Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. — Q1 2013 Form 10-Q
Business context and reporting period
Host Inc. is a self-managed REIT that conducts its hotel ownership business through Host L.P.; Host Inc. owns approximately 98.7% of Host L.P. At March 31, 2013, the company’s consolidated portfolio comprised 118 hotels, primarily luxury and upper-upscale properties.
The quarter ended March 31, 2013. Comparisons with the quarter ended March 23, 2012 are not like-for-like: the company changed to calendar-quarter reporting in 2013 and did not restate 2012 GAAP results. Management therefore uses estimated, non-GAAP “2012 As Adjusted” results for many operating comparisons; those estimates include a different day count due to the 2012 leap year.
Key financial and operating metrics
| Metric | Q1 2013 | Comparison |
|---|---|---|
| Total revenue | $1.255 billion | $1.249 billion in 2012 As Adjusted; $952 million as reported |
| Operating profit | $90 million | $83 million in 2012 As Adjusted |
| Operating margin | 7.2% | 6.6% in 2012 As Adjusted |
| Income from continuing operations | $34 million | $4 million in 2012 As Adjusted |
| Net income attributable to Host Inc. | $56 million; $0.08 per diluted share | $55 million in 2012 As Adjusted; $0.08 per diluted share |
| Adjusted EBITDA | $283 million | $257 million in 2012 As Adjusted |
| Adjusted FFO per diluted share | $0.28 | $0.24 in 2012 As Adjusted |
| Comparable hotel RevPAR | $142.87 | Up 5.1%; average room rate rose 4.0% and occupancy increased 0.7 percentage points to 72.3% |
All dollar amounts are in U.S. dollars. 2012 As Adjusted figures are management’s supplemental estimates, not restated GAAP results. GAAP net income included $26 million from discontinued operations, including the Atlanta Marriott Marquis sale gain and recognition of previously deferred key money.
Cash provided by operations was $177 million, versus $73 million reported in 2012; management attributed approximately 65% of the increase to the reporting-period change, with the remainder reflecting improved hotel operations. Investing activities provided $147 million, including $279 million of asset-sale proceeds, and financing activities provided $334 million. Cash and equivalents rose to $1.075 billion from $417 million at year-end 2012.
At March 31, total debt was $5.534 billion, up from $5.411 billion at December 31; the average interest rate was 5.5%, average maturity 5.4 years, and 80% of debt was fixed-rate. The company had $842 million of revolver capacity available. After announced and completed subsequent debt transactions, management estimated approximately $4.8 billion of debt, $380 million of cash, $692 million of revolver capacity, a 5.8-year average maturity and approximately $230 million of annual cash interest expense.
Material changes and unusual items
- Comparable hotel revenues increased 2.6% year over year on management’s adjusted calendar basis; comparable hotel adjusted operating profit margin rose to 23.4% from 22.55%.
- Transient revenue increased 9.2%, while group revenue declined 3.7%. Management cited Easter timing, leap-year comparisons, government-related booking cancellations and certain renovation-related disruptions as factors affecting group demand.
- In March, the company issued $400 million of 3.75% senior notes due 2023, with net proceeds of approximately $396 million. Proceeds and cash were intended to redeem $400 million of 9% notes due 2017 at a call premium; management forecast annual interest savings of $21 million.
- Holders exchanged approximately $174 million of 3.25% exchangeable debentures for approximately 11.7 million Host Inc. shares; the remaining approximately $1 million was redeemed for cash. Host Inc. also issued 6.1 million shares through its at-the-market program for approximately $102 million net proceeds.
- After quarter-end, the company repaid the $246 million Orlando World Center Marriott mortgage and called $200 million of 6.75% notes for redemption. It also sold excess land near the Newport Beach Marriott for $24 million on April 1 and expected to recognize an approximately $21 million gain in Q2.
- The Atlanta Marriott Marquis was sold during Q1. The company recorded an approximately $19 million sale gain, net of $5 million deferred for an environmental contingency, and recognized $10 million of previously deferred key money.
Outlook, risks and contingencies
Management forecast 2013 comparable hotel RevPAR growth of 5% to 7%, with continued margin improvement, and expected room-rate gains to be the main growth driver. It cited positive lodging fundamentals, strong overseas arrivals and low upper-upscale supply growth, while expecting economic growth to moderate in Q2, partly due to sequestration, before returning to modest growth in the second half.
Planned 2013 capital spending was $90 million to $100 million for redevelopment and return-on-investment projects, $40 million to $50 million for acquisition-related projects, and $270 million to $290 million for renewals and replacements. The board had authorized up to $500 million of debt repurchases; $300 million remained available after the anticipated Series Q redemption.
- Legal proceedings: the company accrued approximately $11 million for ordinary-course matters and estimated aggregate losses could reach $53 million. Separately, it accrued approximately $59 million for San Antonio Marriott Rivercenter ground-lease litigation and funded a court-ordered $25 million escrow, included in restricted cash.
- European joint venture: its €337 million mortgage loan, secured by six properties, faced near-term maturity and covenant issues. The JV obtained a 30-day extension and covenant waivers, and was pursuing a three-year refinancing that would require approximately €95 million of principal reduction. The loan is non-recourse to Host and does not trigger default under Host debt.
- Other risks cited include lodging-demand and economic volatility, labor and operating costs, debt and covenant constraints, interest and foreign-exchange exposure, renovation execution, insurance coverage, legal and regulatory matters, and REIT qualification requirements.
Most important facts for investors to verify
- Use calendar-adjusted 2012 comparisons carefully: the company did not restate 2012 GAAP quarterly results, and adjusted figures rely partly on estimates.
- Confirm the completion, funding and realized interest savings of the announced debt redemptions and mortgage repayment; distinguish quarter-end liquidity from the later pro forma estimates.
- Assess whether RevPAR guidance is supported by rate, occupancy and group-demand trends, particularly given government-related weakness, Easter timing and renovation disruptions.
- Track the European JV refinancing and required capital contribution, as well as developments in the San Antonio litigation and environmental contingency.
- Evaluate cash generation apart from asset-sale proceeds, and compare planned capital expenditures and dividends with operating cash flow and debt needs.