HOST HOTELS & RESORTS, INC. quarterly report, Q3 FY2019

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Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. — Q3 2019 Form 10-Q

Business context and reporting period. The combined filing covers the quarter and nine months ended September 30, 2019. Host Inc. is a self-managed REIT and owns approximately 99% of Host L.P.; the companies operate as one enterprise. At quarter-end, the portfolio comprised 82 primarily luxury and upper-upscale hotels, including 77 in the United States.

Financial results and liquidity

  • Q3 revenue: $1.262 billion, down 2.8% year over year; nine-month revenue was $4.135 billion, down 0.7%.
  • Profit: Q3 net income was $372 million versus $378 million; net income attributable to Host Inc. was $368 million versus $322 million. Diluted EPS was $0.51 versus $0.43. Nine-month net income was $851 million versus $845 million; attributable income was $840 million versus $784 million, and diluted EPS was $1.14 versus $1.06.
  • Operating performance: Q3 GAAP operating profit was $137 million versus a $92 million loss, and nine-month operating profit was $633 million versus $342 million. GAAP operating margin was 10.9% for Q3 and 15.3% year to date. The comparisons were significantly affected by a $239 million impairment expense in Q3 2018. Comparable hotel EBITDA was $289 million in Q3, down 1.9%, with margin of 26.5%, down 85 basis points. Nine-month comparable hotel EBITDA was $996 million, flat, with margin down 15 basis points to 29.1%.
  • REIT measures: Q3 Adjusted EBITDAre was $312 million, down 9.3%; nine-month Adjusted EBITDAre was $1.179 billion, down 0.9%. Adjusted FFO per diluted share was $0.35 for Q3, down 5.4%, and $1.37 year to date, up 2.2%.
  • Comparable hotels: Q3 comparable RevPAR declined 0.2% in constant dollars, while Total RevPAR rose 1.2%. Nine-month comparable RevPAR declined 0.9%; Total RevPAR increased 0.5%.
  • Cash flow: Nine-month cash from operations was $914 million versus $941 million. Investing cash use was $74 million versus $210 million; financing cash use was $380 million versus $361 million. Cash, cash equivalents and restricted cash totaled $2.215 billion at September 30, including $2.030 billion of balance-sheet cash and $184 million in the FF&E replacement fund.
  • Debt and liquidity: Total debt was $4.442 billion, versus $3.837 billion at year-end 2018; weighted-average rate was 4.1%, weighted-average maturity 5.2 years, and 78% of debt carried fixed rates. The company had $1.5 billion of revolver capacity available and reported compliance with financial covenants. Credit-facility ratios included leverage of 1.7x, fixed-charge coverage of 7.0x and unsecured interest coverage of 10.3x.

Material changes versus the prior comparable period

  • Property sales and acquisitions reduced reported revenue by $60 million in Q3 and $54 million year to date compared with the respective 2018 periods. Comparable hotel revenue nevertheless grew 1.2% in Q3 and 0.5% year to date.
  • Q3 attributable earnings and EPS increased despite lower total revenue, while Adjusted EBITDAre and Adjusted FFO per share declined. Lower prior-year impairment and depreciation comparisons, as well as materially smaller asset-sale gains in 2019, affected reported results.
  • Comparable hotel margins faced pressure from labor costs and softer RevPAR. Comparable hotel wages and benefits rose 4.3% in Q3; management expected labor-cost pressure to continue.
  • On August 1, the company expanded its revolver from $1.0 billion to $1.5 billion, extended credit-facility maturities, and reduced applicable borrowing spreads by 10 basis points. It issued $650 million of 3.375% senior notes due 2029 in September. After quarter-end, it redeemed $650 million of older notes due 2021 and 2022, paying a $50 million prepayment premium; management stated there were no material debt maturities until 2023.
  • The company repurchased $400 million of shares through September 30, including $200 million in Q3, and increased its authorization to $1 billion. It had $600 million remaining at quarter-end; following subsequent purchases, the filing reported $586 million available.

Outlook, management commentary and risks

  • Management forecast full-year 2019 comparable RevPAR to decline 1.0% to 0.25% (constant U.S. dollars), citing weaker lodging-demand expectations, economic and trade uncertainty, and above-average industry supply. It expected Marriott’s transformational capital program to reduce comparable RevPAR by about 50 basis points in 2019.
  • Management expected $23 million of Marriott operating-profit guarantees in 2019 to offset the earnings effect of program disruption. The four-year program covers 17 properties; work was underway or expected to be completed at 13 by year-end 2019. Total 2019 capital expenditure guidance was $550 million to $590 million, including approximately $315 million to $335 million of return-on-investment projects.
  • Q3 market performance varied: New Orleans and Florida Gulf Coast Total RevPAR rose 14.2% and 8.4%, respectively; Jacksonville and Seattle fell 14.5% and 8.5%. Jacksonville was affected by Hurricanes Dorian and Humberto, cancellations and a forced closure; Seattle faced new supply and fewer citywide events. New York remained pressured by supply growth and weak Times Square demand.
  • Key risks include lodging-demand sensitivity to economic conditions, geopolitical and trade uncertainty, labor costs and disruptions, new hotel supply, renovations, competition, reliance on Marriott as a major manager, debt covenant compliance, interest and currency exposure, insurance adequacy, cyber incidents and maintaining REIT qualification. The filing cautions that forward-looking statements are not guarantees.
  • Legal proceedings are described as arising in the ordinary course; the company recorded minimal accruals and said aggregate losses were not expected to be material, while noting outcomes cannot be assured. The filing identifies no known matter requiring disclosure of a reasonably possible material loss contingency.
  • Effective January 1, 2019, lease accounting adoption recognized right-of-use assets and lease liabilities; at adoption these were $619 million and $628 million, respectively. The change did not materially affect operations or cash flows. At September 30, reported right-of-use assets were $549 million and lease liabilities $558 million.

Important facts for investors to verify

  • Track comparable RevPAR, Total RevPAR and hotel margins against the full-year RevPAR outlook, particularly in weaker markets and during renovation activity.
  • Separate recurring hotel performance from asset-sale gains, impairment comparisons, property transactions and Marriott guarantees when assessing earnings and FFO trends.
  • Confirm the effect of post-quarter debt redemptions, including the $50 million premium, on interest costs, cash balances and the reported debt-maturity profile.
  • Monitor capital spending against the $550 million to $590 million outlook, share repurchases and dividends, and available liquidity and covenant headroom.
  • Assess whether rising labor costs, market supply, economic uncertainty and renovation disruption materially change demand or the company’s operating outlook.