Business context and reporting period
Host Hotels & Resorts, Inc. filed a combined 10-K with Host Hotels & Resorts, L.P. for the year ended December 31, 2010. Host Inc. is a REIT and owns approximately 98.4% of Host L.P.; substantially all hotel assets and operations are held in the partnership. The company owns hotels operated by third-party managers, principally in the luxury and upper-upscale segments. At year-end it owned or controlled 113 hotels; the filing cites 120 hotels and 62,897 rooms as of February 18, 2011, including subsequent portfolio changes.
Although the request references 2010 Q4, this is an annual filing. Fourth-quarter figures are summarized separately below. Hotel-statistics reporting periods can differ from the calendar-year financial reporting periods.
Financial and operating performance
| Metric | 2010 | 2009 |
|---|---|---|
| Revenue | $4.437 billion | $4.144 billion |
| Operating profit | $223 million | $149 million |
| Net loss | $132 million | $258 million |
| Loss per diluted share | $0.21 | $0.45 |
| Cash from operations | $520 million | $552 million |
| Capital expenditures | $309 million | $340 million |
| Year-end debt | $5.477 billion | $5.837 billion |
| Year-end cash and cash equivalents | $1.113 billion | $1.642 billion |
Revenue increased 7.1%; owned-hotel revenue rose 5.0%. Comparable hotel RevPAR increased 5.8%, with occupancy up 3.8 percentage points to 70.2% and average room rate up 0.1%. GAAP operating profit margin was approximately 5.0%, versus 3.6% in 2009. Adjusted EBITDA, a non-GAAP measure, was $824 million, up 3.3%; Host Inc. FFO per diluted share was $0.68, up 33% as reported by management.
Fourth-quarter 2010 revenue was $1.494 billion, operating profit $91 million, net loss $6 million and diluted loss per share $0.01. In Q4 2009, the respective figures were $1.326 billion, $33 million, $72 million and $0.12.
Interest expense was $384 million, compared with $379 million. About 90% of debt carried fixed rates, subject to the filing’s stated swap arrangements; weighted-average interest rate was 6.2% and average maturity 4.4 years. At year-end, $542 million was available under the credit facility. Covenant leverage was 5.0x and interest coverage 3.0x; the company reported compliance with its debt covenants. Common dividends declared were $0.04 per share for 2010.
Material changes versus prior period
- The lodging recovery lifted comparable RevPAR and operating profit, reversing part of the severe 2009 downturn. Gains were led initially by occupancy; room-rate growth strengthened in the second half.
- Net loss narrowed by $126 million. Comparability was affected by 2009 impairment charges of $131 million, a $41 million litigation accrual and $31 million of disposition gains; 2010 included $21 million of debt-extinguishment costs and $10 million of acquisition costs. No impairment charges were recorded in 2010.
- Debt fell by $360 million year over year after repayments and refinancing, while Host issued $500 million of 6% senior notes and raised $406 million net from common-stock offerings. Cash declined by $529 million as the company funded acquisitions, capital spending and debt repayments.
- After subtenant covenant defaults, Host ended subleases on 71 HPT-leased hotels in July 2010 and began recording their hotel operations. This contributed $92 million to other revenue growth but resulted in a $13 million net loss for those properties in 2010. The 18 Residence Inn master leases ended in December 2010; the 53 Courtyard leases are scheduled to expire December 31, 2012.
Outlook, risks and unusual items
Management forecast comparable RevPAR growth of 6%–8% in 2011, expecting gains from both occupancy and room rates and continued low industry supply growth. Planned 2011 ROI and repositioning spending was approximately $290–$310 million. Management said liquidity and capital-market access were sufficient for near-term maturities, capital spending and investment opportunities, while noting that forecasts depended on economic recovery and travel demand.
Host completed a seven-hotel New Zealand acquisition for approximately $145 million, including $80 million of mortgage debt, on February 18, 2011. It also reported agreements to acquire the New York Helmsley Hotel for $313.5 million and Manchester Grand Hyatt San Diego for $570 million, subject to closing conditions. Management anticipated deploying more than $900 million of cash for announced acquisitions. A February 22, 2011 Christchurch earthquake led to evacuations at two newly acquired hotels; the filing said damage was not yet assessable.
Material risks include cyclical hotel demand, high fixed operating costs, substantial indebtedness and refinancing needs, covenant restrictions, interest-rate and currency exposure, renovation requirements, reliance on third-party managers, labor actions, insurance limitations, REIT qualification and access to external capital. A Texas jury verdict concerning the San Antonio Marriott Rivercenter ground lease led to an approximately $47 million accrual; Host appealed the judgment. The European joint venture also negotiated covenant relief on certain loans, including escrow and capital-spending commitments; its debt is described as non-recourse to Host.
KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether the 2011 RevPAR forecast of 6%–8% was achieved, and whether rate growth—not just occupancy—supported margins.
- Final closing costs, financing and returns for the announced New York and San Diego acquisitions, alongside the New Zealand earthquake’s property and operating impact.
- Progress on debt maturities and refinancing, particularly the $526 million exchangeable-debenture put option in April 2012, covenant headroom and credit-facility extension.
- Outcome of the Rivercenter appeal and any change to the $47 million litigation accrual or ultimate cash exposure.
- Results and obligations related to HPT leases, including collection of deferred proceeds and the 2012 Courtyard lease expiration.
- Cash available after acquisition commitments, required hotel investment and debt service; reported cash and undrawn credit capacity should not be treated as freely deployable without considering these uses.