Host Hotels & Resorts, Inc. and L.P. — Q2 2012 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. held approximately 98.6% of Host L.P. at June 15, 2012. The filing reports the quarter and year-to-date periods ended June 15, 2012, compared with periods ended June 17, 2011. The portfolio had 120 consolidated hotels and 64,005 rooms at quarter-end; management reported 121 properties as of July 19.
Financial and operating performance
| Metric | Q2 2012 | Q2 2011 | YTD 2012 | YTD 2011 |
|---|---|---|---|---|
| Total revenue | $1.368B | $1.284B | $2.351B | $2.176B |
| Operating profit | $180M | $152M | $201M | $149M |
| Net income | $83M | $64M | $83M | $4M |
| Net income available to Host Inc. common stockholders | $82M | $62M | $80M | $2M |
| Host Inc. diluted EPS | $0.11 | $0.09 | $0.11 | — |
| Adjusted FFO per diluted share | $0.34 | $0.31 | $0.49 | $0.43 |
- Comparable hotel RevPAR rose 6.1% in both Q2 and YTD. For the quarter, comparable average room rate increased 3.7% and occupancy rose 1.7 percentage points to 77.6%; YTD rate increased 3.3% and occupancy rose 1.9 points to 73.7%.
- GAAP operating margin increased 140 basis points in Q2 and 170 basis points YTD. Comparable adjusted operating margin increased 120 basis points in Q2 and 110 basis points YTD, to 27.3% and 24.5%, respectively.
- Cash provided by operations was $302M, versus $256M. Investing used $269M, mainly reflecting $341M of capital expenditures, partly offset by $108M of hotel-sale proceeds. Financing used $394M; cash fell $361M to $465M.
- At June 15, total debt was $5.226B, down from $5.753B at December 31, 2011. Debt had a 6.1% average interest rate and 4.9-year average maturity; 89% bore fixed rates. The company reported $862M available under its credit facility.
Material changes versus prior comparable period
- Q2 total revenue grew 6.5%, operating profit 18.4%, and net income available to Host Inc. stockholders 32.3%. Revenue growth reflected stronger hotel demand and improved room and food-and-beverage sales.
- YTD revenue grew 8.0%, with part of the increase attributable to 2011 acquisitions. YTD net income includes a $48M gain from the San Francisco Airport Marriott sale; this makes the increase from $4M in 2011 less indicative of underlying operating growth.
- Interest expense increased 5.6% in Q2 and 5.3% YTD, including debt-extinguishment costs. The company redeemed $500M of Series S notes and repurchased $386M face value of 2007 exchangeable debentures; it prepaid a $113M mortgage and issued a $100M mortgage loan.
- Host issued 14.2M shares year-to-date for approximately $220M net proceeds. The share count increased, and an at-the-market offering program had approximately $351M of remaining capacity at quarter-end.
Outlook, risks, and unusual items
- Management forecast 2012 comparable hotel RevPAR growth of 5.5%–7.0%, citing improving lodging fundamentals and limited new supply. This is operating guidance, not an earnings forecast.
- Expected 2012 capital spending: $310M–$330M for renewals and replacements, $165M–$175M for redevelopment/return-on-investment projects, and $115M–$125M for acquisition capital expenditures.
- After quarter-end, Host acquired the 888-room Grand Hyatt Washington, D.C. for approximately $400M, plus related costs and assets. Development projects include two Rio de Janeiro hotels, expected to open in 2014, and a Nashville Hyatt Place joint venture, expected to open in December 2013.
- Management expected to raise $500M through a five-year term loan after quarter-end, at an estimated rate of LIBOR plus 180 basis points based on then-current leverage, to repay revolver borrowings and other debt. Closing was subject to customary conditions.
- Management cited uncertainty in Europe, U.S. unemployment and economic growth, and U.S. fiscal policy as risks to demand and its outlook. Other disclosed risks include hotel operating costs, renovations, financing access and rates, debt covenants, insurance, and REIT qualification.
- Legal matters include approximately $5M accrued for general proceedings, with aggregate estimated exposure up to $37M, excluding San Antonio litigation. A separate $57M loss contingency was accrued for the San Antonio Marriott Rivercenter ground-lease dispute; $25M was held in court-ordered escrow. The European joint venture had covenant defaults and cash sweeps on cross-collateralized loans due in 2013, plus a default on another loan due in 2014; these debts are non-recourse to Host.
- Q2 comprehensive income was reduced by $25M of other comprehensive loss, primarily reflecting foreign-currency translation. The company reported a $12M loss on extinguishment of Series S notes. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether comparable RevPAR growth and margin improvement continue, particularly given regional softness and the company’s demand assumptions.
- How much reported earnings growth reflects hotel operations versus the $48M disposition gain and other unusual items; review GAAP results alongside FFO and adjusted measures.
- Completion, pricing, covenants, and use of proceeds for the proposed $500M term loan, and the company’s refinancing and debt-maturity needs.
- Actual spending against capital plans and the returns from the Grand Hyatt Washington acquisition and development projects.
- Developments in the San Antonio litigation and European joint-venture loan defaults, including any required equity contributions or potential lender actions.
- The impact of further share issuance on per-share results and distributions, and the availability of cash and credit-facility capacity.