Host Hotels & Resorts, Inc. — Q2 2011 Form 10-Q
Business context and reporting period. The combined filing covers Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. for the quarter and year-to-date periods ended June 17, 2011, compared with periods ended June 18, 2010. Host Inc. is a REIT and owns approximately 98.5% of Host L.P., which conducts the hotel business. At quarter-end, the company owned or controlled 123 lodging properties: 106 in the United States and 17 internationally.
Financial performance and position
Amounts are in millions of dollars, except per-share data and hotel statistics.
| Metric | Q2 2011 | Q2 2010 | Year-to-date 2011 | Year-to-date 2010 |
|---|---|---|---|---|
| Total revenue | $1,296 | $1,112 | $2,198 | $1,934 |
| Operating profit | $152 | $110 | $150 | $109 |
| Net income (loss) attributable to Host Inc. | $62 | $19 | $2 | $(65) |
| Net income available to common shareholders | $62 | $13 | $2 | $(73) |
| Basic and diluted EPS | $0.09 | $0.02 | $0.00 | $(0.11) |
| Adjusted EBITDA | $313 | $250 | $457 | $376 |
| FFO per diluted share | $0.30 | $0.23 | $0.41 | $0.31 |
- Q2 total revenue rose 16.5%; year-to-date revenue rose 13.7%. Owned-hotel revenue grew 13.8% for the quarter and 10.9% year-to-date. Growth reflects stronger comparable hotel performance and acquisitions; Q2 2011 also included $52 million in revenue from HPT-leased Courtyard properties, which had been reported as rental income in the prior-year comparison.
- Comparable RevPAR increased 6.7% in Q2 and 6.1% year-to-date. Q2 comparable average room rate rose 5.0%, while occupancy increased 1.1 percentage points to 75.2%.
- GAAP operating margin was 11.7% for Q2 versus 9.9%; year-to-date it was 6.8% versus 5.6%. Comparable adjusted operating margin improved 115 basis points to 25.75% in Q2 and 65 basis points to 23.10% year-to-date. Management noted that renovations, acquisitions, depreciation and corporate costs affect comparisons between GAAP and comparable margins.
- Q2 interest expense was $89 million versus $82 million; year-to-date it was $171 million versus $179 million. The quarterly increase included debt-extinguishment costs and interest on newer notes, partly offset by savings from repaid notes.
- Year-to-date operating cash flow was $256 million versus $219 million. Investing activities used $1.290 billion, including $1.035 billion for acquisitions and $240 million of capital expenditures; financing activities provided $555 million. Cash fell $479 million to $634 million from year-end 2010.
- At June 17, total debt was $5.888 billion, compared with $5.477 billion at year-end; total assets were $13.103 billion. Debt had a 6.2% average interest rate and 4.3-year average maturity; 89% was fixed-rate. Cash was $634 million and available credit-facility capacity was $438 million. After subsequent transactions, the company reported debt of approximately $5.6 billion and facility capacity of $479 million.
Material changes and transactions
- Year-to-date acquisitions included the New York Helmsley Hotel, Manchester Grand Hyatt San Diego, a New Zealand hotel portfolio, and a 75% controlling interest in Hilton Melbourne South Wharf. Management described approximately $1.2 billion of hotel acquisitions year-to-date.
- The company issued $500 million of 5.875% Series W senior notes due 2019. Proceeds helped redeem $250 million of Series K notes and repay $50 million drawn on the credit facility. It also issued 16.7 million shares year-to-date through at-the-market offerings, raising net proceeds of $288 million; $209 million of authorization remained.
- After quarter-end, approximately $134 million of 3.25% exchangeable debentures were exchanged for about 8.8 million common shares and $16 million was redeemed for cash. The Le Méridien Piccadilly was contributed to the expanded Euro JV; proceeds funded a $41 million credit-facility repayment.
- On July 14, the company agreed to acquire the 888-room Grand Hyatt Washington, D.C. for $442 million, potentially including assumption of a $166 million mortgage, subject to customary conditions.
Outlook, risks and unusual items
- Management forecast comparable hotel RevPAR growth of 6.0%–7.5% for 2011. It expected hotel demand and room rates to continue improving, but cited economic uncertainty, U.S. unemployment and slower growth, federal debt-limit negotiations, European fiscal weakness, and Middle East and North Africa unrest and energy prices.
- Planned 2011 capital spending was approximately $220 million–$240 million for return-on-investment projects and $320 million–$345 million for renewals and replacements. Management said major renovations at the Sheraton New York Hotel & Towers and Philadelphia Marriott Downtown would continue to weigh on results; wage and benefit increases were also pressuring margins.
- Two acquired Christchurch hotels remained closed after the February 2011 earthquake and were expected to remain closed until at least Q2 2012, potentially longer. The company accrued an estimated $3 million economic loss, citing expected insurance coverage subject to the policy deductible. It reported no additional accrual for the June earthquake.
- Q2 included a $3 million non-cash impairment charge on a held-for-sale property and $5 million of debt-extinguishment costs. Acquisition-related costs were $4 million year-to-date. A separate $48 million loss contingency relates to the San Antonio Marriott Rivercenter. For other legal proceedings, approximately $6 million was accrued and aggregate losses were estimated at up to $8 million.
- The company reported compliance with credit-facility and senior-note covenants. The credit facility matured in September 2011, and the company had notified lenders of its intent to seek a one-year extension, subject to conditions. Hotel operations also face lodging-demand, operating-cost, property-maintenance, financing, foreign-exchange, insurance, regulatory and REIT-qualification risks.
Important facts for investors to verify
- Comparable RevPAR and margin trends, including the effects of renovations, acquisitions and the HPT lease accounting change.
- Cash available after acquisition spending, capital expenditures, dividends and upcoming debt maturities; confirm the credit-facility extension and post-quarter debt figures.
- Whether the stated 2011 RevPAR and capital-spending outlook was achieved, and the effect of wage growth and renovation disruptions.
- Insurance recovery, reopening timing and total economic impact for the Christchurch properties.
- Developments in the San Antonio Marriott Rivercenter matter and other legal contingencies, and final purchase accounting for 2011 acquisitions.