Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. — Q3 2011 Form 10-Q
Business context and period. The combined filing covers the quarter and year-to-date period ended September 9, 2011, compared with periods ended September 10, 2010. Host Inc. is a REIT and owns approximately 98.5% of Host L.P.; the two entities are managed as one enterprise. The company owned or controlled 121 hotels, including 105 in the United States and 16 internationally. Reported financial amounts below are consolidated and in millions unless noted.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | YTD 2011 | YTD 2010 |
|---|---|---|---|---|
| Total revenue | $1,142 | $1,003 | $3,340 | $2,937 |
| Operating profit | $54 | $23 | $204 | $131 |
| Net loss | $(35) | $(61) | $(32) | $(126) |
| Net loss attributable to Host Inc. | $(33) | $(58) | $(32) | $(124) |
| Basic loss per share | $(0.05) | $(0.09) | $(0.05) | $(0.20) |
| Cash provided by operations | — | $399 | $328 |
- Comparable hotel RevPAR increased 6.4% in Q3 and 6.3% YTD. Q3 comparable average room rate rose 3.7% and occupancy increased 1.9 percentage points. Comparable adjusted operating margin increased 110 basis points in Q3 and 80 basis points YTD; these are company-defined non-GAAP measures.
- Q3 GAAP operating margin was 4.7%, versus 2.3%; YTD it was 6.1%, versus 4.5%.
- At September 9, cash and cash equivalents were $524, down from $1,113 at December 31, 2010. Total debt was $5,488, versus $5,477; total assets were $12,805 and total liabilities $5,886.
- Debt had a 6.4% average interest rate and 4.3-year average maturity; 90% was fixed-rate. Credit-facility availability was $481. The company reported compliance with credit-facility and senior-note covenants.
- YTD investing cash use was $1,357, including $1,047 for acquisitions, $182 for renewals and replacements, and $153 for return-on-investment projects. Financing provided $369; cash decreased $589 overall.
Material changes versus prior period
- Q3 revenue rose 13.9% and YTD revenue 13.7%. Growth reflected comparable-hotel improvement as well as acquisitions; recent acquisitions contributed $79 million of Q3 and $174 million of YTD property-level expenses. Thus, reported growth includes a larger portfolio and is not solely organic.
- Operating profit increased to $54 million in Q3 and $204 million YTD, while the company remained loss-making after interest and other items. YTD net loss narrowed to $32 million from $126 million.
- Cash from operations improved by $71 million YTD. Investment spending rose substantially from the prior year, principally because of acquisitions and higher capital expenditures.
- During 2011 the company acquired the Manchester Grand Hyatt San Diego, New York Helmsley Hotel, Hilton Melbourne South Wharf and a seven-hotel New Zealand portfolio. It transferred Le Méridien Piccadilly to Euro JV Fund II, retaining an indirect 33.4% interest and receiving $40 million cash proceeds.
- Financing included a $500 million senior-note issuance, $289 million net proceeds from equity issuance, debt repayments and exchanges, and the extension of the credit facility maturity to September 9, 2012. The outstanding share count and weighted-average shares increased.
Outlook, commentary and risks
- Management forecast 2011 comparable-hotel RevPAR growth of 6.25%–6.75%, while noting that economic uncertainty had led it to lower expectations slightly. It expected demand to continue improving in Q4, but cautioned that results and margins were not assured.
- Planned 2011 spending was approximately $220–$240 million on return-on-investment projects and $300–$320 million on renewal and replacement capital expenditures. Major projects and renovations were expected to continue affecting operating results, including in Q4.
- Management cited European sovereign-debt concerns, high unemployment, slower-than-expected GDP growth, U.S. fiscal and political uncertainty, and volatile credit markets as risks to lodging demand, financing availability and costs. Hurricane Irene reduced estimated Q3 RevPAR by approximately 60 basis points.
- The company expected approximately $14 million of full-year 2011 losses on HPT-leased hotel arrangements if subtenants continued not to fund rent shortfalls. It was evaluating recovery options.
- Two New Zealand hotels damaged in the February 2011 earthquake remained closed; management expected closures at least through Q2 2012 and estimated the insured economic loss would be capped at approximately $3 million, which was accrued.
- The Grand Hyatt Washington acquisition for $442 million had not closed; closing was extended to December 14, 2011, subject to customary conditions. The $15 million deposit was at risk if the transaction did not close.
- Legal contingencies included approximately $49 million accrued relating to the San Antonio Marriott Rivercenter. For other disclosed proceedings, the company had accrued approximately $6 million and estimated aggregate losses could reach $8 million; outcomes were not assured.
- On September 19, after quarter-end, the board declared a $0.04-per-share dividend, payable October 17, 2011.
Important facts for investors to verify
- How much of revenue and profit growth reflects comparable-property improvement versus acquired hotels, HPT lease accounting changes and other portfolio changes.
- Whether the RevPAR outlook and margin improvement persist, particularly as renovation work, hurricane disruption and uncertain economic conditions affect demand.
- Liquidity after planned capital spending and acquisitions, upcoming debt maturities, credit-facility availability and continued covenant compliance.
- Final purchase accounting and returns for 2011 acquisitions; completion and funding of the Grand Hyatt Washington transaction and exposure of its deposit.
- Actual recovery, insurance proceeds and operating impact for HPT rent shortfalls and the New Zealand earthquake-damaged properties.
- Developments in the San Antonio Marriott Rivercenter litigation and other legal contingencies, including whether recorded accruals prove adequate.