HOST HOTELS & RESORTS, INC. quarterly report, Q1 FY2012

Business context and reporting period

Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. filed combined unaudited quarterly reports for the quarter ended March 23, 2012. Host Inc. is a REIT and held approximately 98.6% of Host L.P. The company owned 120 hotels with 64,004 rooms; 106 hotels were included in comparable-hotel results. The company notes that interim results are seasonal and not necessarily indicative of full-year performance.

Financial and operating performance

Amounts are in millions of dollars except per-share data and hotel statistics.

• Revenue rose 10.3%; owned-hotel revenue increased 10.5%. Growth reflected stronger comparable-hotel results and contribution from ten 2011 acquisitions.
• Comparable RevPAR increased 6.1% to $126.21, driven by a 2.9% increase in average room rate and a 2.1 percentage-point increase in occupancy. On a calendar-quarter basis, management reported comparable RevPAR growth of 6.4%.
• GAAP operating margin was 2.1%, versus negative 0.3% a year earlier. Comparable adjusted operating profit margin improved to 20.7% from 19.7%.
• Interest expense was $86, up from $82. Net income included $50 of income from discontinued operations, primarily a $48 gain on the San Francisco Airport Marriott sale; continuing operations remained loss-making.
• Cash used in investing activities was $92, including $162 of capital expenditures, partly offset by $108 of asset-sale proceeds. Cash provided by financing activities was $505. Cash and equivalents ended the quarter at $1,312, versus $826 at year-end 2011.
• Total debt at quarter-end was $6,137, up from $5,753 at year-end. Credit-facility availability was $859. The filing reports $91%? No: its market-risk section says 90% of debt was fixed-rate; a later debt discussion reports 91% after the subsequent transactions.

Material changes and capital actions

• On March 22, the company issued $350 of 5.25% senior notes due 2022, yielding approximately $344 net proceeds. After quarter-end it used proceeds and cash to repay a $113 mortgage and redeem $250 of 6.875% notes; the note redemption generated an $8 extinguishment loss.
• Holders put $386 face amount of 2.625% exchangeable debentures, repurchased April 16. The company also announced it intended to redeem the remaining $250 of 2014 notes on May 29.
• Quarter-end cash was $1.312 billion. The filing describes cash of approximately $560 after roughly $750 of subsequent debt repayments, and separately estimates approximately $400 of cash and $5.2 billion of debt after additional planned refinancing actions. These are different timing estimates, not quarter-end balances.
• The company completed its prior at-the-market equity program in Q1, issuing 11.1 million shares for approximately $172 net proceeds. A new $400 million ATM program was established April 24; sales are discretionary.
• The San Francisco Airport Marriott was sold March 23 for $108 net proceeds plus $5 for its FF&E replacement fund. A $48 gain was recorded. The Asia/Pacific JV acquired the 278-room Citigate Perth for A$61 million; Host contributed A$14 million.
• Common dividend declared was $0.06 per share, up $0.01 from the previous quarter, and paid April 16.

Outlook, risks and contingencies

• Management forecast 2012 comparable-hotel RevPAR growth of 5%–7%, citing improving demand and limited industry supply growth. It reported industry demand growth of 4.1% and supply growth of 0.3% for the three months ended March 31.
• Expected 2012 capital spending: $250–$280 for redevelopment/ROI projects, including $100–$110 for acquisition capital expenditures, and $300–$330 for renewals and replacements.
• Management identified European financial uncertainty, unemployment, gasoline prices and U.S. fiscal-policy uncertainty as risks to lodging demand and recovery. Other stated risks include economic and credit-market volatility, hotel operating and renovation risks, financing costs and covenants, competition, insurance, and REIT qualification.
• The European joint venture had covenant defaults and cash sweeps on loans secured by six hotels, including €340 of mortgage loans due in 2013; a separate €70.5 loan due in 2014 also had a covenant default. Loans are non-recourse to Host, but cross-collateralization, refinancing constraints, possible equity contributions and lender remedies pose risks to the JV investment.
• For ordinary-course legal proceedings, the company accrued approximately $5 and estimated aggregate losses could reach $12. Separately, it accrued approximately $57 for San Antonio Marriott Rivercenter ground-lease litigation and funded a court-ordered $25 escrow. An adverse state appellate ruling upheld a judgment including damages, interest and fees and reinstated a $7.5 exemplary-damages award; Host intended to appeal to the Texas Supreme Court.
• Management stated it was in compliance with credit-facility and senior-note covenants. Controls and procedures were assessed as effective, with no material quarterly change in internal control reported.

Important facts for investors to verify

1. Confirm the timing and final amounts of post-quarter debt repayments, the planned remaining note redemption, and resulting cash, debt and interest costs.
2. Review comparable-hotel definitions and the distinction between reported-quarter and calendar-quarter RevPAR, as well as the effect of acquisitions and renovations.
3. Assess whether forecast RevPAR growth and the planned capital program translate into sustained cash flow after interest, maintenance spending and distributions.
4. Monitor European JV covenant cures and refinancing outcomes, and the potential effect on Host’s investment.
5. Track the San Antonio litigation appeal, escrow and recorded contingency, along with dilution and proceeds from the new ATM program.