Business context and reporting period
Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. filed a combined unaudited Form 10-Q for the quarter ended March 31, 2014. Host Inc. is a REIT and owns approximately 99% of Host L.P.; the two entities’ operating and financial results are substantially alike. The company owned 114 hotels, primarily luxury and upper-upscale, of which 109 were comparable hotels.
Financial and operating performance
Unless otherwise noted, amounts are in millions of dollars. Results are for the first quarter of 2014 compared with the first quarter of 2013.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $1,309 | $1,224 |
| Operating profit | $134 | $90 |
| GAAP operating margin | 10.2% | 7.4% |
| Net income | $185 | $60 |
| Net income attributable to Host Inc. | $179 | $56 |
| Diluted EPS | $0.24 | $0.08 |
| Adjusted EBITDA | $308 | $283 |
| NAREIT FFO per diluted share | $0.32 | $0.29 |
| Adjusted FFO per diluted share | $0.33 | $0.28 |
- Revenue increased 6.9%. Comparable hotel RevPAR rose 6.8% in constant U.S. dollars and 6.2% in nominal dollars. Comparable hotel adjusted operating profit increased 12.5% to $289, and its margin expanded 120 basis points to 24.0%.
- Management attributed growth to stronger average room rates and occupancy, higher group demand, and a 9.4% increase in comparable food-and-beverage revenue. Group revenue increased 11.0%; transient revenue increased 3.3%.
- Net income included a $109 after-tax gain on hotel sales. Continuing-operations income was $76, compared with $34 in Q1 2013; the prior-year quarter also included $26 of discontinued-operations income. Lower interest expense ($58 versus $76) and improved operating profit contributed to the year-over-year improvement.
- Cash from operating activities was $171, versus $176. Investing activities provided $134, including $274 of net asset-sale proceeds; financing activities used $775, primarily for debt repayments and dividends. Cash and cash equivalents declined to $392 from $861 at year-end 2013.
- At March 31, total assets were $12,209 and total debt was $4,093, down from $4,759 at December 31. Debt averaged 4.9% interest and 5.7 years to maturity; 79% was fixed-rate. The company reported $782 of available credit-facility capacity and 104 hotels unencumbered by mortgage debt.
Material changes and transactions
- In January, Host acquired the 151-room Powell Hotel in San Francisco for approximately $75; management plans approximately $22 of redevelopment beginning in early 2015.
- Host sold an 89% interest in the Philadelphia Marriott Downtown and sold the Courtyard Nashua. The transactions generated a combined $109 after-tax gain; the Philadelphia hotel was no longer consolidated after the sale.
- Debt actions included repayment of a $300 mortgage at maturity, redemption of $150 principal of senior notes for $152, and repayment of $225 on the revolver.
- The company adopted ASU 2014-08 prospectively. Hotel operations through sale are generally reported in continuing operations, while gains or losses on property sales are shown separately below continuing operations. Prior periods were not restated.
Outlook, risks and contingencies
- Management forecast full-year 2014 comparable RevPAR growth of 5%–6% in constant U.S. dollars and comparable food-and-beverage and other revenue growth of approximately 4%–5%. It expected rate gains to drive most RevPAR growth, with occupancy growth similar to 2013. These are operating expectations, not earnings guidance.
- Planned 2014 capital spending: $320–$340 for renewals and replacements, $70–$80 for redevelopment and return-on-investment projects, and $30–$35 for acquisition-related capital projects.
- Management said it believed liquidity and capital-market access were sufficient for near-term debt maturities, capital expenditures, and operating needs, but noted that flexibility depends on continued compliance with debt covenants. The company reported compliance with its financial covenants.
- Risks include lodging-demand weakness from economic, weather, geopolitical, or travel disruptions; labor-cost and operating pressures; debt-market and refinancing risks; restrictive covenants; competition and renovation disruption; acquisition and joint-venture execution; insurance adequacy; regulatory and tax changes; and maintaining REIT status.
- Legal matters included approximately $23 accrued for proceedings other than the San Antonio matter; management estimated aggregate losses on those other matters could reach $50. Separately, approximately $69 was accrued for litigation concerning the San Antonio Marriott Rivercenter ground lease. A $25 court-ordered escrow was included in restricted cash; the appeal outcome remained uncertain.
- Seasonality and short-term variations mean interim results may not indicate full-year performance. Management identified no material change in internal controls and concluded disclosure controls were effective.
Important facts for investors to verify
- How much reported earnings growth reflects hotel operations versus the $109 property-sale gain and the differing discontinued-operations presentation.
- Whether comparable RevPAR and margin growth persists, particularly given market-level variation and reliance on group demand.
- Cash needs and liquidity after substantial debt repayments, dividends, planned capital spending, and the Powell Hotel redevelopment.
- Debt maturities, exchangeable debenture terms, covenant headroom, and the availability and terms of future refinancing.
- Developments in the San Antonio litigation and other legal matters, including the recorded accruals and restricted escrow.
- Reconciliations and limitations of non-GAAP measures, including Adjusted EBITDA, NAREIT FFO, and Adjusted FFO.