Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. — Q1 2015 10-Q
Business context and reporting period. The filing covers the quarter ended March 31, 2015, compared with Q1 2014. Host Inc. is a self-managed REIT that conducts its operations through Host L.P.; the combined filing reports substantially the same operating and financial results for both. At quarter-end, the company owned 113 hotels, primarily luxury and upper-upscale properties, including 97 in the United States.
Financial and operating performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $1.317 billion | $1.309 billion | +0.6% |
| Operating profit | $144 million | $134 million | +7.5% |
| GAAP operating margin | 10.9% | 10.2% | +70 bps |
| Net income | $104 million | $185 million | -43.8% |
| Net income attributable to Host Inc. | $98 million | $179 million | -45.3% |
| Diluted EPS | $0.13 | $0.24 | -45.8% |
| Adjusted EBITDA | $321 million | $308 million | +4.2% |
| NAREIT FFO per diluted share | $0.35 | $0.32 | +9.4% |
| Adjusted FFO per diluted share | $0.35 | $0.33 | +6.1% |
- Comparable hotel revenue increased 3.0% to $1.267 billion; comparable hotel EBITDA grew 5.0% to $324 million, and its margin rose 50 bps to 25.6%.
- Comparable RevPAR increased 3.8% in constant U.S. dollars, driven by a 4.8% increase in average room rate, partly offset by a 0.7 percentage-point decline in occupancy. In nominal U.S. dollars, RevPAR rose 3.0%.
- Cash provided by operations was $173 million, versus $171 million. Investing activities used $167 million, including $125 million of renewal and replacement capital expenditures and $45 million for redevelopment/ROI projects. Financing activities used $198 million, chiefly reflecting $197 million of common dividends. Cash fell by $199 million to $485 million.
- At March 31, total assets were $12.010 billion and total debt was $3.968 billion, down from $3.992 billion at year-end. Debt had a reported average interest rate of 4.8%, average maturity of five years, and 79% fixed-rate exposure.
Material changes and notable items
- Net income declined mainly because gains on asset sales were $108 million lower year over year: $4 million in Q1 2015 versus $112 million in Q1 2014. The prior-year gain included the sale of an 89% interest in the Philadelphia Marriott Downtown; Q1 2015 included a $3 million gain on the Delta Meadowvale sale.
- Operating profit improved despite modest total revenue growth, supported by lower corporate and other expenses ($24 million versus $34 million) and lower interest expense ($51 million versus $58 million). Adjusted EBITDA growth was partly offset by dispositions exceeding acquisitions.
- The company sold the Delta Meadowvale Hotel & Conference Centre for approximately C$40 million (about $31 million), plus C$2 million (about $2 million) for its FF&E replacement fund.
- Q1 renewal and replacement spending increased to $125 million from $76 million; redevelopment/ROI spending rose to $45 million from $14 million. The company said renovation-related disruption was significant.
- The 11th edition of the Uniform System of Accounts for the Lodging Industry was adopted January 1, 2015. Management estimated it reduced Q1 comparable RevPAR growth and comparable hotel EBITDA margin by about 20 bps each, while increasing comparable food-and-beverage revenue growth by about 300 bps.
Outlook, capital plans, and risks
- Management expected 2015 comparable RevPAR growth of 4.5%–5.5% in constant U.S. dollars, with growth primarily rate-driven. It anticipated continued U.S. lodging demand strength, but also higher supply growth than in recent years, while still below historical industry levels.
- Management cautioned that New York and Washington, D.C. weakness, renovation and redevelopment disruption, and continued U.S. dollar strength could weigh on 2015 results. New York and Washington together represented approximately 27% of annual revenue. Seven properties were expected to be excluded from comparable statistics for 2015 due to projects; management expected meaningful benefits from those projects beginning in 2016.
- Expected 2015 capital spending: $335 million–$355 million for renewal and replacement, and $270 million–$285 million for ROI, redevelopment, and acquisition-related projects. Three hotels were expected to close for redevelopment during Q2.
- In April, the board authorized repurchases of up to $500 million of common stock over 18 months, subject to market conditions and competing investment, dividend, and leverage priorities. A separate February authorization allowed up to $500 million of debt repurchases; the full authorization remained available at quarter-end.
- Host had $485 million of cash and $815 million available under its credit facility. Management said it believed liquidity and capital-market access were sufficient for investment, capital spending, near-term maturities, and potential operating declines. It reported compliance with debt covenants; credit facility leverage was 2.7x versus a 7.25x maximum, and fixed-charge coverage was 5.5x versus a 1.25x minimum.
- A regular $0.20-per-share dividend was paid April 15, 2015, totaling approximately $151 million. Management described this as its intended quarterly dividend for the next several quarters, subject to board approval. REIT status requires distribution of at least 90% of annual taxable income, excluding net capital gains.
- The $400 million 2.5% exchangeable debentures have a holder put option on October 15, 2015 at 100% of principal plus accrued interest. They were exchangeable at quarter-end; conversion could result in approximately 31.1 million shares. This is a material near-term financing and potential dilution consideration.
Risks, contingencies, and unusual matters
- Key stated risks include lodging demand and economic conditions, labor costs, new hotel supply and competition, renovation execution and costs, access to financing and debt covenants, interest and foreign-exchange exposure, property insurance, cyber disruption, regulation, and continued REIT qualification.
- The company reported approximately $4 million accrued for legal proceedings and estimated aggregate losses would not exceed $10 million. It stated it knew of no other matters requiring loss-contingency disclosure, while noting outcomes cannot be assured.
- Currency translation and other comprehensive items produced a $37 million Q1 loss in other comprehensive income, compared with $7 million of income in Q1 2014. The company uses foreign-currency forwards and foreign-currency debt as hedges; interest-rate swaps were reported fully effective.
- Quarterly results are subject to seasonal variation and are not necessarily indicative of full-year performance. Comparable hotel measures, EBITDA, FFO, and adjusted measures are non-GAAP or supplemental measures and should be considered alongside GAAP results.
Important facts for investors to verify
- Whether the 4.5%–5.5% full-year comparable RevPAR outlook was achieved, and how renovations, closures, and the U.S. dollar affected results.
- The timing, funding, and returns of the projected $605 million–$640 million of 2015 capital projects, including expected hotel closures and 2016 benefits.
- The October 2015 debenture put, any refinancing or repayment, and any resulting cash needs or share dilution.
- Actual use of the $500 million stock-repurchase and debt-repurchase authorizations, relative to acquisitions, dividends, and leverage targets.
- Comparable-property performance in New York, Washington, D.C., Houston, and Canada, and the extent to which U.S. dollar strength affected reported results.
- Reconciliation of non-GAAP measures to GAAP results and the impact of the accounting presentation change on comparisons.