Host Hotels & Resorts, Inc. — Q1 2011 Form 10-Q
Business context and reporting period. The filing covers the quarter ended March 25, 2011, and presents combined reporting for Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. Host Inc. is a REIT and conducts its hotel ownership and operating business through Host L.P., in which it held approximately 98.4%. At quarter-end, the company owned or controlled 106 U.S. lodging properties and 16 international properties. Results are unaudited; management cautions that interim results may not indicate full-year performance.
Key financial and operating metrics
| Metric | Q1 2011 | Prior comparable quarter |
|---|---|---|
| Total revenue | $903 million | $823 million |
| Owned-hotel revenue | $847 million | $793 million |
| Operating loss | $3 million | $2 million |
| Net loss attributable to Host Inc. | $60 million; $0.09 loss per share | $84 million; $0.13 loss per share |
| Cash provided by operations | $37 million | $49 million |
| Adjusted EBITDA (non-GAAP) | $144 million | $126 million |
| FFO (non-GAAP) | $77 million; $0.11 per diluted share | $49 million; $0.08 per diluted share |
| Total debt at March 25 | $5.538 billion | $5.477 billion at December 31, 2010 |
| Cash and cash equivalents at March 25 | $154 million | $1.113 billion at December 31, 2010 |
Total assets were $12.493 billion and total equity was $6.383 billion at March 25. The company reported $438 million of remaining credit-facility capacity. Debt had a 6.1% average interest rate and 4.2-year average maturity; 88% was fixed-rate. The quarter’s $959 million decrease in cash primarily reflected acquisitions and investment spending. Cash used in investing was $1.138 billion, while financing provided $142 million.
Material changes versus the prior comparable period
- Total revenue increased 9.7%; owned-hotel revenue rose 6.8%. Comparable-hotel RevPAR increased 5.4%, with average room rate up 4.8% and occupancy up 0.4 percentage points.
- Revenue growth reflected improved hotel performance, acquisitions, and the inclusion of HPT-leased hotel operations following the 2010 termination of subleases. HPT-related results were a $6 million loss in Q1 2011 versus a $1 million loss in Q1 2010, limiting comparability.
- Property-level expenses rose 10.1% to $881 million, faster than owned-hotel revenue. Management cited higher wages and benefits, payroll taxes and bonuses, acquired properties, and increased property-level expenses. Comparable adjusted operating margins declined 10 basis points; management attributed approximately 85 basis points of pressure to payroll taxes, bonuses, and lower attrition and cancellation revenue, and another 60 basis points to major renovation disruption.
- Interest expense decreased $14 million to $82 million, reflecting lower debt-repayment charges and interest savings. Net loss narrowed to $60 million from $84 million.
- Cash from operations declined $12 million, primarily due to payment of accrued year-end liabilities, partly offset by improved operations. Debt increased by $61 million from year-end, while cash fell substantially due largely to more than $1 billion of acquisitions and investments.
Outlook, commentary, risks and unusual items
- Operating outlook: Management forecast 2011 comparable-hotel RevPAR growth of 6%–8%, citing improving demand, low industry supply growth and expected room-rate gains. It noted uncertainty from economic conditions, Japan-related events, political turmoil in North Africa and the Middle East, and U.S. budget debates. Major renovations were expected to continue affecting results.
- Investment and capital spending: Management expected 2011 return-on-investment capital expenditures of approximately $230–$250 million and renewal and replacement spending of approximately $300–$325 million. The company spent $46 million and $48 million, respectively, on these categories in Q1.
- Acquisitions: Q1 acquisitions included the New York Helmsley Hotel, Manchester Grand Hyatt San Diego, and seven New Zealand hotels; the filing reports total acquisition investments of approximately $1.031 billion. On April 29, the company acquired a 75% voting interest and preferred interest in the entity owning the 364-room Hilton Melbourne South Wharf, with total transaction value of approximately $150 million, partly funded by a $50 million credit-facility draw.
- Earthquake exposure: Two hotels in the New Zealand portfolio remained closed after the February Christchurch earthquake and were expected to stay closed until at least Q4 2011, potentially longer. Management reported preliminary indications that the structures remained intact, expected insurance coverage to be sufficient, estimated property loss capped at approximately $3 million by the deductible, and recorded no loss accrual due to limited information.
- Debt and liquidity: The company repaid $132 million of Canadian mortgage debt, funded partly with a $103 million credit-facility draw, and issued $80 million of New Zealand mortgage debt. Its credit facility matures in September 2011, with a possible one-year extension subject to conditions. Management said it was in compliance with debt covenants and believed liquidity and capital-market access were sufficient for near-term maturities, capital spending and investment opportunities.
- Equity and dividend: Host Inc. completed the remaining prior-program share sales, issuing 5.6 million shares for approximately $99 million net. A new at-the-market program permits up to $400 million of share sales; none had been sold under it as of April 29. The quarterly common dividend was increased to $0.02 per share, paid April 15.
- Other contingencies and subsequent events: The company had accrued approximately $6 million for ordinary-course legal matters and estimated aggregate losses could reach $8 million. It also reported a separate $48 million accrued contingency related to the San Antonio Marriott Rivercenter. An April 27 amendment to expand and extend the European joint venture, including a proposed contribution of the Le Méridien Piccadilly, remained subject to regulatory approvals.
- Key business risks: Lodging demand and hotel operating costs, renovation disruption, leverage and refinancing, covenant restrictions, insurance recovery, foreign currency exposure, manager and joint-venture relationships, REIT qualification, and acquisition execution could affect results. The filing provides no earnings guidance beyond the stated RevPAR outlook.
Important facts for investors to verify
- Whether RevPAR growth and pricing gains persisted, and whether renovation-related disruption and cost pressures eased as management expected.
- How much of reported revenue growth came from comparable hotel performance versus acquisitions and the changed accounting presentation of HPT-leased hotels.
- Cash and available borrowing capacity after the acquisitions, April credit-facility draw, planned capital expenditures and debt maturities.
- The extent of earthquake damage, reopening timing, insurance recovery and any eventual loss accrual for the Christchurch hotels.
- Developments in the San Antonio Marriott Rivercenter contingency and other legal matters, as well as required approvals and execution of the European joint-venture expansion.
- Progress under the new $400 million at-the-market equity program and the effect of potential share issuance on existing shareholders.