Host Hotels & Resorts, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This combined filing covers Host Hotels & Resorts, Inc. (a REIT) and Host Hotels & Resorts, L.P.; the partnership holds and operates substantially all assets, and the financial statements are substantially the same. The filing also reports fourth-quarter results.
Business context
Host owns predominantly luxury and upper-upscale hotels, operated by third parties. At February 20, 2017, its consolidated portfolio comprised 96 hotels and approximately 53,600 rooms; it also held non-controlling interests in joint ventures with hotel and timeshare investments. Marriott-managed properties represented approximately 78% of revenue after Marriott’s September 2016 acquisition of Starwood. Hotel demand is exposed to economic and travel cycles, with business and group travel important to performance.
Financial and operating performance
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $5.430 billion | $5.350 billion |
| Operating profit / margin | $684 million / 12.6% | $631 million / 11.8% |
| Net income | $771 million | $565 million |
| Net income attributable to Host Inc. | $762 million | $558 million |
| Diluted earnings per share | $1.02 | $0.74 |
| Adjusted EBITDA | $1.471 billion | $1.409 billion |
| Adjusted FFO per diluted share | $1.69 | $1.54 |
| Cash from operating activities | $1.303 billion | $1.159 billion |
| Capital expenditures | $519 million | $658 million |
| Cash and cash equivalents at year-end | $372 million | $221 million |
| Total debt at year-end | $3.649 billion | $3.867 billion |
- Comparable hotel RevPAR rose 2.7% in constant U.S. dollars; occupancy increased 130 basis points to 78.5%, while average room rate rose 1.0%. Comparable hotel EBITDA increased 5.8% to $1.364 billion, and its margin expanded 80 basis points to 27.8%.
- Annual revenue increased 1.5%; rooms revenue rose 0.8%, food-and-beverage revenue 2.0%, and other revenue 6.9%. Results include portfolio sales and acquisitions, renovation disruption, and foreign-currency effects.
- Debt carried a 3.8% weighted-average interest rate and had a 5.2-year weighted-average maturity. Approximately 65% was fixed-rate; the company reported $788 million of available revolver capacity and compliance with debt covenants. Assuming available credit-facility extensions, management cited no significant debt maturities until 2019.
- Host Inc. declared $0.85 per common share for 2016, versus $0.80 in 2015. Cash dividends paid during 2016 were $596 million; Host L.P. distributions were $603 million.
Material changes and notable items
- Net income rose 36.5%, but the increase was substantially affected by higher gains on asset sales ($253 million versus $95 million in 2015) and lower interest expense ($154 million versus $227 million). Management also cited better hotel operations and a $41 million reduction in debt-extinguishment costs. The filing reports $243 million of gains from ten 2016 hotel dispositions and a $12 million business-interruption recovery related to the New Orleans Marriott.
- Host sold ten hotels in 2016 for approximately $467 million of proceeds and repaid $137 million of mortgage debt. It repurchased 13.8 million shares for approximately $218 million. Capital expenditures totaled $519 million, including $293 million for renewals and replacements and $226 million for redevelopment and return-on-investment projects.
- Effective January 1, 2016, a consolidation-accounting standard led Host to deconsolidate its 49.9%-owned Fort Lauderdale Marriott Harbor Beach joint venture. The change reduced reported 2015 year-end assets and liabilities by $128 million and $150 million, respectively, and reduced reported 2015 and 2014 revenue by $37 million and $33 million; net income attributable to Host was unchanged.
- After year-end, Host acquired The Don CeSar and related Beach House Suites for $214 million and sold the JW Marriott Desert Springs Resort & Spa for $172 million.
Outlook, risks and contingencies
- Management forecast 2017 comparable hotel RevPAR growth of 0.0%–2.0% on a constant-dollar basis. It expected stable near-term U.S. travel demand, but flagged accelerated hotel supply growth, constrained room-rate growth, possible occupancy declines, online booking and sharing platforms, and weaker international travel associated with a strong U.S. dollar. January 2017 comparable RevPAR was up 7.4%, which management said was substantially influenced by Washington, D.C. inauguration-related demand.
- For 2017, Host expected $90–$115 million of redevelopment and ROI spending and approximately $275–$300 million of renewal and replacement spending. It authorized a new $500 million share repurchase program and a separate authorization to repurchase up to $250 million of debt.
- Key risks include lodging-cycle sensitivity; concentrated exposure to major urban and resort markets; new supply; reliance on third-party hotel managers and Marriott; labor costs and union activity; capital-market access and debt covenants; interest-rate, currency, weather and disaster risks; and REIT qualification and tax requirements. A 100-basis-point change in floating rates was estimated to affect 2017 interest expense and cash flow by approximately $13 million.
- Contractual obligations included $1.461 billion of operating lease payments, largely tied to ground leases. Host estimated adoption of the new lease standard could add $400–$500 million of ground-lease right-of-use assets and liabilities; the estimate was preliminary.
- Legal proceedings were described as ordinary-course matters. Host accrued approximately $5 million and estimated aggregate potential losses could reach $17 million. It also jointly and severally guaranteed a Maui timeshare joint venture construction loan with approximately $9 million outstanding; management considered material payments under other disclosed guarantees remote.
Important facts for investors to verify
- How much of 2016 earnings growth came from recurring hotel operations versus disposition gains, insurance recoveries, and lower debt-extinguishment costs.
- Whether the 2017 RevPAR outlook and hotel margins held up as supply growth increased, particularly in New York, Houston, and Boston.
- The timing and funding of the 2017 debt maturities, including the $500 million term loan initially due in 2017 and any credit-facility extension conditions.
- Actual capital spending, dividend and repurchase activity, and the returns achieved on the Don CeSar acquisition and other portfolio investments.
- The eventual balance-sheet effect of lease-accounting adoption, and developments in legal, joint-venture guarantee, and REIT compliance exposures.