Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; comparisons are with 2013. The combined filing covers Host Inc., a REIT, and its approximately 99%-owned operating partnership, Host L.P. The portfolio comprised 115 hotels, including 109 comparable hotels.
Financial performance
| Metric | Q3 2014 | Q3 2013 | YTD 2014 | YTD 2013 |
|---|---|---|---|---|
| Revenue | $1.294 billion | $1.211 billion | $4.034 billion | $3.835 billion |
| Operating profit | $202 million | $79 million | $561 million | $374 million |
| GAAP operating margin | 15.6% | 6.5% | 13.9% | 9.8% |
| Net income | $145 million | $18 million | $489 million | $199 million |
| Host Inc. diluted EPS | $0.19 | $0.03 | $0.63 | $0.26 |
| Adjusted EBITDA | $331 million | $270 million | $1.050 billion | $984 million |
| NAREIT FFO per diluted share | $0.42 | $0.25 | $1.17 | $0.93 |
| Adjusted FFO per diluted share | $0.34 | $0.25 | $1.10 | $0.98 |
Comparable hotel RevPAR increased 7.9% in Q3 and 6.6% YTD on a constant-dollar basis. Q3 comparable occupancy was 79.9%, up 1.1 percentage points, while average rate rose 6.4%. Comparable hotel adjusted operating profit margin increased 305 basis points in Q3 and 155 basis points YTD. Non-GAAP measures are management-defined supplemental metrics, not substitutes for GAAP results.
- Cash flow, YTD: Operating activities provided $764 million, versus $697 million. Investing used $168 million, including $296 million of renewal/replacement, redevelopment and new-development spending. Financing used $1.065 billion, including $373 million of mortgage debt and other prepayments/maturities and $318 million of common dividends. Cash declined $474 million to $387 million.
- Debt and liquidity: Total debt was $4.012 billion, down from $4.759 billion at year-end 2013. Average debt interest rate was 4.8%, average maturity 5.4 years, and 79% of debt was fixed-rate. Cash was $387 million and unused credit-facility capacity was $788 million. Management reported compliance with covenants; credit-facility leverage was 2.9x versus a 7.25x maximum.
- Balance sheet: Total assets were $12.135 billion, compared with $12.814 billion at December 31, 2013; total liabilities were $4.581 billion, compared with $5.362 billion.
Material changes and notable items
- Reported Q3 GAAP results include a $69 million reversal of a previously accrued litigation loss after the Texas Supreme Court denied the final rehearing request in the San Antonio Marriott Rivercenter case. The reversal reduced corporate and other expenses. Adjusted EBITDA and Adjusted FFO exclude $59 million of the reversal; $10 million of previously accrued interest is included.
- YTD results include a $112 million gain on the sale of an 89% interest in the Philadelphia Marriott Downtown. Interest expense declined $80 million YTD, mainly reflecting lower debt balances and rates and fewer debt-extinguishment costs.
- Asset sales and acquisition timing reduced revenue by a net $22 million in Q3 and $57 million YTD versus comparable periods. The company acquired the Powell Hotel for approximately $75 million and b2 miami downtown for approximately $58 million.
- On October 1, 2014, the company sold Tampa Marriott Waterside for approximately $199 million and expected to record an approximately $115 million gain in Q4. It also anticipated $50 million to $150 million of additional sales over the following months, without assurance of completion.
Outlook, risks and contingencies
Management forecast full-year 2014 comparable RevPAR growth of 6.0% to 6.25% on a constant-dollar basis. It expected Q4 RevPAR growth to continue but moderate from Q3, citing shifting holidays and disruption from renovations at large convention hotels. Management saw potential for further RevPAR improvement in 2015, while warning of sluggish wage growth and economic slowdown risks in Europe and developing markets. The filing gives no quantified earnings or revenue guidance.
- Management expected 2014 renewal and replacement capital expenditures of $330 million to $345 million, ROI/redevelopment spending of $65 million to $75 million, and acquisition-related capital expenditures of $20 million to $25 million.
- The $0.20 per-share Q3 dividend was paid October 15; management described it as the intended regular quarterly dividend for coming quarters, subject to board approval. A special dividend of approximately $0.05 was possible if tax-free exchanges for asset sales could not be achieved, also subject to board approval.
- At September 30, approximately $31 million was accrued for legal proceedings; the company estimated aggregate losses could be as much as $50 million. It cautioned that litigation outcomes are uncertain. A $25 million court-ordered bond related to the resolved Keystone case was released October 17.
- Other key risks include lodging-demand and economic volatility, labor costs, renovation-related operating disruption, debt covenants and refinancing access, insurance adequacy, competition for acquisitions, foreign currency exposure and maintaining REIT qualification.
Important facts for investors to verify
- How much of the sharp GAAP earnings improvement reflects the $69 million litigation reversal and asset-sale gains versus recurring hotel operations; reconcile reported results with non-GAAP measures.
- Whether projected RevPAR growth, renovation schedules and capital-spending plans are tracking management’s expectations, especially given expected Q4 disruption.
- Subsequent asset-sale proceeds and gains, and whether contemplated additional dispositions were completed.
- Liquidity, covenant headroom and the terms and refinancing or exchange implications of the $400 million exchangeable debentures, including the October 2015 holder put option.
- Updates to legal accruals, the possible special dividend and board decisions on future regular dividends.