Business context and reporting period
Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. filed a combined Form 10-K for the year ended December 31, 2011. Host Inc. is a REIT and owns approximately 98.5% of Host L.P.; substantially all operations and assets are held through Host L.P. The portfolio comprised 121 hotels and 64,947 rooms as of February 22, 2012, primarily luxury and upper-upscale properties. Amounts below are in U.S. dollars; financial statement figures are generally in millions.
The fourth-quarter figures are unaudited. Company reporting periods differ from hotel-statistics periods; the 2011 fourth quarter covered 113 days versus 112 days in 2010.
Financial and operating performance
| Metric | 2011 | 2010 | Change / context |
|---|---|---|---|
| Total revenue | $4,998 | $4,428 | Up 12.9% |
| Operating profit | $324 | $223 | Up 45.3%; GAAP operating margin 6.5%, versus 5.0% |
| Net loss | $(16) | $(132) | Improved by $116 |
| Diluted loss per share | $(0.02) | $(0.21) | Improved by $0.19 |
| Adjusted EBITDA | $1,018 | $834 | Up 22.1% |
| NAREIT FFO per diluted share | $0.89 | $0.68 | Up 30.9% |
| Adjusted FFO per diluted share | $0.92 | $0.74 | Up 24.3% |
| Cash from operating activities | $661 | $520 | Up $141 |
| Cash and cash equivalents at year-end | $826 | $1,113 | Down $287 |
| Total debt at year-end | $5,753 | $5,477 | Up $276 |
Comparable hotel RevPAR increased 6.1% to $129.97, reflecting a 4.3% increase in average daily rate and a 1.3-percentage-point increase in occupancy to 72.1%. Comparable adjusted operating margin increased to 22.3% from 21.4%. Reported results include acquired hotels and additional revenue from the leased HPT portfolio, so total revenue growth exceeded comparable-property growth.
In the fourth quarter, revenue was $1,658 versus $1,491 in 2010; operating profit was $119 versus $91, and net income was $16 versus a net loss of $6.
Liquidity, debt, investment and material changes
- Year-end liquidity included $826 million in cash and $883 million of available capacity under a new $1 billion revolving credit facility, maturing in November 2015 with a conditional one-year extension. Management described liquidity as strong.
- Debt was $5.753 billion; approximately 90% bore fixed interest, weighted-average interest rate was 6.3%, and weighted-average maturity was 4.4 years. Secured mortgage debt was approximately $1.0 billion, about 17% of total debt. The company reported compliance with debt covenants; credit-facility leverage was 4.8x against a 7.25x maximum.
- Scheduled debt maturities were $400 million in 2012, $359 million in 2013 and $1.142 billion in 2014. The 2012 amount includes $388 million of exchangeable debentures subject to a holder put in April 2012; management anticipated holders would exercise it and planned to use cash and financing proceeds to repay it.
- 2011 investing cash outflow was $1.576 billion, including $1.047 billion of acquisitions and $542 million of capital expenditures. Acquisitions included the Manchester Grand Hyatt San Diego, New York Helmsley, a New Zealand hotel portfolio and a controlling interest in the Hilton Melbourne South Wharf.
- Capital expenditures increased to $542 million from $309 million: $327 million for renewals and replacements and $215 million for redevelopment and ROI projects. The company issued 19.1 million shares through at-the-market programs for net proceeds of $323 million, contributing to dilution.
- Dividends declared rose to $0.14 per common share for 2011 from $0.04 in 2010. The board indicated a $0.06-per-share dividend for the first quarter of 2012, subject to its determination.
Outlook, commentary, risks and unusual items
Management forecast 2012 comparable hotel RevPAR growth of 4%–6%, with rate growth expected to be the main driver. It expected low hotel supply growth and continued demand improvement, while citing uncertainty from the global economy and Europe’s sovereign-debt crisis. Planned 2012 spending was approximately $235–$275 million on redevelopment/ROI projects and $310–$330 million on renewals and replacements. Management also planned increased dispositions, subject to market conditions.
- Litigation: An adverse appellate ruling in the Keystone dispute reinstated a $7.5 million exemplary-damages award in addition to alternative damages, interest and fees. The company estimated maximum exposure at $63 million and accrued approximately $56 million; rehearing motions were pending as of the filing.
- Acquisition deposit: The company forfeited a $15 million deposit after terminating a proposed Grand Hyatt Washington, D.C. acquisition. Management said this reduced 2011 FFO per diluted share by $0.02.
- Earthquake impacts: Two Christchurch hotels were substantially damaged in February 2011 and remained closed. The company estimated approximately $22 million of property damage and related costs, recorded $2 million of business-interruption insurance gain, and reported an outstanding insurance receivable of $13 million at year-end.
- European joint venture: The Euro JV had €786 million of non-recourse mortgage debt. Certain prior covenant, cash-sweep or payment issues and 2013 maturities create refinancing risk; management warned that refinancing could require higher rates, tighter covenants, asset-sale proceeds or additional equity.
- Other exposures: Risks include lodging cyclicality, high fixed operating costs, substantial capital needs, interest-rate and foreign-exchange changes, reliance on third-party hotel managers, insurance limits, REIT qualification and access to external capital. The 53 Courtyard hotels leased from HPT were expected to exit their leases on December 31, 2012; HPT was expected to pay approximately $51 million of deferred sale proceeds, subject to lease terms and potential damages.
Most important facts for investors to verify
- Whether the 2012 debenture put was exercised and how the $388 million obligation was funded, including subsequent refinancing or debt transactions.
- Whether forecast 2012 RevPAR growth and the planned capital-expenditure program were achieved, and how renovations affected hotel availability and returns.
- The final outcome and cash cost of the Keystone litigation, including the appeal and accrued-loss adequacy.
- Insurance recoveries and reopening timelines for the Christchurch hotels, and the status of the reported insurance receivable.
- Comparable-property performance versus growth attributable to acquisitions, HPT lease consolidation and other portfolio changes; also consider the differing reporting calendars.
- Debt covenant headroom, liquidity after maturities and capital spending, and the effect of equity issuance and exchangeable securities on per-share results.