Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Unaudited consolidated results are substantially the same for the REIT and its operating partnership, except for equity and attribution. Host Inc. owns approximately 99% of Host L.P.
Business context and operating performance
Host owned 96 hotels at quarter-end, primarily luxury and upper-upscale properties, with 89 included in comparable-hotel statistics. Its business is hotel ownership; operations are managed by third-party hotel operators.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $1.441 billion | $1.459 billion | $2.789 billion | $2.798 billion |
| Operating profit | $244 million | $239 million | $415 million | $390 million |
| GAAP operating margin | 16.9% | 16.4% | 14.9% | 13.9% |
| Net income | $212 million | $351 million | $373 million | $535 million |
| Net income attributable to Host Inc. | $210 million | $347 million | $368 million | $529 million |
| Diluted EPS | $0.28 | $0.47 | $0.50 | $0.71 |
| Adjusted EBITDA | $444 million | $436 million | $811 million | $782 million |
| NAREIT FFO per diluted share | $0.49 | $0.49 | $0.93 | $0.90 |
| Adjusted FFO per diluted share | $0.49 | $0.49 | $0.94 | $0.90 |
Comparable RevPAR increased 1.7% in Q2 and 2.5% year to date on a constant-dollar basis. Comparable hotel EBITDA was $406 million in Q2, up 0.4%, and $728 million for the first half, up 2.9%; corresponding margins were 31.0% and 29.0%. Domestic comparable RevPAR rose 1.8% in Q2, while international comparable RevPAR declined 3.1%, principally reflecting weakness in Brazil.
Cash flow, balance sheet, debt and liquidity
- First-half cash from operations was $612 million, compared with $611 million in 2016. Investing activities used $380 million, versus $90 million of cash provided in the prior-year period; financing activities provided $55 million, versus $627 million used.
- Cash and cash equivalents were $644 million at June 30, 2017; cash, cash equivalents and restricted cash including the FF&E replacement fund totaled $838 million for cash-flow reporting.
- Total debt was $3.992 billion, up from $3.649 billion at December 31, 2016. Management reported a 3.9% average interest rate, 5.5-year average maturity and 68% fixed-rate debt. About 99% of revenue came from hotels unencumbered by mortgage debt.
- The amended credit facility extended the $1 billion revolver and a $500 million term loan to May 2021, subject to extension options. Available revolver capacity was $775 million. The company reported compliance with debt covenants: leverage ratio 2.4x, fixed-charge coverage 7.1x and unsecured interest coverage 9.9x.
- Host paid $332 million in common-stock dividends during the first half. A regular $0.20-per-share quarterly dividend was paid July 17, 2017. No common-stock repurchases were made under the $500 million authorization through June 30.
Material changes and unusual items
- Net income attributable to Host Inc. fell 39.5% in Q2 and 30.4% year to date. Management attributed the declines mainly to lower gains on asset sales: $29 million in Q2 2017 versus $172 million in Q2 2016, and $46 million versus $231 million for the first half. Operating profit and Adjusted EBITDA improved in both periods.
- Room revenue rose 0.8% in Q2, but food-and-beverage revenue declined 5.2%, reflecting weaker banquet and audiovisual business, the shift of Easter into Q2, and lower group demand. Lower-margin outlet business partly replaced higher-margin banquet business.
- Q2 performance varied by market: Seattle and Phoenix comparable RevPAR grew 18.7% and 11.8%, respectively; Houston declined 12.7%. Brazilian weakness and difficult comparisons with pre-Olympics activity weighed on international results.
- Host acquired W Hollywood, The Don CeSar and Beach House Suites, and the Miami Marriott Biscayne Bay ground lease during the first half. It sold the Sheraton Memphis Downtown and JW Marriott Desert Springs Resort & Spa. Hilton Melbourne South Wharf, classified as held for sale at quarter-end, was sold July 28 for A$230 million ($182 million); management expected to record an approximately $74 million gain in Q3.
- Legal proceedings in the ordinary course of business had approximately $5 million accrued; the company estimated aggregate losses could be as much as $17 million and said it was unaware of other matters requiring loss-contingency disclosure.
Outlook, management commentary and risks
- Management forecast full-year 2017 comparable RevPAR growth of 1.0%–1.75% on a constant-dollar basis. It expected growth in the second half, but at a slower pace, citing a difficult comparison with first-half events and the prior-year Olympics in Brazil.
- Management cited accelerating hotel supply, especially in markets where Host has substantial exposure, as a potential constraint on room rates and occupancy. It also described the economic and lodging-industry outlook as uncertain.
- Expected 2017 capital expenditures were approximately $275 million–$290 million for renewals and replacements and $100 million–$110 million for redevelopment and return-on-investment projects. First-half spending was $111 million and $32 million, respectively.
- Key stated risks include changes in economic conditions and travel demand, international political or economic instability, labor and operating-cost inflation, competition and new supply, renovations, reliance on hotel managers including Marriott, debt covenants and financing costs, foreign-exchange exposure, insurance coverage, cyber incidents, legal and regulatory changes, and the ability to maintain REIT qualification. Interim results may be affected by seasonal variation.
Most important facts for investors to verify
- Whether the 1.0%–1.75% full-year comparable RevPAR forecast was achieved, and how second-half supply and demand affected occupancy and rates.
- Whether hotel-level performance and margins remained resilient despite weaker food-and-beverage and international results.
- The realized gain and net proceeds from the July 2017 Hilton Melbourne South Wharf sale, and how sale proceeds were deployed.
- Debt levels, interest expense, covenant headroom, and available revolver capacity after acquisitions, capital spending and dividends.
- The basis and limitations of non-GAAP measures, including Adjusted EBITDA, NAREIT FFO and Adjusted FFO, when comparing results with GAAP net income.
- Developments in the disclosed legal matters and the estimated potential loss range.