Host Hotels & Resorts, Inc. and L.P. — Q2 2023 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and six months ended June 30, 2023, compared with the same 2022 periods. Host is a hotel-owning REIT; its portfolio comprised 77 predominantly luxury and upper-upscale hotels, with 75 included in comparable-hotel results. Host Inc. owns approximately 99% of Host L.P.; the entities’ operating results and debt are substantially the same.
Financial and operating performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $1.393B | $1.381B | $2.774B | $2.455B |
| Operating profit | $249M | $327M | $497M | $449M |
| Net income | $214M | $260M | $505M | $378M |
| Net income attributable to Host Inc. | $210M | $256M | $497M | $372M |
| Diluted EPS | $0.29 | $0.36 | $0.70 | $0.52 |
| Adjusted EBITDAre | $446M | $500M | $890M | $806M |
| Adjusted FFO per diluted share | $0.53 | $0.58 | $1.08 | $0.97 |
Q2 revenue rose 0.9%, but operating profit fell 23.9% and net income fell 17.7%. Comparable RevPAR increased 2.7% and Total RevPAR increased 3.8%, primarily on room-rate growth. Comparable hotel EBITDA margin declined to 32.7% from 37.1%; GAAP operating margin fell to 17.9% from 23.7%. Higher wages and staffing, insurance and utility costs pressured margins. For the six months, revenue grew 13.0%, while operating profit margin was 17.9% versus 18.3%. Comparisons benefited from pandemic-affected early 2022 results; the first-half 2023 results also included a $69M gain on the sale of The Camby.
Cash from operations was $820M for the six months, up from $708M. Investing used $275M, including $323M of capital expenditures and joint-venture investment, partly offset by asset-sale and insurance proceeds. Financing used $396M, principally for dividends and share repurchases. Cash and cash equivalents were $802M at June 30; the FF&E replacement fund held $213M. Total debt was $4.210B, with a 4.5% weighted-average interest rate and 4.7-year weighted-average maturity; 76% was fixed-rate. The company reported $1.5B available under its revolving credit facility and compliance with financial covenants. Total assets were $12.365B and total liabilities $5.220B.
Changes, outlook, risks and unusual items
- Year-to-date revenue and operating cash flow improved, while Q2 profitability and margins declined amid higher operating costs and increased interest expense. Interest expense was $45M in Q2, versus $37M a year earlier.
- Management expects full-year 2023 comparable RevPAR growth of 7%–9%. It anticipates total capital expenditures of $625M–$725M, including $125M–$175M for Hurricane Ian restoration. Outlook is subject to substantial macroeconomic uncertainty; demand trends remain uneven across markets and business types.
- Management cited continued group-business growth and gradual recovery in business-transient travel, but moderating transient demand in San Francisco, Seattle and resort markets. Wage and benefit rate inflation was expected to be approximately 5% in 2023.
- Hurricane Ian restoration and business interruption remain significant contingencies. Estimated reconstruction and remediation costs, including enhancements, were $260M–$285M. The company recorded $130M of property-damage costs and a corresponding insurance receivable; $113M had been received and $17M remained receivable at June 30. Expected potential insurance recovery was estimated at $310M for covered costs, but sufficiency is not assured. The Ritz-Carlton, Naples reopened July 6, 2023.
- A $72M loan to the buyer of The Camby contributed to notes receivable of $485M. The Sheraton Boston buyer’s loan matured August 1, 2023; Host agreed to forbear enforcement through September 30, increased the all-in interest rate from 6.5% to 12%, and received a 10% principal paydown, among other consideration.
- The company declared a regular $0.15-per-share quarterly dividend, paid July 17, 2023. It repurchased $50M of shares in Q1; none in Q2. A $600M at-the-market share offering program had not been used as of June 30. A $1B senior-note repurchase authorization also remained available.
- Other risks include recession, inflation and interest rates, labor availability and costs, hotel competition, renovation execution, natural disasters and insurance recovery, financing and covenant constraints, and reliance on hotel operators. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether RevPAR growth reaches the 7%–9% full-year outlook, and whether recovery in group and business-transient demand offsets softer transient and resort demand.
- Actual Hurricane Ian reconstruction costs, timing and total insurance recovery, including collection of the remaining receivable and any business-interruption proceeds.
- Repayment or resolution of the Sheraton Boston loan following the forbearance period, and collectability and terms of the company’s other hotel-sale loans.
- Execution of the $625M–$725M capital plan and impact of wage, insurance, utility and interest costs on margins and cash generation.
- Liquidity and covenant headroom, debt costs and maturities, and the effects of any share issuance, buybacks or future dividend decisions.