Host Hotels & Resorts, Inc. — Q3 2016 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and nine months ended September 30, 2016, compared with the corresponding 2015 periods. Host Inc. is a self-managed REIT that conducts its hotel business through Host L.P.; the combined filing reports substantially the same operations for both. At quarter-end, the consolidated portfolio included 96 hotels, with 88 included in comparable-hotel statistics.
Financial and operating performance
- Revenue: Q3 revenue was $1.295 billion, up 0.9%; nine-month revenue was $4.093 billion, up 1.7%. Comparable-hotel revenue increased 3.3% in Q3 and 3.1% year to date.
- Profit and per-share measures: Q3 net income was $108 million versus $87 million; net income attributable to Host Inc. was $107 million, or $0.14 per diluted share, versus $85 million, or $0.11. Nine-month net income was $643 million versus $400 million; Host Inc.-attributable income was $636 million, or $0.85 per diluted share, versus $395 million, or $0.53.
- Margins and operating measures: GAAP operating profit was $144 million in Q3 and $534 million year to date; operating margin rose 70 basis points to 11.1% in Q3 and 90 basis points to 13.0% year to date. Comparable hotel EBITDA margin increased 110 basis points to 26.6% in Q3 and 90 basis points to 28.0% year to date. Comparable RevPAR rose 3.8% in Q3 and 3.0% year to date on a constant-dollar basis. Adjusted EBITDA was $342 million in Q3 and $1.123 billion year to date; adjusted FFO per diluted share was $0.37 and $1.28, respectively. These are non-GAAP measures.
- Cash flow: Nine-month operating cash flow was $917 million, versus $802 million. Investing activities used $13 million, compared with $697 million used in 2015; financing activities used $789 million, compared with $517 million. Cash and equivalents increased by $119 million to $340 million.
- Debt and liquidity: Total debt was $3.752 billion, down from $3.867 billion at December 31, 2015. Average interest rate was 3.7%, average maturity 5.3 years, and 65% of debt was fixed-rate. The company reported $688 million of available credit-facility capacity at September 30; after a subsequent $60 million net revolver draw, it reported $628 million available. Credit-facility covenant ratios were within stated limits.
Material changes versus prior comparable periods
- Nine-month net income increased substantially, driven in large part by $245 million of gains on asset sales versus $62 million in 2015. The year-to-date increase also reflected lower interest expense, including the absence of $21 million of 2015 debt-extinguishment costs.
- Q3 results included $12 million of business-interruption proceeds related to the 2010 BP oil spill. Q3 asset-sale gains were $14 million versus $5 million.
- Operating performance improved, but total revenue growth was partly offset by hotel dispositions. Comparable RevPAR gains reflected stronger occupancy and room rates; corporate transient demand remained weak.
- During 2016 the company sold ten hotels, receiving $467 million net proceeds year to date, and acquired the Key Bridge Marriott ground lease for $54 million. It repurchased 13.1 million shares for approximately $206 million year to date.
- Adoption of a consolidation accounting standard led to deconsolidation of the Fort Lauderdale Marriott Harbor Beach partnership. This changed reported assets, liabilities, revenue and affiliate earnings; the filing says it did not affect total Host Inc. stockholders’ equity or attributable net income.
Outlook, commentary, risks and contingencies
- Management estimated full-year 2016 comparable RevPAR growth of 2.0%–2.5% on a constant-dollar basis. It expected softer corporate demand, international travel challenges and increased hotel supply to constrain growth into 2017; management also cited continued U.S. job, wage and consumer-confidence strength.
- Management expected 2016 renewal and replacement capital spending of approximately $300–$310 million and ROI, redevelopment and acquisition-related spending of approximately $200–$215 million. It anticipated declaring a fourth-quarter dividend of $0.25 per share, including a $0.05 special dividend; future dividends remain subject to board approval.
- Management cited business-travel weakness, rising supply, rate pressure, labor costs, economic and geopolitical uncertainty, foreign-exchange exposure, renovation disruption, insurance and cyber risks, and dependence on hotel managers. Following Marriott’s acquisition of Starwood, approximately 81% of the company’s properties were managed or franchised by Marriott.
- The company accrued approximately $5 million for legal proceedings and estimated aggregate losses would not exceed $10 million; it cautioned that outcomes cannot be assured. The filing identifies no other matters requiring loss-contingency disclosure.
- The forthcoming lease accounting standard was expected to result in recognition of an estimated $400–$500 million right-of-use asset and related liability, primarily for ground leases, with minimal income-statement impact anticipated.
Important facts for investors to verify
- How much of earnings growth reflects recurring hotel operations versus disposition gains and the BP-related payment; review the company’s non-GAAP reconciliations and adjustments.
- Whether RevPAR and margin trends persist as corporate transient demand weakens and new supply is expected to outpace demand in key markets.
- Available revolver capacity after subsequent draws, debt maturities and covenant headroom, and the effect of variable-rate exposure.
- Actual capital spending, hotel renovation impacts, asset-sale proceeds and remaining share-repurchase activity; the program had $117 million of capacity at September 30 and was scheduled to expire December 31, 2016.
- Board action on the anticipated fourth-quarter dividend and the company’s ability to sustain distributions while funding investment and capital needs.
- Potential operating and integration effects of Marriott’s management of a large majority of the portfolio, as well as foreign-market, legal and other disclosed risks.