HOST HOTELS & RESORTS, INC. annual report, FY2019

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Host Hotels & Resorts, Inc. — 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. This combined filing covers Host Hotels & Resorts, Inc. (a REIT) and Host Hotels & Resorts, L.P., through which substantially all properties and operations are held. The company owned 80 hotels with approximately 46,700 rooms at year-end; most are luxury or upper-upscale U.S. properties operated by third parties. Marriott-managed or franchised hotels generated approximately 68% of 2019 revenue.

Financial and operating performance

  • Revenue: $5.469 billion, down 1.0% from $5.524 billion in 2018. Rooms revenue fell 3.3%; food and beverage revenue rose 1.9%, and other revenue rose 8.3%.
  • Comparable hotel trends: Comparable RevPAR decreased 0.6% in constant dollars, reflecting occupancy down 80 basis points to 78.9%, partly offset by slightly higher average daily rate. Comparable Total RevPAR rose 1.0%; comparable hotel revenue increased 0.9% to $4.397 billion.
  • Profit: Net income was $932 million versus $1.151 billion in 2018; net income attributable to Host Inc. was $920 million versus $1.087 billion. Diluted EPS declined 14.3% to $1.26. Operating profit was $799 million versus $530 million, and GAAP operating margin increased to 14.6% from 9.6%.
  • Recurring operating measures: Adjusted EBITDAre was $1.534 billion, down 1.8%. Comparable hotel EBITDA was $1.275 billion, up 0.7%, with a 29.0% margin versus 29.05%. NAREIT FFO per diluted share fell 4.0% to $1.70; Adjusted FFO per diluted share rose 0.6% to $1.78. These are non-GAAP measures and are not substitutes for cash flow or net income.
  • Cash flow and investment: Cash provided by operations was $1.250 billion, down from $1.300 billion. Investing activities provided $58 million net, including $1.192 billion of asset-sale proceeds, $602 million of acquisitions, and $558 million of capital expenditures. Financing activities used $1.315 billion. Year-end cash and cash equivalents were $1.573 billion; an additional $176 million was held in FF&E replacement reserves.
  • Balance sheet and liquidity: Total assets were $12.305 billion and debt was $3.794 billion. Cash interest rates applied to 74% of debt; approximately 26% was floating rate. The weighted-average interest rate was 3.8%, and weighted-average debt maturity was 5.4 years. The company reported $1.5 billion of available revolver capacity, no significant debt maturities until 2023, and compliance with debt covenants. Credit-facility covenant ratios included 1.6x leverage versus a 7.25x maximum.
  • Capital returns: Host Inc. declared $0.85 per share of dividends in 2019 and repurchased 27.8 million shares for $482 million. A further 7.5 million shares were repurchased for $127 million through February 22, 2020. A $0.20-per-share quarterly dividend was authorized for payment in April 2020.

Changes, transactions, and unusual items

  • Revenue declined partly because dispositions exceeded acquisitions: the net effect of portfolio transactions reduced 2019 revenue by $116 million versus 2018. Host sold 14 hotels in 2019 for approximately $1.192 billion net and acquired 1 Hotel South Beach for $610 million.
  • Net income was affected by lower asset-sale gains: “other gains” were $340 million in 2019 versus $902 million in 2018. The 2018 comparison included major gains on the sale of the New York Marriott Marquis retail units and the Euro joint venture. In 2019, hotel-sale gains were approximately $339 million.
  • 2018 included $260 million of impairment expense, compared with $14 million in 2019. The lower prior-year impairment burden helped drive the reported increase in operating profit and GAAP margin, despite lower revenue.
  • Interest expense increased to $222 million from $176 million, including $50 million of cash prepayment premiums and accelerated financing-cost recognition related to refinancing. The company issued $650 million of 3.375% senior notes due 2029 and used proceeds and cash to redeem $650 million of higher-coupon notes due 2021 and 2022.
  • Adoption of the lease accounting standard added $595 million of right-of-use assets and $606 million of lease liabilities at year-end; management reported no material effect on 2019 operating results or cash flows. Future minimum operating lease payments totaled $1.773 billion, largely related to ground leases.

Outlook, management commentary, and risks

  • 2020 outlook: Management forecast comparable RevPAR growth of 0.0%–1.0% on a constant-dollar basis. It expected group business and food-and-beverage revenue to support results, while business travel remained subdued. Expected wage and benefit increases of approximately 5% and above-inflationary hotel operating costs were expected to pressure margins.
  • Planned 2020 capital expenditures were $550 million–$650 million, including $180 million–$200 million for Marriott’s transformational capital program. Projects include renovations, hotel and meeting-space expansions, and resort improvements.
  • Management described the 2020 environment as uncertain, citing slower expected economic growth, trade and election uncertainty, above-average new supply, and the coronavirus outbreak’s uncertain travel and economic effects, particularly in gateway cities. The forecast was not assured.
  • Key business risks include lodging-cycle exposure; supply growth and competitive short-term rentals; labor-cost inflation; reliance on third-party hotel managers and Marriott; concentration in major urban and resort markets; substantial capital needs; and limited ability to sell some hotels without management-contract constraints. The company also cited natural-disaster, climate, insurance, cyber, interest-rate and LIBOR-transition risks.
  • Marriott’s disclosed Starwood guest-reservation database breach remained a notable exposure; Marriott reported unauthorized access dating back to 2014, and the company stated the ultimate reputational and operating impact was uncertain. No material environmental claim was identified as pending or threatened. Ordinary-course legal proceedings were not expected to materially affect financial condition, though period results could be affected.
  • The independent auditor issued an unqualified opinion on the financial statements. Host Inc. management and the auditor reported effective internal control over financial reporting as of year-end; Host L.P. did not have a separate auditor attestation on internal controls.

Important facts for investors to verify

  • Whether 2020 RevPAR guidance and the expected group-business contribution are supported by subsequent operating results, especially given coronavirus-related travel disruption and new supply.
  • Whether labor and other hotel operating costs reduce comparable EBITDA margins, and how much of the reported 2019 GAAP margin improvement reflects the absence of 2018 impairment charges.
  • Cash needs for the $550 million–$650 million capital program, ground-lease obligations, dividends and repurchases, alongside available liquidity and debt maturities.
  • The realized returns and operating disruption associated with the Marriott transformational capital program, including its stated $84 million of operating-profit guarantees over four years.
  • Potential business and reputation effects from Marriott’s data breach, and any subsequent legal, regulatory, insurance or guest-demand developments.
  • How the company’s strategy to focus on its domestic portfolio and pursue acquisitions, dispositions and additional share repurchases develops after year-end.