Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. — Q2 2014 Form 10-Q
Business context and reporting period. The combined filing covers the quarter and six months ended June 30, 2014, compared with the corresponding 2013 periods. Host Inc. is a self-managed REIT and owns approximately 99% of Host L.P.; the entities operate as one enterprise. At quarter-end, the consolidated portfolio comprised 114 hotels, including 99 in the United States.
Financial and operating results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $1.431 billion | $1.399 billion | $2.740 billion | $2.624 billion |
| Operating profit | $225 million | $205 million | $359 million | $295 million |
| GAAP operating margin | 15.7% | 14.7% | 13.1% | 11.2% |
| Net income | $159 million | $121 million | $344 million | $181 million |
| Host Inc. net income attributable to shareholders | $155 million | $119 million | $334 million | $175 million |
| Diluted EPS | $0.21 | $0.16 | $0.44 | $0.24 |
| Adjusted EBITDA | $411 million | $431 million | $719 million | $714 million |
| NAREIT FFO per diluted share | $0.43 | $0.39 | $0.75 | $0.68 |
| Adjusted FFO per diluted share | $0.43 | $0.45 | $0.76 | $0.73 |
- Comparable-hotel RevPAR increased 5.1% in Q2 and 5.9% year to date in constant U.S. dollars. Q2 occupancy was 81.0%, with average room rate up 4.1%; year-to-date occupancy was 77.5%.
- Comparable-hotel adjusted operating profit rose 5.5% in Q2 and 8.3% year to date. Comparable-hotel adjusted operating margins improved 60 and 80 basis points, respectively. These are non-GAAP measures.
- Cash provided by operations was $525 million for the first half, versus $460 million in 2013. Investing activities provided $12 million, compared with $25 million used in 2013. Financing activities used $960 million, versus $454 million used.
- Cash and cash equivalents were $440 million at June 30, down from $861 million at year-end 2013. The company also reported $778 million of available credit-facility capacity.
- Total debt was $4.030 billion, down from $4.759 billion at December 31, 2013. Management reported a 4.8% average interest rate, 5.7-year average maturity, and 79% of debt at fixed rates. Ninety-six percent of hotels, measured by revenue, were unencumbered by mortgage debt.
Material changes versus prior periods
- Q2 revenue increased 2.3%, while first-half revenue rose 4.4%. Growth reflected improved hotel operations, partly offset by the net impact of acquisitions and dispositions.
- Q2 net income increased 31.4%; first-half net income increased 90.1%. Results benefited from improved operations and lower interest expense. Interest expense fell $48 million in Q2 and $66 million year to date, including lower debt-extinguishment costs and lower weighted-average interest rates and debt.
- First-half 2014 results included $111 million of gains on asset sales, principally the sale of an 89% interest in the Philadelphia Marriott Downtown. Q2 2013 included a $21 million gain on excess land; first-half 2013 also included discontinued operations from hotels sold in 2013.
- Despite higher comparable-hotel operating profit, Q2 Adjusted EBITDA declined 4.6% and Adjusted FFO per diluted share fell 4.4%. Management attributed pressure in part to transaction-related comparisons and related effects; first-half Adjusted EBITDA was up 0.7% and Adjusted FFO per diluted share up 4.1%.
- Cash outflows included $749 million of significant debt repayments through July 31, including repayment of a $300 million mortgage loan, redemption of $150 million of senior notes, and repayment of $225 million on the revolver.
Outlook, management commentary and risks
- Management forecast full-year 2014 comparable-hotel RevPAR growth of 5.75%–6.25% in constant U.S. dollars, expecting growth to be driven primarily by room rates. The outlook assumes continued lodging-demand improvement; management cautioned that economic growth and travel patterns could weaken.
- Planned 2014 capital spending: $330–$350 million for renewals and replacements, $65–$75 million for redevelopment and return-on-investment projects, and $25–$30 million for acquisition-related capital projects. The company reported completing renovations of 2,800 guestrooms in the first half.
- Management anticipated approximately $200 million of asset sales in the second half of 2014, with no assurance the transactions would close on schedule.
- The June 27 credit-facility amendment retained $1 billion of revolving capacity and the $500 million term loan, reduced borrowing margins, and extended maturities, with applicable extension options, to as late as June 2019 for the revolver and June 2019 for the term loan. Host L.P. reported $778 million available and compliance with financial covenants.
- The Board declared a $0.20-per-share third-quarter dividend, up 33% from the prior quarter, payable October 15, 2014. Management described this as its intended regular quarterly dividend for coming quarters, subject to Board approval; a special dividend may also be considered to meet REIT distribution requirements.
- On June 13, 2014, the Texas Supreme Court reversed the appellate judgment in the San Antonio Marriott Rivercenter litigation, removing the company’s liability for the jury verdict and punitive-damages award. Keystone indicated it would seek rehearing. Host had accrued approximately $69 million, including a court-ordered $25 million escrow reserve; the company said it would reverse the accrual and cancel the bond if rehearing is denied and the court issues its final mandate. Separately, it accrued approximately $23 million for other legal proceedings and estimated aggregate potential losses of up to $51 million, excluding the San Antonio matter.
- Other stated risks include lodging-demand and economic volatility, labor costs, debt and covenant restrictions, property upkeep and renovation impacts, insurance availability, foreign currency exposure, and REIT qualification. The company said it had not completed its assessment of the future revenue-recognition standard. It adopted the revised discontinued-operations standard prospectively in 2014.
Important facts for investors to verify
- Whether the San Antonio litigation rehearing is granted and whether the $69 million accrual and escrow reserve are ultimately reversed.
- Whether the 5.75%–6.25% full-year RevPAR outlook is achieved, particularly given uneven market trends and the Easter holiday timing effects in Q2 comparisons.
- Actual capital expenditures and asset-sale proceeds versus management’s 2014 plans, and the resulting effect on cash and debt.
- Whether the higher $0.20 quarterly dividend is maintained and how any special dividend would affect liquidity and investment capacity.
- The sustainability of earnings growth: Q2 Adjusted EBITDA and Adjusted FFO per share declined despite improved comparable-hotel operations, while reported net income benefited from lower interest expense and asset-sale gains.
- Non-GAAP measures, including Adjusted EBITDA, FFO and comparable-hotel results, are company-defined supplemental measures and should be assessed alongside GAAP results.