HOST HOTELS & RESORTS, INC. quarterly report, Q3 FY2012

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Host Hotels & Resorts, Inc. — Q3 2012 Form 10-Q

Reporting period: Quarter ended September 7, 2012; year-to-date (YTD) comparisons are against September 9, 2011. Amounts are in U.S. dollars and millions unless stated otherwise. Host Inc. is a REIT operating through Host L.P.; together they owned 120 hotels with 64,648 rooms at period-end.

Financial performance and position

  • Revenue: Q3 total revenue was $1.204 billion, up 6.5%; owned-hotel revenue increased 6.1%. YTD revenue was $3.555 billion, up 7.5%. Comparable hotel RevPAR increased 7.6% for the quarter and 6.7% YTD.
  • Hotel operations and margins: Comparable Q3 average room rate rose 4.7% and occupancy increased 2.1 percentage points to 78.4%; YTD rate rose 3.9% and occupancy increased 2.0 points to 75.4%. GAAP operating profit was $65 million for Q3 and $266 million YTD. GAAP operating margin improved to 5.4% from 4.8% for Q3 and to 7.5% from 6.1% YTD. Comparable adjusted operating margin was 22.2% for Q3 and 23.6% YTD, up 285 and 170 basis points, respectively.
  • Profit and per-share results: Host Inc. reported a Q3 net loss attributable to the company of $34 million, or $0.05 per share, versus a $33 million loss a year earlier. YTD attributable net income was $46 million, or $0.06 per share, compared with a $32 million loss in 2011. The 2012 YTD result included a $48 million gain on hotel dispositions; continuing operations reported a $2 million loss.
  • Funds from operations: NAREIT FFO was $126 million for Q3 and $466 million YTD; adjusted FFO was $150 million and $505 million, respectively. Adjusted FFO per diluted share was $0.21 for Q3 and $0.69 YTD, versus $0.16 and $0.60 in 2011.
  • Cash flow and capital spending: YTD cash from operations was $425 million, compared with $384 million. Investing used $822 million, including $441 million for acquisitions and $456 million for capital expenditures; financing used $175 million. Cash fell $572 million from $826 million at year-end 2011 to $254 million.
  • Debt and liquidity: Total debt was $5.495 billion, down from $5.753 billion at year-end 2011. The company reported a 5.5% weighted-average debt interest rate, 5.4-year average maturity, and 78% fixed-rate debt. It had $751 million of available revolver capacity. Credit facility and senior-note covenants were met; credit-facility leverage was 4.6x against a 7.25x maximum.
  • Assets and equity: Total assets were $13.042 billion, including net property and equipment of $11.731 billion. Year-to-date common-share issuance generated approximately $253 million net proceeds; 16.3 million shares were issued.

Changes versus comparable periods

  • Q3 operating profit rose 20.4% and YTD operating profit rose 31.0%; revenue growth exceeded growth in property-level costs. Comparable adjusted margins also expanded.
  • Hotel demand and pricing improved, while performance varied by market. Florida and New England were especially strong in Q3; the D.C. Metro region declined 0.6% in comparable RevPAR for the quarter.
  • Interest expense increased 6.9% in Q3 and 5.0% YTD, partly because of debt-redemption costs, despite lower average rates and debt balances. YTD cash from operations increased, while cash balances declined following investment, debt and distribution activity.
  • YTD earnings shifted from a loss to a profit largely because of the $48 million disposition gain; continuing operations remained loss-making.

Outlook, commentary and risks

  • Management forecast 2012 comparable hotel RevPAR growth of 6.25%–7.0%, citing favorable trends through the first three quarters and fourth-quarter group revenue on the books up 7.5%. It cautioned that the presidential election and holiday timing could make Q4 results volatile.
  • For 2013, management expected demand to outpace supply and anticipated RevPAR growth, primarily from room-rate increases. It estimated upper-upscale supply growth of about 0.5% in its primary markets. Management identified Europe’s financial uncertainty, weak U.S. recovery and fiscal-policy uncertainty as risks.
  • Expected 2012 capital spending: $165–$175 million for redevelopment/ROI projects, $125–$135 million for acquisition-related projects and $330–$340 million for renewals and replacements. Overall 2013 capital expenditures were expected to be below 2012 levels.
  • Debt actions included issuing $450 million of 4.75% senior notes due 2023 and a $500 million five-year floating-rate term loan, while redeeming higher-coupon notes. Management said YTD refinancing reduced the weighted-average interest rate by 80 basis points and extended average maturities by one year. These actions included redemption premiums and debt-extinguishment costs.
  • Significant projects included the Grand Hyatt Washington acquisition for approximately $400 million; a 20-year Vornado lease and redevelopment of retail/signage space at the New York Marriott Marquis; proposed Maui timeshare development; and a planned sale of excess Newport Beach land. Several projects remain subject to agreements, financing, approvals or closing conditions.
  • Contingencies: The company accrued $5 million for general legal proceedings and estimated aggregate losses could reach $37 million, excluding the San Antonio matter. It separately accrued approximately $58 million for San Antonio Marriott Rivercenter ground-lease litigation and funded a $25 million court-ordered escrow. The company was pursuing review by the Texas Supreme Court.
  • Joint venture exposure: Certain Euro JV property loans had covenant defaults and cash sweeps, including cross-collateralized loans with €339 million due in 2013 and a separate €70.5 million loan due in 2014. The loans are non-recourse to Host, but refinancing may require partner equity contributions; lenders could accelerate loans if defaults are not cured.
  • Other stated risks include economic and lodging-demand weakness, operating and renovation risks, debt costs and restrictive covenants, insurance availability, joint-venture and development risks, and REIT qualification requirements. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.

Key facts for investors to verify

  • Whether comparable RevPAR and margin growth continued, and how much resulted from room rates, occupancy, acquisitions or non-comparable properties.
  • How much of YTD net income and FFO reflects the hotel-sale gain and debt-extinguishment or acquisition-cost adjustments.
  • Current liquidity, debt maturities, floating-rate exposure, refinancing costs and share issuance/dilution; the filing’s balance-sheet cash figure was $254 million.
  • Progress and potential funding needs for Euro JV loan restructurings, and developments in the San Antonio litigation and other legal contingencies.
  • Whether the stated 2012 RevPAR and capital-spending outlooks, and proposed value-enhancement projects, were achieved; these are management expectations, not guarantees.