Host Hotels & Resorts, Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and year-to-date ended September 10, 2010; comparative periods ended September 11, 2009. Financial amounts are in millions of dollars unless noted. Host is a hotel-owning REIT focused primarily on luxury and upper-upscale properties.
Financial and operating performance
| Metric | Q3 2010 | Q3 2009 | Year-to-date 2010 | Year-to-date 2009 |
|---|---|---|---|---|
| Total revenue | $1,006 | $903 | $2,943 | $2,818 |
| Operating profit (loss) | $23 | $(8) | $131 | $116 |
| Net loss attributable to Host | $(58) | $(55) | $(124) | $(182) |
| Loss per common share | $(0.09) | $(0.09) | $(0.20) | $(0.33) |
| FFO per diluted share | $0.11 | $0.11 | $0.42 | $0.33 |
- Q3 comparable hotel RevPAR rose 8.8% to $118.66, with occupancy up 2.9 percentage points to 73.3% and average room rate up 4.5% to $161.80. Year-to-date comparable RevPAR increased 5.6%, primarily from higher occupancy; average rate declined 1.1%.
- Q3 full-service hotel sales grew 7.4%; total revenue rose 11.4%, partly reflecting the change in accounting for 71 HPT-leased hotels after their subleases ended. Year-to-date full-service sales increased 3.1%.
- Q3 operating profit improved from a loss, while the company remained loss-making after interest and other items. Year-to-date operating profit rose 12.9%, but interest expense increased 1.5% and corporate and other expenses increased 35.3%.
- Comparable hotel adjusted operating profit was $161, up from $138, on comparable sales of $925 versus $865. The implied operating margin was approximately 17.4%, compared with 16.0%. Management said occupancy-led year-to-date growth continued to pressure margins; sustained room-rate growth is needed for stronger margin improvement.
- Year-to-date cash provided by operations was $328, versus $370. Investing used $498 and financing used $634; cash and equivalents fell $804 from $1,642 at year-end 2009 to $838 at September 10, 2010.
- Total debt was $5,424, down from $5,837 at December 31, 2009. Management reported 85% fixed-rate debt, a 6.5% average interest rate and 3.9-year average maturity. Cash was $838 and credit-facility availability was $543 at quarter-end.
Material changes and transactions
- Q3 acquisitions included the W New York, Union Square (90% controlling interest), Westin Chicago River North and Le Meridien Piccadilly leasehold interest. Subsequent to quarter-end, Host acquired the JW Marriott, Rio de Janeiro. The filing reports $532 of 2010 acquisitions and investments, including a European mortgage-note investment.
- Host redeemed $225 face amount of Series K senior notes and recorded a $7 debt-extinguishment loss. It also repaid other debt and redeemed $101 of preferred stock during the year-to-date period.
- Host issued 11.8 million common shares year-to-date for net proceeds of $158.2. A new at-the-market program permits up to $400 of common stock sales; approximately $350 remained available at the time of filing.
- After subtenants failed to meet net-worth covenants, Host terminated subleases on 71 hotels leased from HPT effective July 6 and began recording hotel operations from July 7. Q3 included $50 of hotel revenue, $37 of hotel expense and $19 of rent expense for these properties. Host said the properties produced a slight loss.
Outlook, risks and contingencies
- Management forecast 2010 comparable RevPAR growth of 5.5%–6.5%, while noting a more cautious outlook for food, beverage and ancillary revenue. It expected renovation disruption to affect certain markets in Q4, with much of the 2010 renovation work scheduled for November and December.
- Expected 2010 capital expenditures were $300–$320; $149 had been spent year-to-date. Planned work includes guest-room and public-space renovations and a $190 project at the San Diego Marriott Hotel & Marina.
- Management said liquidity was sufficient for near-term maturities, capital expenditures and investment opportunities. It intended to defease the W New York mortgage for approximately $121 in Q4; together with the Rio acquisition, management estimated cash would then be about $670.
- Host was in compliance with credit-facility and senior-note covenants. Credit-facility leverage was 5.6x against a 7.25x maximum; fixed-charge coverage was 1.9x against a 1.10x minimum for 2010. Management cautioned that operating weakness could affect ratings and refinancing costs. The facility’s scheduled maturity was September 2011, with a one-year extension subject to conditions.
- Host accrued approximately $47 for litigation arising from an adverse jury verdict concerning the San Antonio Marriott Rivercenter ground lease. The trial court entered judgment, and Host appealed; the filing notes that Keystone could receive only one of the two principal damage awards. Other legal proceedings were described as ordinary-course matters, with outcomes uncertain.
- Risks highlighted include economic weakness, hotel demand and operating volatility, leverage and covenant exposure, capital needs, reliance on managers and joint-venture partners, REIT qualification, insurance availability, and foreign-currency and interest-rate movements. Management cautioned that interim results may not indicate full-year performance.
Most important facts for investors to verify
- Whether comparable RevPAR growth translates into sustained room-rate gains, stronger margins and improved earnings.
- Cash and liquidity after the Rio acquisition and planned W New York mortgage defeasance, and the timing and cost of upcoming debt maturities.
- Final acquisition accounting and actual operating contribution from the newly acquired hotels; some purchase-price allocations remained preliminary.
- Resolution and final financial exposure from the Rivercenter litigation appeal and the HPT lease arrangements, including expected deferred proceeds and lease expirations.
- Actual 2010 capital spending, renovation disruption, and performance against management’s RevPAR outlook.
- Share issuance under the at-the-market program and its effect on per-share results and ownership dilution.