Business context and reporting period
Host Hotels & Resorts, Inc. is a self-managed REIT operating through Host Hotels & Resorts, L.P.; this combined Form 10-Q covers the quarter and nine months ended September 30, 2015. The company primarily owns luxury and upper-upscale hotels. At quarter-end, it owned 110 consolidated hotels, including 99 classified as comparable.
Financial and operating performance
Amounts are in millions except per-share data and percentages. Comparisons are with the corresponding 2014 period.
| Metric | Q3 2015 | Q3 2014 | YTD 2015 | YTD 2014 |
|---|---|---|---|---|
| Revenue | $1,287 | $1,294 | $4,053 | $4,034 |
| Operating profit | $132 | $202 | $503 | $561 |
| GAAP operating margin | 10.3% | 15.6% | 12.4% | 13.9% |
| Net income attributable to Host Inc. | $85 | $144 | $395 | $478 |
| Diluted EPS | $0.11 | $0.19 | $0.53 | $0.63 |
| Adjusted EBITDA | $323 | $331 | $1,066 | $1,050 |
| NAREIT FFO per diluted share | $0.34 | $0.42 | $1.12 | $1.17 |
| Adjusted FFO per diluted share | $0.34 | $0.34 | $1.15 | $1.10 |
- Comparable hotel RevPAR rose 2.8% in Q3 and 3.9% YTD in constant U.S. dollars. Q3 comparable hotel revenue increased 2.1%; comparable hotel EBITDA was flat at $315 million, and its margin declined 55 basis points to 25.65%. YTD comparable hotel EBITDA grew 3.5% to $1,045 million, with margin up 10 basis points to 27.3%.
- Q3 RevPAR growth reflected a 2.3% rate increase and occupancy up 30 basis points to 80.3%. Nominal-dollar RevPAR growth was 1.6%; international RevPAR fell 20.7% in nominal dollars due to currency effects.
- YTD cash from operations was $818 million, versus $764 million. Investing activities used $702 million, including $402 million for acquisitions and $472 million of renewal/replacement and redevelopment/acquisition-related capital expenditures. Financing activities used $521 million. Cash declined $419 million to $265 million.
- At September 30, total debt was $4.278 billion, versus $3.992 billion at year-end 2014. The company reported a 4.3% average interest rate, 5.2-year average maturity and 73% fixed-rate debt. Cash was $265 million; revolver capacity available was $791 million, with another $200 million available under the delayed-draw term loan. About 96% of hotel revenues were from properties unencumbered by mortgage debt.
Material changes and notable items
- Q3 net income fell mainly because Q3 2014 included a $69 million reversal of previously accrued litigation costs; 2015 corporate and other expenses were $21 million versus a $38 million benefit in 2014. YTD earnings also reflected lower gains on asset sales and higher debt-extinguishment costs.
- The stronger U.S. dollar reduced revenue by an estimated $15 million in Q3 and $32 million YTD, and Adjusted EBITDA by $8 million and $18 million, respectively. Renovations at non-comparable hotels reduced revenue by an estimated $18 million in Q3 and $39 million YTD.
- The company acquired The Phoenician for $400 million in June. Recent acquisitions and dispositions, net, reduced revenue by $21 million in Q3 and $63 million YTD and Adjusted EBITDA by $11 million and $27 million, respectively.
- In 2015, Host repurchased $352 million of common stock through September 30 and paid $498 million in common dividends. In October, it authorized a further $500 million repurchase program; total available authorization was then $600 million.
Outlook, risks and contingencies
- Management forecast full-year 2015 comparable RevPAR growth of 4.0%–4.5% in constant U.S. dollars and expected stronger RevPAR growth in 2016, without providing a specific 2016 target. The outlook cited group booking pace and anticipated demand growth, but noted risks from global economic weakness, a strong dollar, oil-market softness and underperformance in markets including Houston, Calgary and New York.
- Expected 2015 capital spending was $275–$290 million for ROI, redevelopment and acquisition-related projects, plus $345–$360 million for renewals and replacements. Management estimated that three repositioned hotels could generate about $18 million of net income and $26 million of hotel-level EBITDA in 2016 versus 2015; these were preliminary internal forecasts and not assured.
- Subsequent to quarter-end, the company issued $400 million of 4.5% senior notes due 2026 and planned to use proceeds, cash and additional borrowing to redeem $500 million of 6% notes for $515 million. It also gave notice to redeem $391 million of exchangeable debentures; management expected holders to elect shares, potentially resulting in about 32.1 million shares issued.
- Host announced its intention to exit the Asia-Pacific market and expected to sell six remaining properties in Australia and New Zealand over the following 12 months; timing and completion were not assured. Its European joint venture sold eight hotels after quarter-end and anticipated a $29 million gain at the joint-venture level.
- Management reported compliance with credit-facility and senior-note covenants. Legal proceedings in the ordinary course had a $4 million accrual; estimated aggregate losses were not expected to exceed $10 million. The filing notes that actual outcomes may differ and identifies lodging demand, labor costs, debt and refinancing conditions, renovation execution, insurance, cyber incidents, currency movements, and REIT qualification among relevant risks.
Important facts for investors to verify
- Whether RevPAR and hotel-margin trends, especially in international markets and weaker U.S. locations, meet management’s full-year outlook.
- How renovations, repositioning projects and elevated capital expenditures affect hotel cash generation and the projected 2016 improvement.
- Completion and financing terms of the planned debt redemptions, and the actual share dilution from exchangeable debentures.
- Progress and proceeds from planned hotel dispositions, the Asia-Pacific exit, and the use of sale proceeds for repurchases, investment or other purposes.
- Cash, debt, available credit capacity, covenant compliance and dividend/repurchase decisions as operating conditions and capital needs evolve.