Host Hotels & Resorts, Inc. — 2018 Form 10-K Summary
Business context and reporting period
This is an annual report for the fiscal year ended December 31, 2018, not a standalone fourth-quarter filing. Host is a REIT that owns lodging real estate and conducts operations through Host Hotels & Resorts, L.P. At year-end, the portfolio comprised 93 hotels, primarily luxury and upper-upscale, with approximately 52,000 rooms. Third parties manage all hotels. Marriott-managed or franchised properties represent approximately 73% of 2018 revenue in the business discussion; another filing disclosure gives 75% for Marriott-related agreements.
Financial and operating performance
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $5.524 billion | $5.387 billion |
| Net income | $1.151 billion | $571 million |
| Net income attributable to Host Inc. | $1.087 billion | $564 million |
| Diluted EPS | $1.47 | $0.76 |
| Operating profit | $530 million | $676 million |
| GAAP operating profit margin | 9.6% | 12.5% |
| Adjusted EBITDAre | $1.562 billion | $1.510 billion |
| Adjusted FFO per diluted share | $1.77 | $1.69 |
| Cash provided by operations | $1.300 billion | $1.230 billion |
| Capital expenditures | $474 million | $277 million |
| Total debt at year-end | $3.837 billion | $3.954 billion |
Comparable hotel RevPAR rose 2.0% in constant dollars (1.9% nominal); occupancy increased 60 basis points to 79.6%, and average room rate rose 1.2% in constant dollars. Comparable hotel EBITDA increased 4.6% to $1.356 billion, with margin improving 60 basis points to 28.8%.
For the fourth quarter, revenue was $1.361 billion versus $1.344 billion in Q4 2017; operating profit was $188 million versus $134 million; net income was $306 million versus $93 million; and diluted EPS was $0.41 versus $0.12. The filing’s quarterly table reports net income attributable to Host Inc. of $303 million versus $92 million.
Year-end liquidity included $1.542 billion of cash and cash equivalents, $213 million in FF&E replacement reserves, and $945 million of unused revolver capacity. The weighted-average debt interest rate was 4.4%, average maturity was 4.2 years, and 73% of debt bore fixed rates. No company debt matured in 2019; scheduled maturities begin with $500 million in 2020. Credit facility and senior note covenants were reported in compliance.
Material changes versus the prior comparable period
- Revenue rose 2.5%, with comparable hotel revenue up 2.4%. Comparable RevPAR growth continued for a ninth consecutive year.
- Net income more than doubled, primarily because gains on asset sales increased to $902 million from $108 million. This included gains on the sale of the European joint venture, New York Marriott Marquis retail units, JW Marriott Mexico City, and Key Bridge Marriott.
- Operating profit fell 21.6% and GAAP margin declined 290 basis points, principally reflecting $260 million of impairment expense on four hotels, compared with $43 million in 2017.
- Adjusted EBITDAre rose 3.4% and adjusted FFO per share increased 4.7%, reflecting improved hotel operations. These non-GAAP measures exclude certain items and are not substitutes for GAAP results or cash flow.
- Cash from operations increased $70 million. Capital spending rose to $474 million, while asset-sale proceeds increased to $1.605 billion. Debt decreased by $117 million.
- Host sold its approximately one-third interest in the European joint venture and other properties, and said it had largely exited international markets. In March 2018 it acquired three Hyatt hotels for $1 billion.
Outlook, management commentary, risks, and unusual items
Management forecast 2019 comparable RevPAR growth of 0.0%–2.0% in constant dollars. It expected occupancy to remain high but rate growth to be constrained by above-average supply growth and economic uncertainty. Marriott transformation projects were expected to reduce comparable RevPAR by approximately 45 basis points; management said Marriott operating-profit guarantees were expected to offset the estimated earnings effect. The company projected 2019 capital expenditures of $550 million–$625 million, including $225 million of Marriott brand reinvestment projects.
In 2018, Host recorded $260 million of property impairment expense, including $216 million relating to the Sheraton New York Times Square Hotel. A $386 million gain was recorded on the sale of the New York Marriott Marquis retail units, and a $238 million gain on the European joint-venture sale. Host also paid approximately $77 million of U.S. and state capital-gains tax on retained sale proceeds rather than distributing that gain to shareholders.
Key risks include lodging-cycle sensitivity, economic or travel-demand declines, new room supply, rising labor and operating costs, and the need for substantial recurring renovations. Marriott concentration is material; Marriott disclosed a breach involving the acquired Starwood guest reservation database in November 2018, and the filing said its scope and potential effects remained uncertain. Other risks include weather and climate exposure, insurance limits, ground leases, interest-rate and LIBOR transition exposure, third-party manager dependence, and REIT qualification and tax requirements.
After Hurricanes Harvey and Irma, the company reported a $19 million remaining insurance receivable for property damage and cleanup costs at year-end, after $14 million of property insurance proceeds. It said it expected insurance to cover a substantial portion of damage and near-term business interruption. The company described ordinary-course legal proceedings and stated that aggregate losses were not expected to materially affect financial condition, while noting outcomes are uncertain.
Host declared $0.85 per share in 2018 dividends. For the fourth quarter, it paid a regular $0.20 dividend and a special $0.05 dividend in January 2019. In February 2019, the board authorized a $0.20 quarterly dividend and up to $250 million of senior-note repurchases; these are subsequent events, not 2018-period operating results. Host also acquired 1 Hotel South Beach for $610 million in February 2019.
Important facts for investors to verify
- How much of the 2018 earnings increase reflects one-time sale gains and tax effects, versus recurring hotel operations; reconcile GAAP results with FFO and EBITDAre.
- Whether the 2019 RevPAR range, rate growth, and occupancy assumptions are being achieved, particularly in markets with elevated supply or weaker group demand.
- The total cost, timing, expected returns, and disruption from planned capital spending, including Marriott’s four-year reinvestment program and the stated operating-profit guarantees.
- Marriott’s exposure and the operational, reputational, and financial consequences of the Starwood reservation-data breach; clarify the filing’s differing Marriott concentration measures.
- Liquidity and refinancing capacity as debt maturities begin in 2020, including floating-rate exposure, the LIBOR transition, and any use of the authorized debt-repurchase program.
- The status and collectability of the remaining hurricane insurance receivable, and whether material uninsured losses, litigation, or environmental contingencies arise.