Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. — Q1 2018 Form 10-Q
Reporting period: Quarter ended March 31, 2018; financial statements are unaudited and compare with Q1 2017. Host Inc. is a REIT and owns approximately 99% of Host L.P.; the combined filing reports substantially the same operating business.
Business context
Host owns and operates primarily luxury and upper-upscale hotels. At quarter-end, its consolidated portfolio comprised 96 hotels, including 90 in the United States and six in Brazil, Canada, and Mexico. It also holds non-controlling interests in hotel joint ventures.
Financial and operating results
- Revenue: $1.346 billion, down 0.1% from $1.348 billion. Rooms revenue was $844 million; food and beverage revenue was $413 million.
- Profit: GAAP operating profit was $171 million, unchanged, and operating margin was 12.7%. Net income was $256 million versus $161 million; net income attributable to Host Inc. was $253 million, or $0.34 per diluted share, versus $158 million, or $0.21.
- Comparable hotel performance: Comparable revenue rose 1.5% to $1.271 billion; comparable hotel EBITDA increased 3.7% to $351 million and its margin rose 60 basis points to 27.6%. Comparable RevPAR rose 1.7% in constant U.S. dollars (1.8% nominal), with occupancy up 170 basis points and average room rate down 0.6%.
- Cash flow: Operating cash flow was $248 million, compared with $212 million. Investing activities used $955 million, including the three-hotel acquisition and $115 million of capital expenditures. Financing activities provided $119 million. Cash and cash equivalents were $323 million at March 31; cash-flow-statement cash and restricted cash, including the FF&E replacement fund, totaled $520 million.
- Debt and liquidity: Total debt was $4.266 billion, up from $3.954 billion at year-end 2017. Average interest rate was 3.9%, average maturity 4.8 years, and 65% of debt was fixed-rate. The company reported $511 million of revolver availability and no significant debt maturities until 2020. It was in compliance with its financial covenants.
- Distributions: Host Inc. declared a regular dividend of $0.20 per share, paid April 16, 2018. The quarter’s cash-flow statement reports $185 million of common-stock dividends paid.
Material changes and notable transactions
- Net income rose primarily because the gain on asset sales increased to $120 million from $17 million. The 2018 gain principally reflected the January sale of the Key Bridge Marriott for $190 million, including $8 million deposited into the property’s FF&E fund; the recorded gain was approximately $119 million.
- On March 29, Host acquired the 301-room Andaz Maui, 668-room Grand Hyatt San Francisco, and 454-room Hyatt Regency Coconut Point for $1 billion. These hotels contributed only three days of operations in Q1.
- Adjusted EBITDAre was $370 million, unchanged year over year, while NAREIT FFO and Adjusted FFO were both $0.43 per diluted share, versus $0.44. Management attributed the FFO decline primarily to higher interest and tax expense. These are non-GAAP measures.
- Interest expense increased to $44 million from $39 million, partly reflecting a full quarter of interest on Series G senior notes issued in March 2017. Comparable hotel results improved, but dispositions offset growth in consolidated revenue and adjusted EBITDAre.
Outlook, risks, and unusual items
- Management forecast 2018 comparable RevPAR growth of 1.5%–2.5% in constant U.S. dollars. It cited favorable U.S. economic fundamentals and travel demand, while noting that high occupancy and rising supply could constrain rate growth.
- Expected 2018 capital expenditures were $475 million–$550 million: approximately $185 million–$220 million for return-on-investment projects and $290 million–$330 million for renewals and replacements. Q1 spending was approximately $29 million and $86 million, respectively.
- Management identified risks including slower economic growth, changing travel patterns, trade tensions, higher interest rates, geopolitical instability, rising labor and operating costs, competition and supply growth, reliance on third-party managers (including Marriott), and debt covenant or financing constraints.
- The company recorded an additional $8 million impairment related to the W New York, included in depreciation and amortization; the property’s March 31 fair value was $183 million. Adoption of the new revenue recognition standards increased opening equity by $4.5 million through recognition of a previously deferred gain; a $0.4 million environmental contingent liability remained, with potential exposure under the related guarantee of up to $5 million.
- Management reported minimal accruals for ordinary-course legal proceedings and estimated aggregate losses would not be material; it identified no known matter requiring disclosure of a reasonably possible unfavorable loss contingency. The filing cautions that interim results may not indicate full-year performance because of seasonality.
Important facts for investors to verify
- How much of the year-over-year net income increase reflects the Key Bridge sale gain rather than recurring hotel operations.
- Whether the acquired Hyatt hotels deliver expected performance after contributing only three days to Q1 results, and how the $1 billion purchase was funded.
- Progress toward the 2018 RevPAR forecast and capital expenditure range, particularly given market-specific weakness and supply growth.
- Cash available for operations and investment: distinguish the $323 million balance-sheet cash figure from the $520 million cash-flow total, which includes restricted cash and the FF&E replacement fund.
- Debt costs, revolver usage, covenant headroom, and the sustainability of dividends; also review non-GAAP definitions and reconciliations when assessing FFO and EBITDAre.