning in 2017, we no longer grant stock option awards as part of the 2009 Comprehensive Plan. As of December 31, 2018, 0.4 million shares of stock option awards were outstanding and exercisable, with a weighted average remaining life of 6 years and a weighted average exercise price of $19.35 per share. During 2018, 2017 and 2016, we received proceeds of $3 million, $7 million and $4 million, respectively, from the exercise of stock options. During 2016, stock option compensation expense was $1.5 million and all stock option awards outstanding are fully vested.

In addition to the share-based plans described above, we maintain an upper-middle management plan and an employee stock purchase plan. The upper-middle management awards are time-based, equity-classified awards that vest within three years of the grant date and compensation expense is recognized over the life of the award based on the grant date fair value. Through the employee stock purchase plan, employees can purchase stock at a discount of 10% of the lower of the beginning and ending stock price each quarter. During 2018, 2017 and 2016, we granted 136,000 shares, 69,000 shares and 118,000 shares, respectively, under both of these programs and recorded expense of $1.9 million, $1.7 million and $1.6 million, respectively.