Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. — Q1 2016 Form 10-Q
Business context and reporting period. The combined filing covers the quarter ended March 31, 2016, for a lodging REIT and its operating partnership. Host Inc. owns approximately 99% of Host L.P.; the entities’ financial statements are substantially alike. At quarter-end, the consolidated portfolio included 103 hotels, primarily luxury and upper-upscale properties, with 93 hotels in the comparable-property set.
Key financial and operating results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $1.339 billion | $1.302 billion | +2.8% |
| Operating profit | $151 million | $133 million | +13.5% |
| GAAP operating margin | 11.3% | 10.2% | +110 bps |
| Net income | $184 million | $99 million | +85.9% |
| Net income attributable to Host Inc. | $182 million | $98 million | +85.7% |
| Diluted EPS | $0.24 | $0.13 | +84.6% |
| Adjusted EBITDA | $345 million | $321 million | +7.5% |
| NAREIT and Adjusted FFO per diluted share | $0.41 | $0.35 | +17.1% |
| Cash from operations | $219 million | $164 million | +$55 million |
Revenue growth reflected rooms revenue of $843 million (+3.1%), food-and-beverage revenue of $408 million (+1.2%), and other revenue of $88 million (+8.6%). Comparable hotel RevPAR increased 3.6% in constant U.S. dollars and 3.0% in nominal dollars. Comparable occupancy rose 2.1 percentage points to 75.5%, while average room rate grew 0.7%. Comparable hotel EBITDA was $319 million, up 6.8%, and its margin increased 90 basis points to 26.3%.
Net income growth substantially exceeded operating growth, reflecting $59 million of gains on asset sales versus $4 million in the prior-year quarter, alongside improved hotel operations and lower interest expense. Adjusted EBITDA excludes disposition gains and other specified items; it grew more slowly than GAAP net income.
Balance sheet, cash flow and capital allocation
- At March 31, 2016, total assets were $11.690 billion, cash and cash equivalents were $234 million, and total debt was $3.961 billion, up from $3.867 billion at December 31, 2015. Debt comprised $2.377 billion of senior notes, $1.401 billion under the credit facility and $183 million of mortgage debt.
- Management reported a 3.6% average interest rate, 5.6-year average debt maturity and 61% fixed-rate debt. Credit-facility availability was $592 million at quarter-end. The company reported compliance with financial covenants, including a 2.8x leverage ratio versus a 7.25x maximum and a 7.3x fixed-charge coverage ratio versus a 1.25x minimum.
- Cash provided by operations was $219 million; investing activities used $58 million and financing activities used $152 million. Cash increased by $13 million during the quarter. Investing cash flow included $115 million of net asset-sale proceeds; capital spending included $94 million for renewals and replacements and $73 million for redevelopment, ROI and acquisition-related projects.
- The company repurchased 5.1 million shares for approximately $81 million at an average $16.08 per share; $242 million remained under the $500 million authorization. A $0.20-per-share quarterly dividend was paid April 15, 2016. The filing states that $380 million had been distributed to stockholders through dividends and share repurchases since the beginning of 2016, including the prior-year fourth-quarter dividend paid in January.
- After quarter-end, Host repaid the $100 million Hyatt Regency Reston mortgage with a revolver draw. It reported net revolver draws of $328 million from January through April, reflecting the timing of repurchases, dividends and expected asset-sale proceeds.
Material changes, outlook and notable items
- Operating trends: Management attributed comparable RevPAR growth to higher occupancy and stronger transient demand; transient revenue rose 5.4%, while group revenue increased only 0.6%. San Francisco and Los Angeles led domestic markets, with RevPAR growth above 12%; Boston and Denver declined. International RevPAR rose 9.6% in constant dollars but fell 5.7% in nominal dollars, largely reflecting U.S.-dollar strength.
- Margins and costs: Comparable hotel margins benefited from an 11.3% decline in utility costs, mild winter weather, favorable energy prices, conservation projects and productivity gains. Management noted higher labor costs and increased management fees, including incentive fees.
- Full-year outlook: Management forecast 2016 comparable hotel RevPAR growth of 3.0%–4.0% in constant U.S. dollars. Expected 2016 renewal-and-replacement spending was $305–$320 million; ROI, redevelopment and acquisition-related capital spending was expected to be $185–$200 million. These are management estimates, not guarantees.
- Portfolio activity: Three non-core hotels were sold during Q1 for approximately $121 million, generating about $57 million of gains as described in MD&A. Five additional properties were under contract for expected Q2 sale, subject to customary closing conditions. Management also expected to sell its remaining two New Zealand properties and one Australian hotel over the following 12 months, without assurance on timing or completion.
- Accounting change: Adoption of updated consolidation guidance effective January 1, 2016 resulted in deconsolidation of the Fort Lauderdale Marriott Harbor Beach partnership and retrospective presentation. The change reduced Q1 2015 reported revenue by $15 million and net income by $5 million, but did not affect net income attributable to Host Inc. or Host L.P. or their respective total equity/capital.
- Risks and contingencies: The filing highlights lodging-demand and economic uncertainty, increased hotel supply in some markets, labor costs, foreign-exchange exposure, renovation disruption, debt covenants and financing access, insurance and cyber risks, and REIT qualification requirements. Legal proceedings were estimated to involve approximately $3 million of accrued liabilities; management estimated aggregate losses would not exceed $10 million, while noting outcomes are uncertain.
- Results are seasonal and interim performance is not necessarily indicative of full-year results. Management stated that disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether comparable RevPAR growth and margin improvement persist, particularly given higher supply in select markets and weaker group demand.
- How much of reported earnings growth came from one-time disposition gains rather than recurring hotel operations; review the company’s non-GAAP reconciliations and definitions.
- Whether planned property sales close as expected and at anticipated values, and whether sale proceeds support capital needs and shareholder returns.
- Progress against the 2016 RevPAR and capital-spending outlook, including the effect of renovations and currency movements.
- Debt levels, revolver usage, liquidity, covenant headroom and the sustainability of dividends and repurchases relative to operating cash flow and investment needs.
- The potential effect of legal matters, foreign-exchange exposure and newly adopted or forthcoming accounting standards; the filing does not provide a clear quantified estimate for all future effects.