Host Hotels & Resorts, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone fourth-quarter filing. The filing combines Host Inc. and Host L.P.; Host Inc. is a REIT and owns approximately 98.7% of Host L.P., which holds and operates substantially all assets.
Business context
Host owned 115 hotels at year-end 2013, primarily luxury and upper-upscale properties, and operated through third-party hotel managers. Its portfolio was concentrated in the United States; foreign operations contributed about 5% of revenue. Host also held non-controlling interests in international and domestic joint ventures.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $5.166 billion | $5.059 billion |
| Operating profit / GAAP operating margin | $512 million / 9.9% | $362 million / 7.2% |
| Net income | $325 million | $63 million |
| Continuing operations income (loss) | $210 million | ($8 million) |
| Diluted EPS | $0.42 | $0.08 |
| Adjusted EBITDA (non-GAAP) | $1.306 billion | $1.190 billion |
| Adjusted FFO per diluted share (non-GAAP) | $1.31 | $1.10 |
| Cash from operating activities | $1.019 billion | $781 million |
| Capital expenditures | $436 million | $638 million |
| Cash and cash equivalents at year-end | $861 million | $417 million |
| Total debt at year-end | $4.759 billion | $5.411 billion |
- Comparable hotel RevPAR rose 5.8% in constant U.S. dollars; comparable occupancy increased 0.9 percentage points to 76.0%, and average room rate increased.
- Comparable hotel adjusted operating profit margin reached 25.5%, up 100 basis points. Reported revenue growth was partly constrained by the expiration of leases on 53 HPT-leased Courtyard hotels at the end of 2012.
- Net income included $115 million from discontinued operations, including $97 million of after-tax disposition gains. The company also cited lower interest expense, lower impairment expense and higher hotel-disposition gains as contributors to the year-over-year earnings increase.
- At year-end, 71% of debt carried fixed interest rates. The company reported a 3.2x credit-facility leverage ratio and compliance with debt covenants. Available credit-facility capacity was $554 million at year-end and approximately $779 million after subsequent repayments.
- Host declared $0.46 in common-stock dividends for 2013, compared with $0.30 in 2012. The board later authorized a $0.14 quarterly dividend for April 2014.
Material changes and transactions
- Debt fell by $652 million year over year. Host issued $400 million of 3.75% senior notes due 2023 and used proceeds and cash to refinance higher-cost debt; it also repaid or refinanced other notes and mortgages. Interest expense declined 18.5% to $304 million.
- Host issued 16.9 million common shares through at-the-market offerings for net proceeds of about $297 million, funding acquisitions, development and capital projects. It also exchanged $174 million of older debentures for common shares.
- Host acquired the Hyatt Place Waikiki Beach for approximately $138.5 million and completed several hotel and land dispositions. Subsequent to year-end, it sold an 89% interest in the Philadelphia Marriott Downtown and acquired the Powell Hotel.
- Capital spending included $303 million for renewal and replacement, $97 million for redevelopment and ROI projects, and $36 million for acquisition-related projects. Total capital expenditures were down from 2012.
- Host changed to calendar-quarter reporting in 2013. The filing says 2012 quarterly results are not directly comparable with 2013 quarterly results because prior-year hotel-manager reporting periods differed and were not restated.
Outlook, risks and contingencies
- For 2014, management forecast comparable hotel RevPAR growth of 5%–6% in constant U.S. dollars and comparable food-and-beverage and other revenue growth of approximately 3%–4%. It expected growth to be driven mainly by room rates, with occupancy growth similar to 2013.
- Management expected constrained hotel supply and improving demand, while flagging above-average supply growth in New York and Washington, D.C. and uncertainty from economic conditions, government policy, Europe, China and emerging markets.
- Planned 2014 capital spending included $320–$340 million for renewal and replacement, $70–$80 million for redevelopment/ROI projects, and $30–$35 million for acquisition-related projects.
- A significant contingency is the San Antonio Marriott Rivercenter ground-lease lawsuit. Host accrued approximately $68 million and funded a $25 million escrow; an appeal was pending after Texas Supreme Court oral argument in February 2014. The outcome was uncertain.
- Other principal risks include lodging-cycle sensitivity, substantial capital needs, debt and refinancing exposure, interest and foreign-exchange movements, reliance on third-party managers, labor costs and union activity, natural disasters and insurance limits, joint-venture obligations, REIT qualification and related distribution requirements.
- Host’s independent auditor issued an unqualified opinion on the financial statements, and reported effective internal control over financial reporting for Host Inc. Management also reported effective controls for Host L.P.
Important facts for investors to verify
- Reconcile the $325 million net income figure to continuing earnings and disposition-related discontinued operations; assess how much performance was recurring.
- Review comparable RevPAR, occupancy, rate growth and margins by market, particularly the weakness in Latin America and Washington, D.C.
- Check post-year-end debt repayments, the 2015 put option on $400 million of exchangeable debentures, remaining maturities, and actual credit-facility availability.
- Track the San Antonio litigation appeal, escrow and recorded loss accrual, along with any changes in other legal contingencies.
- Compare 2014 guidance and capital-spending plans with subsequent reported results; consider the stated 2012/2013 quarterly comparability limitation.
- Evaluate dividend coverage alongside REIT distribution requirements, capital expenditure needs, leverage and the potential dilution from share issuance or convertible securities.