Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; unaudited. Amounts are in U.S. dollars and millions unless noted. Host Inc. is a REIT that conducts substantially all operations through Host L.P. At quarter-end, the company owned 94 hotels, of which 87 were comparable.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | YTD 2017 | YTD 2016 |
|---|---|---|---|---|
| Revenue | $1,254 | $1,295 | $4,043 | $4,093 |
| Operating profit | $127 | $144 | $542 | $534 |
| GAAP operating margin | 10.1% | 11.1% | 13.4% | 13.0% |
| Net income | $105 | $108 | $478 | $643 |
| Net income attributable to Host Inc. | $104 | $107 | $472 | $636 |
| Diluted EPS | $0.14 | $0.14 | $0.64 | $0.85 |
| Adjusted EBITDA | $317 | $342 | $1,128 | $1,123 |
| Adjusted FFO per diluted share | $0.33 | $0.37 | $1.27 | $1.28 |
| Comparable hotel EBITDA margin | 26.1% | 26.85% | 28.0% | 27.9% |
- Comparable RevPAR declined 1.8% in Q3 on a constant-dollar basis, reflecting a 30-basis-point occupancy decrease and a 1.5% lower average room rate. YTD comparable RevPAR rose 1.0%.
- YTD operating cash flow was $864, down from $915. Investing activities used $200, including $467 for acquisitions, offset partly by $472 of asset-sale proceeds. Financing activities used $244, including $480 of common dividends.
- At September 30, cash and cash equivalents were $789; total debt was $3,961, up from $3,649 at year-end 2016. Debt comprised $2,777 of senior notes and $1,184 of credit-facility borrowings; no mortgage debt remained. Average interest rate was 3.9%, average maturity 5.4 years, and 70% of debt was fixed-rate.
- The revolver had $807 of available capacity. The company reported compliance with debt covenants, including a 2.3x leverage ratio versus a 7.25x maximum and 6.5x fixed-charge coverage versus a 1.25x minimum.
Material changes and management commentary
- Q3 revenue fell 3.2%; YTD revenue declined 1.2%. Q3 room revenue decreased 2.2% and food-and-beverage revenue 6.5%. Comparable Q3 hotel revenue fell 2.6% and comparable hotel EBITDA fell 5.3%.
- Management attributed Q3 weakness to the shift of Jewish holidays into the quarter, lower group business, the difficult comparison with Brazil’s 2016 Olympics, and Hurricanes Harvey and Irma. The hurricanes affected 13 properties and reduced Q3 revenue by an estimated $12, with about 65% of lost revenue from food and beverage. Management estimated a $7 impact on Q3 net income and Adjusted EBITDA.
- YTD net income fell 25.7%, primarily because gains on asset sales were lower: $105 versus $245 in 2016. Conversely, Q3 gains on asset sales were $59 versus $14. Q3 interest expense increased to $43 from $38, principally reflecting the 2017 Series G notes issuance.
- The company sold Hilton Melbourne South Wharf and Sheraton Indianapolis during Q3 and recorded approximately $58 of total gains. The Key Bridge Marriott was classified as held for sale; a sale for $190 was expected by Q1 2018, subject to customary conditions. The company also acquired W Hollywood, The Don CeSar and Beach House Suites, and a Miami Marriott ground lease during 2017.
- Management’s full-year 2017 comparable RevPAR forecast was growth of 1.15%–1.35% on a constant-dollar basis. It expected full-year renewal and replacement capital spending of $270–$300, including about $55 for hurricane-related replacements, and redevelopment/ROI spending of about $90–$100.
- Seven of nine Florida hotels temporarily closed during the storms and had reopened; approximately 320 rooms remained out of service. The company recorded a $31 insurance receivable for estimated property damage and repair costs, but was still evaluating the full property and business-interruption impacts.
Outlook, risks and contingencies
- Management described the lodging outlook as uncertain. It cited economic and travel-demand changes, new hotel supply, labor and operating costs, competition, interest rates and credit availability, foreign-market exposure, natural disasters, and the possibility that insurance recoveries may not cover all losses.
- Management noted above-average supply growth in some markets, including New York and Houston, which may constrain room-rate growth. Brazil comparisons remained unusually difficult following the 2016 Olympics.
- Legal matters in the ordinary course had approximately $4 accrued; aggregate losses could be as much as $17, which management described as the estimated maximum potential loss for the proceedings.
- The company expected to adopt the new revenue-recognition standard in 2018 and anticipated no material effect on hotel revenue amounts or timing, though certain asset-sale gains could be recognized earlier. It estimated that adoption of the lease standard could add $400–$500 of right-of-use assets and related liabilities, primarily for 25 ground leases; the income-statement impact was expected to be minimal.
- The quarterly common dividend was $0.20 per share, paid October 16, 2017. Future dividends remain subject to Board approval. No shares were repurchased under the $500 common-stock repurchase authorization during the first nine months.
Important facts for investors to verify
- Track the recovery of hurricane-affected properties, remaining rooms out of service, business-interruption losses and actual insurance collections against the $31 receivable.
- Compare subsequent RevPAR and hotel margins with the 1.15%–1.35% full-year forecast, especially in Florida, Houston and Brazil.
- Verify completion and proceeds of the Key Bridge Marriott sale and the effect of portfolio acquisitions and dispositions on comparable results and cash flow.
- Monitor debt levels, interest costs, covenant headroom, liquidity and planned capital spending; assess the potential balance-sheet effect of the estimated ground-lease liabilities.
- Review the company’s non-GAAP reconciliations and definitions for Adjusted EBITDA, FFO and comparable hotel measures alongside GAAP results.