Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. Unless noted, financial amounts are in U.S. dollars and millions. The combined filing reports substantially similar financial results for Host Inc. and Host L.P.
Business context
Host Inc. is a self-managed REIT that owns approximately 99% of Host L.P. The company owns luxury and upper-upscale hotels; at June 30, its consolidated portfolio comprised 95 hotels, with 88 in the comparable-hotel set. It reports one segment: hotel ownership.
Financial and operating performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $1,518 | $1,441 | $2,864 | $2,789 |
| Operating profit | $263 | $244 | $434 | $415 |
| GAAP operating margin | 17.3% | 16.9% | 15.2% | 14.9% |
| Net income | $211 | $212 | $467 | $373 |
| Net income attributable to Host Inc. | $209 | $210 | $462 | $368 |
| Diluted EPS | $0.28 | $0.28 | $0.62 | $0.50 |
| Adjusted EBITDAre | $476 | $446 | $846 | $816 |
| Adjusted FFO per diluted share | $0.54 | $0.49 | $0.97 | $0.94 |
- Comparable RevPAR increased 2.8% in Q2 and 2.1% year to date on a constant-dollar basis. Comparable hotel EBITDA margin rose 90 basis points to 32.3% in Q2 and 75 basis points to 30.0% year to date.
- Q2 revenue growth was 5.3%; comparable hotel revenue increased 3.7%. Management cited high occupancy, room-rate growth, stronger banquet and audiovisual sales, and ancillary revenue. The Easter calendar shift benefited Q2 food-and-beverage comparisons.
- Q2 net income was nearly flat despite stronger operating results, primarily because the prior-year quarter included a $29 million asset-sale gain. Six-month net income increased partly due to $120 million of asset-sale gains, compared with $46 million in 2017. Adjusted EBITDAre, which excludes disposition gains, increased 6.7% in both Q2 and the six-month period.
- Interest expense increased to $45 million in Q2 and $89 million year to date, reflecting higher borrowings and floating rates; six-month expense also included a full period of interest on Series G notes.
Balance sheet, cash flow and capital
- At June 30, total assets were $12.1 billion, cash and cash equivalents were $646 million, and total debt was $4.228 billion, up from $3.954 billion at year-end 2017. Debt had a 4.0% average interest rate, 4.5-year average maturity, and 66% fixed-rate share; no consolidated hotels were mortgage-encumbered.
- Available revolver capacity was $551 million at quarter-end. After a further $150 million repayment subsequent to quarter-end, capacity increased to $701 million. The filing reports compliance with debt covenants; credit-facility leverage was 2.4x against a 7.25x maximum.
- Six-month operating cash flow was $655 million, versus $615 million in 2017. Investing cash outflow was $859 million, including $1.019 billion of acquisitions and approximately $201 million of capital expenditures; asset-sale proceeds were $362 million. Financing cash outflow was $55 million, including $333 million of common-stock dividends. Cash and cash equivalents declined from $913 million at year-end; cash flow statement cash, including restricted cash and the replacement fund, was $846 million at period end.
- The company acquired three Hyatt hotels in March for approximately $1.0 billion. It sold the W New York on Lexington Avenue for $190 million and the Key Bridge Marriott for $190 million. It agreed to sell W New York–Union Square for $171 million, with closing expected in Q3 subject to customary conditions.
- Host Inc. declared a $0.20-per-share quarterly dividend, paid July 16, 2018. No shares were repurchased under its $500 million buyback authorization, and no shares were sold under its $500 million at-the-market program during Q2.
Outlook, risks and unusual items
- Management forecast full-year 2018 comparable RevPAR growth of 1.75%–2.5% on a constant-dollar basis, and expected full-year capital expenditures of $475 million–$550 million, including $185 million–$220 million of return-on-investment projects.
- Management described lodging fundamentals as favorable but expects higher industry supply and already-high occupancy to constrain RevPAR growth, with growth primarily dependent on room rates. New York and Los Angeles were identified as markets facing above-average supply growth.
- Risks cited include weaker economic or lodging demand, labor and operating-cost inflation, interest-rate increases, market volatility and trade tensions, geopolitical or travel-policy developments, natural disasters, cyber incidents, insurance adequacy, competition, reliance on Marriott as manager for a significant portion of properties, and debt covenants and financing access.
- A $13 million Q2 impairment was recorded for W New York–Union Square, classified as held for sale at a $162 million fair value; an additional $8 million impairment was recorded in Q1. The Lexington Avenue sale generated no material gain or loss.
- Adoption of the revenue-recognition standard reduced liabilities and increased equity by $4.5 million, relating to a previously deferred gain. The company expects adoption of the lease standard in 2019 to add a $400 million–$500 million right-of-use asset and lease liability, primarily for 26 ground leases, with minimal income-statement effect expected.
- Management recorded minimal legal accruals and said aggregate losses from proceedings were not expected to be material; it gave no assurance on outcomes. Interim results may not indicate full-year performance because of seasonality.
Key facts for investors to verify
- Whether full-year comparable RevPAR growth tracks the 1.75%–2.5% forecast, and how supply, occupancy, and room-rate trends evolve by market.
- Completion and proceeds of the W New York–Union Square sale, alongside the earnings and cash-flow contribution from the acquired Hyatt portfolio.
- Debt and liquidity after the post-quarter revolver repayment, including interest-rate exposure and compliance with covenants.
- Execution of the $475 million–$550 million capital plan and its returns, while monitoring labor-cost growth and hotel margins.
- The effect of asset-sale gains and impairments on reported GAAP earnings versus recurring operating measures such as adjusted EBITDAre and FFO.
- Final lease-standard implementation estimates and any changes to the expected $400 million–$500 million balance-sheet recognition.