Host Hotels & Resorts, Inc. — Q1 2019 Form 10-Q
Business context and reporting period. Host is a self-managed REIT that owns luxury and upper-upscale hotels, with operations conducted through Host Hotels & Resorts, L.P. At March 31, 2019, its portfolio included 93 hotels: 88 in the United States, three in Brazil and two in Canada. Figures below are in U.S. dollars; financial results compare the quarter ended March 31, 2019 with Q1 2018 unless stated otherwise.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $1.390 billion | $1.346 billion | Up 3.3% |
| Operating profit | $216 million | $171 million | Up 26.3% |
| GAAP operating margin | 15.5% | 12.7% | Up 280 bps |
| Net income | $189 million | $256 million | Down 26.2% |
| Net income attributable to Host Inc. | $186 million | $253 million | Down 26.5% |
| Diluted earnings per share | $0.25 | $0.34 | Down $0.09 |
| Adjusted EBITDAre | $406 million | $370 million | Up 9.7% |
| Adjusted FFO per diluted share | $0.48 | $0.43 | Up 11.6% |
| Comparable hotel EBITDA margin | 28.1% | 27.6% | Up 50 bps |
| Comparable RevPAR, constant U.S. dollars | Down 1.0% | — | Occupancy down 180 bps; average room rate up 1.3% |
Comparable hotel revenue was nearly flat, up 0.2% to $1.184 billion. Domestic comparable RevPAR fell 1.2%, while international comparable RevPAR rose 11.4% on a constant-dollar basis. Revenue growth for the full portfolio was substantially supported by acquisitions; property transactions added a net $38 million of revenue year over year.
Net income fell mainly because the gain on asset sales was $5 million versus $120 million in Q1 2018. Improved operating profit partly offset that comparison. Adjusted EBITDAre and FFO measures are non-GAAP; the filing provides reconciliations.
Cash flow, debt and liquidity
- Cash provided by operations was $207 million, down from $248 million. Management attributed the decline primarily to payment of 2018 federal and state income taxes; cash taxes paid were $66 million versus $1 million.
- Investing activities used $428 million, including the $610 million acquisition of 1 Hotel South Beach and $110 million of capital expenditures, partly offset by $276 million of asset-sale proceeds. Financing activities used $261 million, primarily for dividends and distributions. Cash and cash equivalents declined to $1.082 billion from $1.542 billion at year-end.
- Additional reported liquidity included $191 million in the FF&E replacement fund and $944 million of available revolver capacity. These amounts are distinct from balance-sheet cash.
- Total debt was $3.862 billion, with a 4.3% weighted-average interest rate and 3.9-year weighted-average maturity; 73% was fixed-rate. No consolidated hotels were encumbered by mortgage debt, and management reported no significant debt maturities until 2020.
- The company reported compliance with debt covenants. Credit-facility ratios included leverage of 1.9x against a 7.25x maximum and fixed-charge coverage of 6.3x against a 1.25x minimum.
Material changes, transactions and outlook
- Host acquired the 429-room 1 Hotel South Beach on February 14 for a total purchase price of $610 million. Consideration included $23 million of preferred OP units classified as debt and $3 million of common OP units.
- Host sold The Westin New York Grand Central for $302 million, including approximately $20 million of FF&E funds retained by the company; it recorded a $3 million gain. After quarter-end, it sold The Westin Mission Hills Golf Resort & Spa for $27 million; the hotel was classified as held for sale at March 31.
- Adoption of lease accounting on January 1 resulted in recognition of a $616 million right-of-use asset and $625 million lease liability on the March 31 balance sheet. The filing says adoption did not materially affect operations or cash flows.
- Management forecast full-year 2019 comparable RevPAR growth of 0.0%–2.0% on a constant-dollar basis and capital expenditures of $550 million–$625 million, including approximately $225 million for the Marriott transformational capital program. Management expected stronger results in the second half than the first half, while noting uncertainty around that outlook.
- The Marriott program covers 17 hotels over an expected four-year period. Renovation disruption was expected to reduce 2019 comparable RevPAR by about 45 bps; management expected $23 million of Marriott operating-profit guarantees in 2019. The guarantees are part of a stated program of up to $84 million over four years.
- The board declared a regular quarterly dividend of $0.20 per share, paid April 15, 2019. Management described this as its intended regular quarterly dividend for coming quarters, subject to board approval.
Management commentary and principal risks
Management cited solid economic indicators, consumer confidence and labor-market conditions as potential supports for travel demand, but expected above-average hotel supply growth and economic uncertainty to constrain RevPAR. Q1 demand was affected by the government shutdown, renovations and fewer citywide events in some markets. Atlanta and Jacksonville benefited from the Super Bowl and group business; New York and Chicago were among the weaker markets. Other risks identified include labor and operating-cost increases, trade and geopolitical uncertainty, a stronger U.S. dollar, debt covenant restrictions, reliance on Marriott as a major manager, renovation disruption, competition, and the ability to maintain REIT tax status and insurance coverage.
The company reported routine legal proceedings and minimal related accruals, estimating aggregate losses would not be material; it said it was not aware of a matter requiring disclosure of a reasonably possible material loss contingency. Actual outcomes remain uncertain. Management also cautioned that interim results are seasonal and are not necessarily indicative of full-year performance.
Important facts for investors to verify
- How comparable RevPAR and occupancy trends develop, especially in weaker markets and as renovation and government-shutdown effects recede.
- Whether the 0.0%–2.0% full-year RevPAR outlook and $550 million–$625 million capital-spending plan remain achievable, and whether Marriott guarantees offset renovation disruption as expected.
- The operating contribution and financing implications of 1 Hotel South Beach, including the preferred OP units classified as debt.
- Cash available after acquisitions, capital spending, dividends and required FF&E reserves, alongside debt maturities and covenant headroom.
- The sustainability of dividend payments and the effect of asset sales, acquisition activity and non-GAAP adjustments on reported earnings and FFO.