Host Hotels & Resorts, Inc. — 2009 Form 10-K
Reporting period: Year ended December 31, 2009. This is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included below. Unless noted, financial amounts are in millions of dollars. Host is a lodging REIT that owns luxury and upper-upscale hotels operated by third parties. At year-end it reported 111 owned or controlled properties; its February 2010 portfolio description lists 110 consolidated hotels and a separate European joint-venture portfolio.
Financial and operating performance
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Total revenue | $4,158 | $5,139 | Down 19.1% |
| Hotel sales | $4,051 | $5,020 | Down 19.3% |
| Operating profit | $98 | $739 | Down 86.7% |
| Net income (loss) attributable to Host | $(252) | $395 | Declined $647 |
| Net income (loss) available to common stockholders | $(261) | $386 | Declined $647 |
| Diluted EPS | $(0.45) | $0.72 | Down $1.17 |
| FFO per diluted share | $0.51 | $1.71 | Down $1.20 |
| Cash provided by operating activities | $552 | $1,020 | Down $468 |
| Capital expenditures | $340 | $672 | Down $332 |
- Hotel trends: Comparable RevPAR fell 19.9%, reflecting a 13.5% decline in average room rate and a 5.4 percentage-point decline in occupancy. Comparable hotel adjusted operating profit was $871, down from $1,348.
- Margins: GAAP operating margin was approximately 2.4% of revenue in 2009, versus 14.4% in 2008. Property-level costs declined only 9.3% as revenue fell, illustrating operating deleverage and the burden of relatively fixed costs.
- Debt and liquidity: Year-end debt was $5,837; cash and cash equivalents were $1,642, with another $600 available under the credit facility. Debt was $5,876 at year-end 2008. The filing reports 88% of debt at fixed rates, a 6.6% weighted average interest rate and 4.4-year weighted average maturity. After $470 of debt repayments in early 2010, debt was approximately $5.4 billion.
- Debt capacity: At December 31, 2009, the company reported compliance with covenants. Credit-facility leverage was 5.3x against a 7.25x maximum; fixed-charge coverage was 1.7x against a 1.05x 2009 minimum; unsecured interest coverage was 2.7x against a 1.75x minimum. The senior-note EBITDA-to-interest coverage ratio was 2.5x against a 2.0x minimum.
- Debt maturities and financing: The company repaid $346 of Series M notes and a $124 mortgage in Q1 2010. After these repayments, it reported $334 of 2010 maturities; 2011 maturities were $430, including a $300 Orlando World Center Marriott mortgage that may be extendable subject to conditions. Holders had a put right on $325 of 2004 exchangeable debentures in April 2010 and $526 of 2007 debentures in April 2012.
- Capital raised and dividends: Host issued approximately 104 million common shares in 2009 for $767 net proceeds and raised debt proceeds as well. The $0.25-per-share special common dividend was paid 90% in stock and 10% in cash; cash common dividends were $42 in 2009 versus $522 in 2008. Management intended to reinstate a $0.01-per-share quarterly common dividend beginning in Q1 2010, subject to applicable restrictions.
Fourth-quarter comparison
Reported Q4 2009 revenue was $1,331, operating profit $30 and net loss $72, or $(0.12) per diluted share. Q4 2008 revenue was $1,600, operating profit $217 and net income $111, or $0.18 per diluted share. Quarterly comparisons should be interpreted cautiously: hotel managers use different reporting calendars, and Host’s fourth quarter contains more operating days than its first three quarters.
Material changes versus 2008
- The recession and reduced corporate and leisure travel drove sharp declines in occupancy, room rates, group demand and ancillary sales. Total hotel sales fell $969; rooms revenue declined 19.9% and food-and-beverage revenue 20.1%.
- Operating expenses fell 9.3%, substantially less than revenue. Depreciation and amortization increased 18.9% to $662, including impairment charges and depreciation associated with prior capital investment. Corporate and other expenses rose to $116 from $58, including a litigation accrual.
- Cash from operations declined to $552 from $1,020. Host raised approximately $1.9 billion through financing and asset sales during the year, increasing year-end cash and supporting debt repayment and liquidity.
- Host sold six hotels in 2009 for approximately $204 of proceeds and recognized $26 of net-of-tax gains on dispositions. It completed no hotel acquisitions.
Outlook, commentary and risks
- 2010 outlook: Management expected continued pressure on lodging fundamentals, with no significant industry improvement until key economic indicators showed sustained growth. It anticipated some occupancy improvement from 2009 lows, but expected room-rate pressure to persist. Management forecast 2010 capital expenditures of $270–$300.
- Supply and longer-term view: Management expected limited new hotel construction to constrain supply growth in 2010–2012, potentially supporting performance in later years if demand recovers. It expected distressed acquisition opportunities might emerge in 2011–2012, but did not provide earnings or RevPAR guidance.
- Impairments: Host recorded $131 of 2009 non-cash impairment charges: $97 related to hotel properties, including $31 in discontinued operations, and $34 for its European joint-venture investment. Management stated further charges could result if economic conditions remained weak.
- Litigation: A February 2010 jury verdict concerning land beneath the San Antonio Marriott Rivercenter awarded damages on alternative claims plus exemplary damages. Host accrued approximately $41 in Q4 2009 based on possible outcomes and intended to pursue post-trial motions and appeal. The verdict was not final when reported.
- European joint venture: Host’s 32.1%-owned venture had €718 of mortgage debt, including €414 of loans with financial-covenant breaches under lender discussions. Cross-collateralization could transmit a default across properties in a portfolio. The debt was non-recourse to Host, but the venture could face acceleration, cash sweeps or other remedies.
- Other material risks: High debt and refinancing needs; covenant and dividend restrictions; dependence on external capital and third-party hotel managers; operating costs that may not fall with revenue; property capital needs; insurance, labor, environmental, foreign-exchange and REIT-qualification risks. The company also disclosed potential exposure to mortgage cash escrows and contingent lease guarantees.
- Audit and controls: KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective.
Important facts for investors to verify
- Whether hotel demand, occupancy and room rates stabilized or recovered, and how comparable RevPAR and hotel-level margins subsequently performed.
- Whether the $325 million 2004 debenture put was met and how remaining 2010–2012 maturities, including the Orlando mortgage and 2012 debenture put, were funded or extended.
- Actual post-year-end debt, unrestricted cash, credit-facility availability and covenant headroom, including the effects of debt repayments and any additional financing.
- The final outcome and cash exposure from the San Antonio Rivercenter litigation, compared with the $41 million accrual.
- Developments in the European joint venture’s covenant negotiations, cash flows, debt remedies and potential need for additional capital.
- Actual 2010 capital spending and common dividends, and the dilution and proceeds associated with share issuance and exchangeable debentures.