Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. — Q3 2013 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2013. Host Inc. is a self-managed REIT that conducts operations through Host L.P.; it owned approximately 98.7% of Host L.P. and consolidated its results. The portfolio included 118 hotels, primarily luxury and upper-upscale properties.
Comparability caution: Beginning in 2013, the company adopted calendar-quarter reporting. The 2012 reported quarter ended September 7 and is not directly comparable. Management therefore emphasizes estimated “2012 As Adjusted” calendar-period comparisons; these estimates are non-GAAP and are not a restatement of 2012 GAAP results.
Key financial results
| Metric | Q3 2013 | Comparable prior period / change |
|---|---|---|
| Total revenue | $1.223 billion | $1.224 billion, 2012 As Adjusted; down 0.1% |
| Owned hotel revenue | $1.214 billion | Up 5.5% from 2012 As Adjusted |
| Operating profit | $79 million | $75 million, 2012 As Adjusted; up 5.3% |
| Operating margin | 6.5% | 6.1%, 2012 As Adjusted; up 40 basis points |
| Net income attributable to Host Inc. | $19 million | 2012 As Adjusted: net loss attributable of $31 million |
| Adjusted EBITDA | $270 million | $268 million, 2012 As Adjusted |
| Adjusted FFO per diluted share | $0.25 | $0.23, 2012 As Adjusted |
For the nine months ended September 30, 2013, revenue was $3.871 billion (up 1.8% from 2012 As Adjusted), owned hotel revenue was $3.832 billion (up 6.7%), operating profit was $376 million (up 17.9%), and net income attributable to Host Inc. was $194 million (up 125.6% from $86 million). Adjusted EBITDA was $984 million versus $875 million; Adjusted FFO per diluted share was $0.98 versus $0.80.
- Comparable-hotel RevPAR rose 5.5% in both Q3 and year to date. Q3 average room rate increased 4.8% and occupancy rose 0.5 percentage points to 78.4%.
- Year-to-date cash from operations was $697 million versus $424 million. Investing activities used $152 million versus $822 million; financing activities used $606 million versus $175 million. Cash and equivalents declined $63 million to $354 million.
- At September 30, total debt was $4.560 billion, down from $5.411 billion at year-end 2012. Average interest rate was 4.9%, average maturity 5.5 years, and 74% of debt was fixed-rate. The company had $771 million of unused revolver capacity and reported compliance with its financial covenants.
Material changes and significant transactions
- Owned hotel revenue growth reflected comparable-hotel performance, renovations and acquisitions; year-to-date recent acquisitions contributed $61 million of incremental revenue. Total revenue comparisons were affected by termination of leases on 53 HPT-leased hotels at year-end 2012.
- Q3 and year-to-date interest expense fell versus adjusted comparisons, reflecting lower debt balances and interest rates. The company redeemed $400 million of Series T notes and $400 million of Series Q notes during 2013, and repaid a $246 million mortgage on the Orlando World Center Marriott.
- Host Inc. issued 16.9 million shares year to date through at-the-market offerings, raising approximately $297 million net; 6.0 million shares raised approximately $109 million in Q3. In March, $174 million of exchangeable debentures were exchanged for approximately 11.7 million common shares.
- The company acquired the 426-room Hyatt Place Waikiki Beach for approximately $139 million. It sold the Atlanta Marriott Marquis for approximately $293 million and The Ritz-Carlton, San Francisco for approximately $161 million. The Portland Marriott Downtown Waterfront was sold after quarter-end for approximately $87 million.
Outlook, risks and unusual items
- Management forecast full-year 2013 comparable-hotel RevPAR growth of 5.5% to 5.7%. For Q4, it expected continued RevPAR and operating improvement, led mainly by room-rate growth, with some pickup in group demand.
- Management estimated the October 2013 federal government shutdown would reduce Q4 revenue by $8 million to $10 million and net income and Adjusted EBITDA by $6 million to $7 million, particularly affecting Washington, D.C. hotels. Group room nights booked for 2014 were ahead of the 2013 pace and at higher rates, but management cautioned that this did not assure higher revenue.
- Management cited economic uncertainty, unemployment, government spending and fiscal policy, possible monetary tightening, European economic conditions, labor costs, lodging demand, competition, renovation needs, financing access, debt covenants, insurance, foreign exchange and REIT qualification among material risks.
- The company accrued approximately $68 million for San Antonio Marriott Rivercenter ground-lease litigation and had $25 million in restricted cash escrow; it was pursuing rehearing after the Texas Supreme Court denied review. Other legal proceedings had $11 million accrued, with estimated aggregate losses up to $53 million, excluding the San Antonio matter.
- Q3 discontinued operations included recognition of a $14 million deferred gain on the San Francisco hotel sale after closing conditions were met. A remaining gain was subject to performance guarantees through 2016, with maximum payments of $11 million in total. Year-to-date results also included gains on land sales and a previously deferred condemnation gain.
Most important facts for investors to verify
- Assess performance using the company’s estimated 2012 As Adjusted comparisons, while noting the estimates and the 2013 reporting-calendar change.
- Reconcile GAAP net income with Adjusted EBITDA and FFO, including the effects of property sales, acquisitions, discontinued operations and litigation.
- Review debt maturities, the exchangeable-debenture put option, liquidity needs, and the impact of ongoing capital expenditure and dividend commitments.
- Track the San Antonio litigation appeal and the company’s exposure under the San Francisco sale performance guarantee.
- Compare the government-shutdown impact and full-year RevPAR outlook with subsequent reported results.