HOST HOTELS & RESORTS, INC. quarterly report, Q3 FY2018

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Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. — Q3 2018 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. The combined filing reports substantially similar financial results for the REIT and its operating partnership.

Business context and operating performance

Host owned 93 hotels at quarter-end, primarily luxury and upper-upscale properties; 85 hotels were included in comparable operating results. The company reported one segment: hotel ownership.

  • Third-quarter revenue rose 3.6% to $1.299 billion; year-to-date revenue increased 3.0% to $4.163 billion. Comparable hotel revenue grew 2.8% and 2.6%, respectively.
  • Comparable RevPAR increased 1.6% in Q3 and 1.9% year to date on a constant-dollar basis. Comparable hotel EBITDA margin expanded 50 basis points to 27.4% in Q3 and 65 basis points to 29.05% year to date.
  • Q3 GAAP operating loss was $92 million versus $127 million operating profit a year earlier; year-to-date operating profit fell 36.9% to $342 million. The decline primarily reflects impairment charges.
  • Q3 net income was $378 million, including a $547 million gain on asset sales; net income attributable to Host Inc. was $322 million, or $0.43 per diluted share, versus $104 million, or $0.14, in Q3 2017. Year-to-date attributable net income was $784 million, or $1.06 per diluted share.
  • Adjusted EBITDAre, a non-GAAP measure, increased 7.8% to $344 million in Q3 and 4.8% to $1.190 billion year to date. Adjusted FFO per diluted share rose 12.1% to $0.37 in Q3 and 5.5% to $1.34 year to date.

Financial position, cash flow and capital

  • At September 30, cash and cash equivalents were $1.269 billion; total debt was $4.079 billion, up from $3.954 billion at year-end 2017. Total assets were $12.155 billion and total equity was $7.395 billion.
  • Debt had a 4.1% average interest rate and 4.3-year average maturity; 68% was fixed-rate. No consolidated hotels were encumbered by mortgage debt. The company reported $702 million of revolver capacity and no significant debt maturities until 2020.
  • Credit-facility covenant ratios were comfortably within stated limits: leverage 2.0x versus a 7.25x maximum; fixed-charge coverage 6.5x versus a 1.25x minimum; unsecured interest coverage 10.1x versus a 1.75x minimum. The company reported compliance with its covenants.
  • Year-to-date operating cash flow was $941 million, up from $867 million. Investing activities used $210 million; financing activities used $361 million. Cash, cash equivalents and restricted cash totaled $1.475 billion at period-end, including $205 million in the FF&E replacement fund.
  • Year-to-date capital expenditures were approximately $320 million. Full-year 2018 guidance was $475 million–$520 million, comprising $195 million–$220 million of return-on-investment projects and $280 million–$300 million of renewals and replacements.
  • The company paid $481 million in common-stock dividends year to date and declared a $0.20-per-share quarterly dividend, paid October 15, 2018. No common-stock repurchases were made under the $500 million authorization.

Material changes, transactions and unusual items

  • Q3 included $239 million of impairment expense: $216 million for the Sheraton New York Times Square and $23 million for The Westin New York Grand Central. Year-to-date impairment expense was $260 million, including $21 million recorded earlier in 2018.
  • Asset-sale gains were $547 million in Q3 and $667 million year to date. Q3 transactions included the New York Marriott Marquis retail and theater units, the W New York–Union Square, and the JW Marriott Hotel Mexico City. The filing reports approximately $386 million of gain on the retail sale and a $163 million after-tax gain on the Mexico City sale, partly allocated to a non-controlling partner.
  • After quarter-end, Host agreed to sell its approximately 33% Euro JV interest for about €435 million ($505 million), subject to customary conditions. Management expected to use approximately $240 million of net proceeds to repay euro-denominated credit-facility debt.
  • Host also agreed to sell The Westin New York Grand Central for approximately $300 million, with closing expected in Q1 2019. It was classified as held for sale at quarter-end.
  • Three Hyatt hotels were acquired in March 2018 for approximately $1.0 billion. Host reported that acquisition and disposition activity affected year-over-year comparisons.
  • Adoption of revenue-recognition guidance reduced liabilities and increased equity/capital by $4.5 million, with no reported effect on 2018 income. Host expected to adopt the new lease standard January 1, 2019, anticipating a $500 million–$600 million right-of-use asset and related liability, primarily for ground leases, with minimal income-statement impact.

Outlook, commentary and risks

Management forecast full-year 2018 comparable RevPAR growth of 1.9%–2.1% on a constant-dollar basis. It cited strong U.S. economic conditions and travel demand, while noting that high occupancy may limit RevPAR growth mainly to room-rate increases. Management also described plans for phased Marriott brand reinvestment projects through 2021, expected to add $150 million–$200 million per year above historical capital spending; Marriott agreed to priority returns and operating-profit guarantees intended to offset expected disruption.

Risks highlighted include economic or lodging-demand weakness, supply growth in markets such as New York and Los Angeles, labor-cost pressure and collective-bargaining negotiations, interest-rate increases, trade tensions, geopolitical and currency volatility, natural disasters, competition, reliance on Marriott as a significant manager, insurance and cybersecurity risks, debt covenants, and the possibility that planned sales or investments do not proceed as expected. Management reported minimal legal accruals and no known matters requiring disclosure of a reasonably possible material loss contingency.

Most important facts for investors to verify

  • How much of reported earnings growth reflects recurring hotel operations versus asset-sale gains, and how impairment charges affect comparisons.
  • Completion, final proceeds and use of proceeds for the Euro JV and Westin Grand Central sales, including debt repayment and retained FF&E funds.
  • Delivery and returns of the announced Marriott renovation program, including disruption, incremental spending and contractual guarantees.
  • Progress against the 2018 RevPAR and capital-expenditure outlook, alongside wage, labor and market-supply trends.
  • Debt, liquidity and covenant headroom after planned transactions, and the eventual balance-sheet effect of adopting lease accounting.