Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The combined filing reports substantially identical operating and balance-sheet results for the REIT and its operating partnership; amounts below are in U.S. dollars unless noted.
Business context
Host is a hotel-owning REIT. At June 30, 2015, its consolidated portfolio comprised 111 primarily luxury and upper-upscale hotels, including 95 in the United States. Comparable operating statistics covered 101 hotels.
Financial and operating performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Total revenue | $1.449 billion | $1.431 billion | $2.766 billion | $2.740 billion |
| Net income | $216 million | $159 million | $320 million | $344 million |
| Net income attributable to Host Inc. | $212 million | $155 million | $310 million | $334 million |
| Diluted EPS | $0.28 | $0.21 | $0.41 | $0.44 |
| GAAP operating profit | $227 million | $225 million | $371 million | $359 million |
| Adjusted EBITDA | $422 million | $411 million | $743 million | $719 million |
| Adjusted FFO per diluted share | $0.46 | $0.43 | $0.81 | $0.76 |
- Comparable hotel RevPAR increased 4.8% in Q2 and 4.4% year to date on a constant-dollar basis. Q2 rate growth was 4.5%; occupancy increased 0.2 percentage points.
- Comparable hotel EBITDA rose 4.8% in Q2 and 5.1% year to date; margins improved 25 basis points to 29.95% in Q2 and 40 basis points to 28.0% year to date. GAAP operating margin was 15.7% in Q2 and 13.4% year to date.
- Operating cash flow was $562 million for the first half, versus $525 million in 2014. Investing activities used $566 million, compared with $12 million provided in the prior-year period; financing activities used $410 million, versus $960 million used.
- Cash and cash equivalents were $262 million at June 30, down from $684 million at year-end 2014. Total debt was $4.053 billion, up from $3.992 billion. Management reported a 4.5% average debt rate, 5.4-year average maturity, and 78% of debt at fixed rates.
- Available credit-facility capacity was $730 million. Management reported compliance with debt covenants; the reported credit-facility leverage ratio was 2.8x against a 7.25x maximum.
Material changes and notable items
- Q2 net income increased 35.8%, principally reflecting improved operations and a $53 million gain on hotel sales. First-half net income declined 7.0%, mainly because gains on asset sales were lower than in 2014 ($57 million versus $111 million) and debt-extinguishment costs increased.
- Interest expense rose to $73 million in Q2 from $55 million, including $15 million of cash and $6 million of non-cash debt-extinguishment costs in the first half. Q2 interest expense included the costs associated with the refinancing.
- In May, Host issued $500 million of 4% senior notes due 2025, with an effective rate of 3.93%, and used the proceeds and cash on hand to redeem $500 million of 5⅞% notes due 2019 for $515 million.
- Host acquired The Phoenician, a 643-room Scottsdale resort, for $400 million in June. It sold three hotels in Q2 for approximately $143 million and recorded a $53 million gain; the Delta Meadowvale disposition occurred in Q1.
- The company repurchased 6.55 million shares for approximately $131 million under its $500 million authorization, leaving approximately $369 million available. It declared a $0.20-per-share quarterly dividend, paid July 15, 2015.
- Renovation disruption, acquisitions and dispositions, and currency translation weighed on reported growth. Management estimated the stronger U.S. dollar reduced revenue by $9 million in Q2 and $16 million year to date; comparable international RevPAR fell 5.9% in Q2 on a constant-dollar basis.
Outlook, risks, and contingencies
- Management forecast 2015 comparable RevPAR growth of 4.5%–5.0% on a constant-dollar basis, expecting second-half growth to exceed first-half performance. It anticipated continued U.S. lodging demand growth and rate-led RevPAR gains, while noting that New York and Houston weakness and a strong U.S. dollar could persist.
- Management expected 2015 renewal and replacement capital expenditures of approximately $335–$355 million and ROI, redevelopment, and acquisition capital expenditures of $270–$285 million. Seven properties were undergoing major redevelopment or repositioning; management expected meaningful benefits beginning in 2016.
- Risks cited include changes in economic conditions and lodging demand, increased labor costs, market supply and competition, renovation disruption and capital needs, foreign currency exposure, debt costs and covenant restrictions, insurance availability, cybersecurity, and maintaining REIT tax status. Interim results are seasonal and not necessarily indicative of full-year performance.
- Host accrued approximately $4 million for legal proceedings and estimated aggregate losses would not exceed $10 million; the filing cautions that outcomes cannot be assured. No other disclosure-required reasonably possible unfavorable legal matters were identified.
- A Euro JV hotel sale generated a distribution to Host of approximately $21 million after quarter-end. Host’s share of the JV’s non-recourse debt was approximately €305 million; this debt is not an obligation of Host.
Key facts for investors to verify
- Whether comparable RevPAR and hotel-margin trends support the 4.5%–5.0% full-year outlook, particularly given renovation disruption and weakness in New York and Houston.
- How much reported earnings growth reflects recurring hotel operations versus property-sale gains, JV earnings, and debt-extinguishment costs; review reconciliations for Adjusted EBITDA and FFO, which are non-GAAP measures.
- Funding and returns on The Phoenician acquisition and the substantial renovation and redevelopment program, including the expected timing of benefits.
- Debt maturities and the October 2015 put option on the $400 million exchangeable debentures, as well as liquidity after dividends, share repurchases, and capital spending.
- Foreign-exchange effects and operating conditions in international markets, and the status and potential exposure of legal contingencies.