Host Hotels & Resorts, Inc. — Q2 2016 Form 10-Q
Business context and period: The filing covers the quarter and six months ended June 30, 2016. Host is a self-managed REIT that owns and operates primarily luxury and upper-upscale hotels through Host Hotels & Resorts, L.P. At quarter-end, the consolidated portfolio comprised 98 hotels; 90 were included in comparable-hotel statistics. The filing combines the substantially similar reports of Host Inc. and Host L.P.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $1,459 million | $1,439 million | $2,798 million | $2,741 million |
| Operating profit | $239 million | $222 million | $390 million | $355 million |
| GAAP operating margin | 16.4% | 15.4% | 13.9% | 13.0% |
| Net income | $351 million | $214 million | $535 million | $313 million |
| Net income attributable to Host Inc. | $347 million | $212 million | $529 million | $310 million |
| Diluted EPS | $0.47 | $0.28 | $0.71 | $0.41 |
| Adjusted EBITDA | $436 million | $422 million | $782 million | $743 million |
| NAREIT FFO per diluted share | $0.49 | $0.43 | $0.90 | $0.78 |
| Adjusted FFO per diluted share | $0.49 | $0.46 | $0.90 | $0.81 |
- Hotel operations: Comparable RevPAR rose 2.0% in Q2 and 2.7% year to date on a constant-dollar basis. Q2 comparable occupancy increased 120 basis points to 82.4%; rate growth was slight. Comparable hotel EBITDA margin improved 65 basis points to 30.7% in Q2 and 75 basis points to 28.65% year to date.
- Cash flow, six months: Operating activities provided $612 million, versus $549 million a year earlier. Investing activities provided $57 million, compared with $564 million used in 2015, reflecting higher asset-sale proceeds and lower acquisition spending. Financing activities used $627 million. Cash and equivalents ended the period at $266 million, up from $221 million at year-end 2015.
- Debt and liquidity: Total debt was $3.715 billion, down from $3.867 billion at year-end. The company reported a 3.7% average interest rate, 5.6-year average maturity and 65% fixed-rate debt. It had $739 million of available credit-facility capacity at June 30 and borrowed an additional $50 million after quarter-end. Management reported compliance with debt covenants.
- Capital returns: Year to date, Host repurchased 10.3 million shares for approximately $162 million and declared $297 million of common dividends; cash dividends paid during the first half were $300 million. A $0.20-per-share quarterly dividend was paid July 15.
Material changes and notable items
- Net income growth substantially exceeded revenue growth, aided by gains on asset sales of $172 million in Q2 and $231 million year to date, compared with $53 million and $57 million in the respective 2015 periods. The gains are non-recurring and materially affect GAAP earnings comparisons.
- Interest expense declined to $39 million in Q2 from $72 million and to $78 million year to date from $121 million. Management attributed the reductions primarily to 2015 refinancing and repayment activity and the absence of $21 million of 2015 debt-extinguishment costs.
- During Q2, the company sold four hotels for reported sale prices totaling approximately $345 million; it also sold two hotels in the first quarter. Total first-half dispositions covered eight hotels, with $466 million of sale prices and $441 million of net proceeds. Two New Zealand hotels were classified as held for sale.
- Adoption of a consolidation-accounting standard, applied retrospectively, resulted in deconsolidation of the partnership owning the Fort Lauderdale Marriott Harbor Beach Resort & Spa. Comparative 2015 revenue and net income were reduced by $25 million and $7 million, respectively, year to date; the change did not affect income attributable to Host Inc. or Host L.P. or their total equity/capital.
- Six-month capital expenditures were $161 million for renewals and replacements and $141 million for redevelopment, ROI and acquisition-related projects. Management estimated full-year 2016 spending of $295–$310 million and $185–$200 million, respectively.
Outlook, management commentary and risks
- Management forecast comparable full-year 2016 RevPAR growth of 2.0%–3.0% on a constant-U.S.-dollar basis. It expected strong group and leisure demand and occupancy, but subdued room-rate growth as corporate travel and international demand remained challenged.
- Management cited weaker business investment and corporate transient demand, a strong U.S. dollar, online price transparency and increased hotel supply—above the long-term average in major markets—as pressures on rates. It also noted that U.S. economic growth, job creation and consumer confidence supported lodging demand.
- Other disclosed risks include economic and geopolitical uncertainty, labor-cost increases, renovation-related disruption, competition, debt covenants and refinancing conditions, foreign exchange exposure, cyber risks, insurance adequacy, and the ability to maintain REIT qualification. The filing cautions that interim results are seasonal and not necessarily indicative of full-year performance.
- Legal proceedings arise in the ordinary course. The company accrued approximately $3 million and estimated aggregate losses would not exceed $10 million; it cautioned that outcomes cannot be assured.
Most important facts for investors to verify
- Separate recurring hotel operating performance from the large disposition gains when evaluating the increase in GAAP net income.
- Review the non-GAAP reconciliations and definitions for Adjusted EBITDA, NAREIT FFO, Adjusted FFO and comparable-hotel measures.
- Track realized RevPAR and rate growth against the 2.0%–3.0% full-year outlook, particularly corporate transient demand, supply growth and currency effects.
- Confirm completion and proceeds from the New Zealand hotel sales and the anticipated sale of the remaining Australian property; closing was not assured.
- Monitor debt, revolver availability, covenant headroom, capital spending, repurchases and dividends, including subsequent borrowing after quarter-end.