Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing, not a standalone fourth-quarter report; quarterly figures are included. Amounts below are in U.S. dollars unless noted. Host Inc. is a REIT whose principal asset is its approximately 99% interest in Host L.P.; substantially all operations and debt sit within Host L.P.
Business context and reporting period
Host owns luxury and upper-upscale hotel real estate and relies on third-party operators to manage its properties. At year-end it owned 114 hotels with approximately 59,000 rooms; it also held non-controlling interests in hotel and timeshare joint ventures. About 80% of revenues came from target markets, and 71% came from hotels in New York, Washington, D.C., San Diego, San Francisco, Boston, Florida, Hawaii, Atlanta and Los Angeles.
Financial and operating performance
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $5.354 billion | $5.166 billion |
| Operating profit | $710 million | $512 million |
| Operating profit margin | 13.3% | 9.9% |
| Net income | $747 million | $325 million |
| Diluted EPS, Host Inc. | $0.96 | $0.42 |
| Adjusted EBITDA | $1.402 billion | $1.306 billion |
| Adjusted FFO per diluted share | $1.50 | $1.31 |
| Cash from operating activities | $1.150 billion | $1.019 billion |
| Cash and cash equivalents at year-end | $684 million | $861 million |
| Total debt at year-end | $3.992 billion | $4.759 billion |
- Comparable hotel RevPAR rose 5.7% in constant dollars (5.3% nominal); comparable occupancy increased 60 basis points to 77%, and average room rate rose 4.8% in constant dollars.
- Comparable hotel EBITDA increased 9.8% to $1.318 billion; its margin expanded 120 basis points to 26.5%.
- Interest expense fell $90 million to $214 million, reflecting lower debt and borrowing costs. Weighted-average interest rate was 4.8%; 79% of debt was fixed-rate.
- Capital expenditures totaled $436 million: $324 million for renewal and replacement and $112 million for redevelopment, ROI and acquisition-related projects. Cash used in investing activities was $93 million; financing activities used $1.226 billion.
- Host Inc. declared $0.75 per share in dividends, up 63% from 2013, including a fourth-quarter special dividend. Host L.P. declared distributions of $0.766 per common unit.
Material changes versus the prior comparable period
- Revenue grew 3.6%; operating profit rose 38.7%, and net income increased $422 million. Adjusted EBITDA grew 7.4%, while Adjusted FFO per share increased 14.5%.
- Net income benefited from improved hotel operations, $90 million lower interest expense, $236 million of asset-sale gains and reversal of a previously accrued $69 million litigation loss contingency. These items make the increase in GAAP earnings larger than the improvement in recurring operating measures.
- Host sold five hotels for a total stated sales price of $519 million and acquired two hotels for approximately $133 million. Net revenue from recent acquisitions and dispositions reduced 2014 revenue by $87 million.
- Debt declined by approximately $767 million. The company repaid or refinanced debt and amended its unsecured credit facility, lowering pricing and extending facility maturities, subject to extension conditions.
- Comparisons are affected by adoption of ASU 2014-08: from 2014, property sales are reported in discontinued operations only when they represent a strategic shift. 2014 dispositions remained in continuing operations, while certain 2013 and 2012 dispositions were reported as discontinued operations; prior periods were not restated.
Outlook, commentary, risks and unusual items
- For 2015, management forecast domestic comparable RevPAR growth of 4.75%–5.75%, international comparable RevPAR flat to up 2.0% in constant dollars, and total portfolio RevPAR growth of 4.5%–5.5% in constant dollars. These are forecasts, not guarantees.
- Management expected U.S. lodging demand to remain solid, with growth primarily rate-driven. It cautioned that New York and Washington, D.C. supply additions, a stronger U.S. dollar, weaker international conditions and renovation disruption could weigh on results. Redevelopment and ROI spending was expected to more than double from 2014; planned 2015 spending was $245–$260 million, with renewal and replacement spending of approximately $330–$350 million.
- Year-end liquidity included $684 million in cash and approximately $796 million of available credit-facility capacity. The company reported a 2.6x leverage ratio, 5.2x fixed-charge coverage and 8.5x unsecured interest coverage, and stated it complied with applicable debt covenants.
- A $400 million exchangeable debenture has a holder put option in October 2015; the filing’s maturity schedule assumes exercise of the put. The debentures were exchangeable through March 31, 2015 under the stated share-price conditions. The board separately authorized up to $500 million of debt repurchases in February 2015.
- The Texas Supreme Court reversed the adverse San Antonio Rivercenter litigation judgment; rehearing was denied in October 2014. Host reversed the $69 million accrued loss and a $25 million court bond was released. Separately, the company reported approximately $35 million accrued for other legal proceedings and estimated aggregate losses could reach $57 million.
- Key risks include lodging-cycle and economic sensitivity, high concentration in gateway markets, reliance on third-party managers, ongoing renovation needs, labor and union costs, access to external capital, interest and foreign-exchange movements, natural disasters and limits on insurance. Host also disclosed guarantees related to joint-venture construction loans, including the Maui timeshare project.
- The filing states that KPMG issued unqualified opinions on the financial statements and Host Inc.’s internal control over financial reporting; management also concluded Host L.P.’s controls were effective.
Important facts for investors to verify
- Reconcile GAAP earnings growth with recurring performance: asset-sale gains and the litigation reversal materially affected 2014 results; compare net income with Adjusted EBITDA, FFO and comparable hotel EBITDA.
- Review the 2015 forecast against realized RevPAR, especially in New York and Washington, D.C., internationally, and at hotels undergoing renovations.
- Check the October 2015 debenture put, subsequent refinancing or repayment actions, credit availability and covenant headroom.
- Track planned renovation spending, property-level disruption and whether completed projects deliver expected returns and margin improvements.
- Assess dividend sustainability alongside REIT distribution requirements, operating cash flow, capital needs and debt service; future dividends remain subject to board approval.
- Monitor legal accruals and joint-venture guarantees, foreign-currency exposure, and the effect of the discontinued-operations accounting change on period comparisons.