Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. — 2015 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2015; it is an annual report, not a standalone Q4 filing. Host Inc. is a REIT that conducts substantially all business through Host L.P. The company owned 107 hotels at year-end and reported a portfolio of 105 hotels as of February 19, 2016, primarily luxury and upper-upscale properties. All hotels are operated by third-party managers.
Financial and operating performance
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $5.387 billion | $5.354 billion |
| Net income | $571 million | $747 million |
| Net income attributable to Host Inc. | $558 million | $732 million |
| Diluted EPS | $0.74 | $0.96 |
| Operating profit / GAAP operating margin | $650 million / 12.1% | $710 million / 13.3% |
| Adjusted EBITDA | $1.409 billion | $1.402 billion |
| NAREIT FFO per diluted share | $1.49 | $1.57 |
| Adjusted FFO per diluted share | $1.54 | $1.50 |
| Cash provided by operating activities | $1.171 billion | $1.150 billion |
| Cash and cash equivalents at year-end | $239 million | $684 million |
| Total debt at year-end | $4.017 billion | $3.957 billion |
- Comparable hotel revenue rose 3.3% to $5.076 billion; comparable hotel EBITDA increased 4.1% to $1.373 billion, and its margin improved 20 basis points to 27.05%.
- Comparable RevPAR increased 3.8% in constant U.S. dollars (2.9% in nominal dollars); occupancy was 77.4%, up 40 basis points, and room rates rose 3.3% in constant dollars.
- Capital expenditures were $663 million: $388 million for renewals and replacements and $275 million for redevelopment, ROI and acquisition-related projects. Operating cash flow less reported capital expenditures was approximately $508 million.
- Debt was 65% fixed-rate; weighted-average interest rate was 3.7% and weighted-average maturity was six years. The company reported $702 million of available revolver capacity and a 2.8x credit-facility leverage ratio. It said no significant maturities were expected before 2019, assuming available extensions.
Material changes versus 2014
- Revenue increased 0.6%, but net income fell 23.6%, diluted EPS declined 22.9%, and GAAP operating profit decreased 8.5%.
- The earnings comparison was affected by $236 million of 2014 asset-sale gains versus $95 million in 2015, the $69 million 2014 litigation-contingency reversal, and $37 million more debt-extinguishment costs in 2015. Adjusted EBITDA was nearly flat, while Adjusted FFO per share rose 2.7%.
- Comparable RevPAR growth slowed from 5.7% to 3.8% in constant dollars. U.S. dollar strength reduced 2015 revenue by an estimated $35 million versus the prior year and weighed on international results.
- Host issued $900 million of senior notes and redeemed $1 billion of higher-coupon notes; it also borrowed $500 million under a new term loan. Approximately $399 million of exchangeable debentures converted into about 32 million shares. The company repurchased 38.3 million shares for approximately $675 million and declared $0.80 per share in dividends, up 6.7%.
- Asset sales and returns of capital from investments generated $383 million in reported investing cash inflows. Capital expenditures rose from $436 million to $663 million, while year-end cash decreased by $445 million.
Outlook, commentary and risks
- Management forecast 2016 comparable RevPAR growth of 3%–4% in constant dollars, describing the industry outlook as uncertain. It expected modest demand growth, higher hotel supply, and restrained rate growth; New York was expected to underperform because of new supply and softer international travel.
- For 2016, redevelopment and ROI spending was forecast at $180–$195 million; renewal and replacement spending at approximately $310–$325 million. The company expected recent acquisitions and completed redevelopments to support earnings, partly offset by disposition-related lost income.
- Management planned further non-core and international disposals, continued evaluation of acquisitions and portfolio investments, and potential dividends and share repurchases, while targeting leverage of 2.5x–3.0x. These intentions are not guarantees.
- Key risks include lodging-cycle and economic weakness, rising supply, concentration in gateway markets, foreign-exchange exposure, labor and renovation costs, reliance on third-party hotel managers, substantial debt and floating-rate exposure, limits on access to external capital, and potential uninsured losses from disasters or terrorism. About 35% of debt was floating-rate; management estimated a 100-basis-point rate increase would add approximately $15 million to 2016 interest expense.
- Legal proceedings were described as ordinary-course matters. The company accrued approximately $4 million and estimated aggregate potential losses of up to $15 million; it said outcomes could affect individual-period results. No impairment was recorded in 2015. The 2015 results also reflect the adoption of updated lodging-accounting presentation rules (USALI), which affected certain comparable statistics but not net income or Adjusted EBITDA.
- Independent auditors gave unqualified opinions on the financial statements; management and the auditor reported effective internal control over financial reporting for Host Inc. Management reported effective controls for Host L.P.
Most important facts for investors to verify
- Whether 2016 RevPAR guidance and the expected underperformance of New York and other supply-pressured markets materialized.
- Debt maturities, the use and availability of credit-facility extensions, floating-rate exposure, and capacity under debt covenants.
- Actual capital spending and returns from major renovation projects, including whether construction disruption or cost overruns affected hotel performance.
- Completion, proceeds and earnings effects of planned international and other hotel dispositions, including the timing of remaining Asia-Pacific sales.
- The sustainability of dividends and buybacks given REIT distribution requirements, cash balances, debt needs and reliance on asset-sale proceeds.
- Underlying operating trends using GAAP results alongside non-GAAP FFO, EBITDA and comparable-hotel measures, including the effects of currency translation and the 2014 litigation gain.