Host Hotels & Resorts, Inc. — Q2 2010 Form 10-Q
Business context and reporting period. Host is a self-managed REIT focused on owning luxury and upper-upscale hotels, operating through Host Hotels & Resorts, L.P. It owned 109 hotels at June 18, 2010. The quarter ended June 18, 2010; year-to-date figures cover the period through that date. Unless noted, amounts are in millions.
Financial and operating performance
| Metric | Q2 2010 | Q2 2009 | YTD 2010 | YTD 2009 |
|---|---|---|---|---|
| Total revenue | $1,114 | $1,051 | $1,937 | $1,915 |
| Operating profit | $110 | $104 | $109 | $124 |
| Net income (loss) attributable to Host | $19 | $(68) | $(65) | $(127) |
| Net income (loss) available to common stockholders | $13 | $(70) | $(73) | $(131) |
| FFO per diluted share | $0.23 | $0.12 | $0.31 | $0.22 |
| Cash provided by operations | — | $219 | $255 |
- Q2 hotel sales increased 5.9%; comparable hotel RevPAR rose 8.1%, with occupancy up 6.0 percentage points and average room rate down 0.7%. Transient RevPAR rose 11.1%; group RevPAR rose about 4.8%.
- YTD comparable RevPAR increased 3.5%, as occupancy improved 5.2 points while average room rate fell 4.2%.
- Comparable hotel adjusted operating profit was $273 versus $257 in Q2, but $432 versus $445 YTD. Management said occupancy-led RevPAR growth adds operating costs and does not support margin recovery as strongly as rate growth.
- At June 18, cash and cash equivalents were $1,171, down from $1,642 at year-end 2009. Total debt was $5,395, down from $5,837; total assets were $11,957 and total liabilities were $5,738.
- YTD investing activities used $158 and financing activities used $532. Capital expenditures were $100 YTD. The filing attributes the $36 year-over-year decline in operating cash flow primarily to lower hotel operating profit.
Material changes and notable transactions
- Host repaid approximately $470 of debt in the first half, including redemption of $346 face amount of Series M notes and repayment of a $124 mortgage. It also redeemed all Class E preferred stock for approximately $101; no preferred stock remained outstanding at quarter-end.
- Host’s 2010 common dividend policy was $0.01 per share quarterly; the Q2 dividend was paid July 15. The company said it intends to pay that amount in 2010 even if it does not generate taxable income.
- After quarter-end, Host acquired the Le Meridien Piccadilly in London for approximately £64 ($98), including assumed mortgage debt of £33 ($50), funded with a credit-facility draw. It also agreed to acquire the Westin Chicago River North for about $165 and entered into a venture to acquire the W New York–Union Square, subject to approvals and closing conditions.
- Host reported a $53 investment in junior tranches of a European hotel mortgage loan; the loan was performing but subordinate to €363 of senior debt and due in October 2010, with extension options subject to conditions.
Outlook, risks, and contingencies
- Management forecast 2010 comparable hotel RevPAR growth of 4%–5.5%. It cautioned that persistent unemployment, uncertainty around economic recovery and the European debt crisis could weigh on lodging demand. Group booking windows remained shorter than historical norms.
- Planned 2010 capital expenditures were $300–$320, including renovations and a major $190 project at the San Diego Marriott Hotel & Marina. Management said it did not expect strong operating-margin growth until average room rates show sustained improvement.
- Approximately 87% of debt was fixed-rate; average interest rate was 6.6%, average maturity 4.3 years. Host reported $600 available under its credit facility and compliance with its financial covenants. Credit-facility actual ratios included 5.46x leverage versus a 7.25x maximum and 1.78x fixed-charge coverage versus a 1.10x minimum for 2010.
- On July 27, Host gave notice it would redeem $225 of Series K senior notes on August 25. Moody’s had revised its outlook to stable; ratings were BB+ at S&P and Ba1 at Moody’s.
- A Texas jury had awarded damages in a dispute relating to the San Antonio Marriott Rivercenter land sale. Host accrued approximately $47 for the potential litigation loss; the court removed the exemplary damages award, and Host pursued post-trial motions and possible appeal.
- Host terminated subleases on 71 select-service hotels after the subtenants failed net-worth covenants; Host remains responsible for the master leases. Beginning in Q3, it expected to report those hotels’ revenues and expenses and related rent. Host stated it expected approximately $17 of deferred proceeds when 18 Residence Inn leases expire at year-end 2010, subject to possible damages.
- The European joint venture had €711 of non-recourse mortgage debt. Some loans had covenant issues; lenders waived or amended certain covenants subject to escrow funding and capital-expenditure commitments. Host said defaults on those loans would not trigger defaults on its own debt.
- Other material risks identified include hotel operating volatility, leverage and refinancing access, covenant restrictions, property upkeep and capital needs, REIT qualification, litigation, foreign-exchange exposure, insurance availability and possible property impairments.
Most important facts for investors to verify
- Whether the forecast 4%–5.5% full-year RevPAR growth materializes, and whether rate growth improves hotel margins.
- Cash and credit-facility availability after the announced note redemption, post-quarter acquisitions and planned capital spending.
- Progress and outcomes of the Texas litigation and the operating and lease consequences of the 71 terminated subleases.
- European joint-venture loan covenant amendments, required escrow and capital spending, and the performance and maturity risk of Host’s junior mortgage-note investment.
- Reported GAAP results versus FFO: Q2 common-stockholder income includes $4 of preferred-stock issuance costs, while FFO is a non-GAAP measure. The filing does not provide a clear quarterly cash-flow figure; cash flow is reported year-to-date.