Host Hotels & Resorts, Inc. — Q2 2009 Form 10-Q
Business context and reporting period. Host is a lodging REIT with interests in 113 hotel properties, operating through Host Hotels & Resorts, L.P. The quarter ended June 19, 2009 (12 weeks); year-to-date covers 24 weeks. Prior-year comparisons ended June 13, 2008. Unless noted, financial amounts are in millions.
Financial performance and liquidity
| Metric | Q2 2009 | Q2 2008 | YTD 2009 | YTD 2008 |
|---|---|---|---|---|
| Total revenue | $1,064 | $1,388 | $1,936 | $2,430 |
| Operating profit | $45 | $272 | $62 | $405 |
| Net income (loss) attributable to common stockholders | $(68) | $183 | $(127) | $238 |
| Diluted EPS | $(0.12) | $0.34 | $(0.24) | $0.45 |
| Funds from operations (FFO) per diluted share | $0.12 | $0.55 | $0.22 | $0.88 |
| Cash provided by operations | $255 | $441 |
- Q2 total hotel sales fell 23.7%; comparable RevPAR fell 24.9%, with average room rate down 14.6% and occupancy down 9.1 percentage points to 67.0%.
- YTD comparable RevPAR declined 22.7%. Comparable hotel adjusted operating profit was $260 million for Q2 versus $419 million, and $448 million YTD versus $696 million.
- Operating costs declined less than revenue: property-level costs fell 9.1% in Q2 and 7.9% YTD. Higher depreciation and impairment charges contributed to the sharp operating-profit decline.
- At June 19, cash and equivalents were $1.346 billion, up from $508 million at year-end 2008. Total debt was $6.093 billion versus $5.876 billion; total assets were $12.472 billion and total liabilities $6.350 billion. The company reported $600 million available under its credit facility.
- Debt had a 6.1% weighted-average interest rate, 4.5-year weighted-average maturity and 89.7% fixed-rate share. Cash from financing was $634 million YTD; investing activities used $51 million.
Material changes and unusual items
- Q2 included $57 million of noncash property impairment charges and a $34 million noncash impairment of the European joint-venture investment. The company reported total noncash impairments of $91 million in Q2 and $131 million YTD, including charges classified in discontinued operations.
- Host issued 75.75 million common shares in April at $6.60 per share, receiving approximately $480 million net. In May, it issued $400 million of 9% senior notes due 2017, receiving approximately $380 million net; proceeds partly repaid $200 million on the revolving credit facility.
- YTD debt actions included repurchasing $75 million face amount of 2004 exchangeable debentures for about $69 million, recognizing a $3 million gain. After quarter-end, Host repurchased another $22 million face amount of 2007 debentures for about $18 million.
- Host sold the Hyatt Regency Boston for approximately $113 million in Q1. After quarter-end, it sold three hotels for approximately $64 million net and expected a roughly $10 million gain in Q3. The San Diego Marriott mortgage of $175 million was repaid July 1.
- A newly adopted convertible-debt accounting rule increased reported noncash interest expense through discount amortization, but did not affect cash interest payments. The company also adopted updated non-controlling-interest presentation requirements.
Outlook, risks and contingencies
- Management expected lodging demand to continue declining through the rest of 2009, with luxury hotels particularly exposed. It anticipated occupancy stabilizing near current levels but continued pressure on room rates, group activity, banquet and food-and-beverage revenue. Management noted some moderation in occupancy declines and improved group-booking pace versus Q1, but booking lead times remained short and uncertain.
- Host suspended its common cash dividend until the fourth quarter and significantly reduced capital spending. It expected 2009 renewal and replacement expenditures of $170–$180 million and repositioning/ROI spending of $170–$180 million. Management said liquidity was sufficient to meet anticipated operating needs, capital spending and near-term maturities.
- Management intended to declare a common dividend of $0.23–$0.25 per share in the first half of September, expected to be about $0.03 in cash with the balance in shares and paid by year-end. A preferred-stock cash dividend of $0.5546875 per share was paid July 15.
- Approximately $480 million of debt, including principal amortization, matured through 2010 as of June 19. Holders may require cash repurchase of the 2004 exchangeable debentures on April 15, 2010. Credit-facility and senior-note covenants were reported in compliance; the company disclosed reduced covenant headroom as hotel operations weakened.
- The European joint venture’s cross-collateralized mortgage loans total €345 million and mature in 2013. Management warned that operating deterioration could trigger covenant or payment defaults later in 2009; lenders had been approached about a workout or waivers. The loans are non-recourse to Host and would not trigger default on Host debt.
- Other disclosed risks include recession-related demand weakness, reduced corporate and group travel, lower leisure spending, H1N1-related effects at the Mexico City hotel, and foreign-currency exposure. Results are subject to seasonality and management estimates, including impairment valuations.
Key facts for investors to verify
- Whether hotel demand and room rates stabilized or deteriorated after June 19, particularly group bookings, luxury resorts and international properties.
- Cash generation, available credit, covenant headroom and ability to address near-term maturities and the 2010 debenture put date.
- Progress of the European joint venture’s lender discussions and any covenant cures, waivers, defaults or further impairment.
- Actual proceeds and gains from post-quarter hotel sales, and whether planned capital spending and the proposed stock-heavy common dividend were implemented as described.
- The filing reports Q2 and YTD noncash impairment totals in MD&A that combine property and affiliate charges; verify the classifications and components when comparing periods.