Host Hotels & Resorts, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. Host is a self-managed REIT that owns primarily luxury and upper-upscale hotels through Host Hotels & Resorts, L.P. At June 30, 2019, its consolidated portfolio comprised 90 hotels, including 85 in the United States. Host Inc. owned approximately 99% of Host L.P. The filing reports the quarter and six months ended June 30, 2019, compared with 2018; financial amounts below are in millions except per-share data. The interim financial statements are unaudited.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Revenue | $1,483 | $1,518 | $2,873 | $2,864 |
| Operating profit | $280 | $263 | $496 | $434 |
| GAAP operating margin | 18.9% | 17.3% | 17.3% | 15.2% |
| Net income | $290 | $211 | $479 | $467 |
| Net income attributable to Host Inc. | $286 | $209 | $472 | $462 |
| Diluted EPS | $0.39 | $0.28 | $0.64 | $0.62 |
| Adjusted EBITDAre | $460 | $476 | $867 | $846 |
| Adjusted FFO per diluted share | $0.53 | $0.54 | $1.01 | $0.97 |
- Hotel operating trends: Comparable RevPAR declined 1.5% in Q2 and 1.2% YTD on a constant-dollar basis, primarily reflecting lower occupancy. Comparable Total RevPAR increased 0.1% and 0.2%, respectively. Comparable hotel EBITDA margin was 32.5% in Q2, down 20 basis points, and 30.45% YTD, up 15 basis points.
- Cash flow: YTD operating cash flow was $624, down from $655. Investing activities used $460, including $602 for acquisitions, $240 of capital expenditures, and $385 of net asset-sale proceeds. Financing activities used $611, including $200 of share repurchases and $334 of common dividends. Cash, cash equivalents and cash held in the FF&E replacement fund totaled $1,310 at June 30; balance-sheet cash and equivalents were $1,107.
- Debt and liquidity: Total debt was $3,864, with a 4.3% weighted-average interest rate, 3.7-year weighted-average maturity and 73% fixed-rate share. No consolidated hotels were mortgaged. The company reported $943 of unused revolver capacity at quarter-end. Its August 1 credit-facility refinancing increased the revolver to $1.5 billion and extended term-loan and revolver maturities. At June 30, leverage was 1.8x against a 7.25x maximum; fixed-charge coverage was 6.6x against a 1.25x minimum; unsecured interest coverage was 9.7x against a 1.75x minimum. The company reported covenant compliance.
- Other balance-sheet items: Total assets were $12,525. Adoption of the new lease standard resulted in $590 of right-of-use assets and $599 of lease liabilities at June 30. The company reported $1,846 of undiscounted future lease payments, predominantly for ground leases.
Material changes versus prior comparable periods
- Q2 revenue fell 2.3%; management attributed a $30 reduction to the net effect of acquisitions and dispositions. YTD revenue increased 0.3%, as acquisitions more than offset dispositions.
- Q2 net income rose 37.4%, primarily because of a $57 gain on asset sales. YTD net income rose 2.6%, while the gain on asset sales declined to $62 from $120 in the prior-year period.
- Adjusted EBITDAre declined 3.4% in Q2 but increased 2.5% YTD. Adjusted FFO per diluted share declined 1.9% in Q2 and increased 4.1% YTD.
- The company repurchased 10.9 million shares for $200 during Q2. By August 6, it had repurchased 14.6 million shares for $262 in total, including 3.7 million shares purchased after quarter-end. On August 5, the board raised the repurchase authorization from $500 to $1 billion; $738 remained available after the reported purchases.
Outlook, management commentary and risks
- Management forecast full-year 2019 comparable RevPAR to decrease 1.0% to 0.0% on a constant-dollar basis, citing softer lodging-demand expectations, economic and trade uncertainty, a strong U.S. dollar, and above-average supply growth in some markets. It expected stronger second-half results than first-half results, with leisure demand remaining strong.
- Management estimated Marriott transformational-capital-program disruption would reduce 2019 comparable RevPAR by approximately 50 basis points, with Marriott operating-profit guarantees expected to provide $23 in 2019. The guarantees are part of a four-year program with potential guarantees of up to $84.
- Expected 2019 capital expenditures were $550–$610, including $315–$345 for return-on-investment projects and $235–$265 for renewals and replacements. Approximately $225 was expected to relate to the Marriott program.
- Three hotels sold after quarter-end for $189, including FF&E funds; management expected to recognize an approximately $98 gain in Q3. Five additional properties were under contract with expected Q3 closings, but the company cautioned completion was not assured.
- The company cited risks including weaker lodging demand, labor and operating-cost inflation, renovations and hotel competition, geopolitical and trade uncertainty, supply growth, reliance on Marriott as a major manager, debt covenants and financing conditions, insurance and cyber risks, and the ability to maintain REIT qualification. It reported minimal legal accruals and no known loss contingency requiring disclosure, while noting litigation outcomes cannot be assured.
- The regular quarterly dividend was $0.20 per share, paid July 15, 2019. Management said this was its intended regular quarterly dividend for the next several quarters, subject to board approval. The filing states Host must distribute at least 90% of annual taxable income, excluding net capital gain, to retain REIT status.
Important facts for investors to verify
- Whether RevPAR and occupancy trends improve as forecast, and how group demand, market supply and renovation-related disruption affect results.
- How much of reported earnings growth reflects asset-sale gains versus recurring hotel operations; compare GAAP results with Adjusted EBITDAre and FFO.
- Completion, proceeds and expected gains from post-quarter hotel sales and the five properties under contract.
- Actual spending on the Marriott capital program, project disruption, operating guarantees received and resulting returns.
- Debt-facility terms and covenants after the August refinancing, future borrowing costs, and liquidity needs after repurchases, dividends and capital spending.
- Whether the announced repurchase and dividend plans remain appropriate as operating conditions and investment opportunities change.