Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. — Q1 2017 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2017; unaudited. Host Inc. is a self-managed REIT that conducts operations through Host L.P. and owns approximately 99% of its partnership interests. The consolidated portfolio comprised 97 primarily luxury and upper-upscale hotels, including 90 comparable hotels.
Financial and operating performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $1.348 billion | $1.339 billion |
| Operating profit / GAAP margin | $171 million / 12.7% | $151 million / 11.3% |
| Net income | $161 million | $184 million |
| Net income attributable to Host Inc. | $158 million | $182 million |
| Diluted EPS | $0.21 | $0.24 |
| Adjusted EBITDA | $367 million | $345 million |
| NAREIT FFO and Adjusted FFO per diluted share | $0.44 | $0.41 |
| Cash provided by operations | $209 million | $219 million |
| Cash used in investing activities | $384 million | $47 million |
| Cash provided by (used in) financing activities | $208 million | ($152 million) |
Comparable RevPAR increased 3.4% in constant U.S. dollars (3.6% nominal), from 0.7 percentage-point higher occupancy and a 2.4% increase in average room rate. Comparable hotel revenue rose 3.1%, comparable hotel EBITDA rose 6.5% to $324 million, and comparable hotel EBITDA margin improved 85 basis points to 26.75%. Domestic comparable RevPAR grew 3.8%; international comparable RevPAR fell 7.1% in constant U.S. dollars.
At March 31, 2017, total debt was $3.988 billion, up from $3.649 billion at year-end 2016. The company reported a 3.8% average interest rate, 5.1-year average maturity, and 69% of debt at fixed rates. Cash and cash equivalents were $411 million; the revolver had $784 million of available capacity. Including restricted cash and cash in the furniture, fixtures and equipment replacement fund, cash-flow-statement cash totaled $584 million.
Changes versus the prior comparable period
- Revenue increased 0.7%; operating profit rose 13.2%, and GAAP operating margin expanded 140 basis points. Management attributed margin improvement to stronger food-and-beverage profits, labor productivity, and lower insurance premiums.
- Net income declined 12.5%, primarily because gains on asset sales were $17 million versus $59 million in Q1 2016. The smaller gains more than offset improved operating profit and higher affiliate earnings. Adjusted EBITDA increased 6.4%, while diluted EPS declined 12.5%.
- Cash from operations decreased $10 million, reflecting operating improvement offset by affiliate distributions received in Q1 2016 but not repeated in 2017. Investing cash use increased with acquisitions, partly offset by asset-sale proceeds.
- During Q1, Host acquired W Hollywood for $219 million, The Don CeSar and Beach House Suites for $214 million, and the Miami Marriott Biscayne Bay ground lease for $38 million. It sold the JW Marriott Desert Springs Resort & Spa for $172 million, including $12 million of replacement funds retained at the hotel.
Outlook, management commentary, and risks
Management forecast full-year 2017 comparable RevPAR growth of 0.0% to 2.0% in constant U.S. dollars. It expected Q1 operations to likely exceed the remaining quarters, citing the Washington, D.C. inauguration and Women’s March and the shift of Easter into Q2. Management cited cautious business spending, expected accelerating hotel supply, and uncertainty about lodging demand as constraints. The filing provides no earnings or revenue guidance.
For 2017, management expected $90 million to $115 million of redevelopment and return-on-investment capital expenditures and $275 million to $300 million of renewal-and-replacement expenditures. A regular dividend of $0.20 per share was paid April 17, 2017. A $500 million common-stock repurchase authorization remained unused at quarter-end; a separate authorization to repurchase up to $250 million of debt also remained fully available.
On March 20, Host issued $400 million of 3.875% Series G senior notes due 2024, receiving approximately $395 million net proceeds. Proceeds repaid $250 million previously drawn on the revolver and were also designated for general corporate purposes. The company reported compliance with debt covenants; credit-facility ratios included leverage of 2.6x versus a 7.25x maximum and fixed-charge coverage of 7.3x versus a 1.25x minimum.
Risks highlighted include economic weakness and reduced lodging demand, geopolitical and political developments affecting international travel, accelerating supply and hotel competition, labor and operating cost increases, renovation disruption and capital needs, debt covenant restrictions and refinancing costs, reliance on third-party managers (including Marriott’s management of a significant portion of the portfolio), foreign currency exposure, cyber incidents, insurance recovery, and REIT qualification requirements. Results are seasonal and interim performance may not indicate full-year results.
Legal proceedings in the ordinary course of business had approximately $5 million accrued; management estimated aggregate losses could be as much as $17 million. The filing states there can be no assurance as to outcomes.
Important facts for investors to verify
- Track RevPAR and hotel supply trends against the 0.0%–2.0% full-year outlook, particularly performance outside Washington, D.C. and in international markets.
- Assess whether operating and comparable-hotel margin gains persist after the unusually strong Q1 calendar and event effects.
- Review acquisition returns, disposition proceeds and gains, and the planned capital-expenditure program alongside operating cash flow and dividend commitments.
- Monitor debt balances, available revolver capacity, covenant headroom, refinancing conditions, and the effect of floating-rate debt and foreign-exchange exposure.
- Reassess the estimated $5 million legal accrual against the disclosed potential aggregate loss of up to $17 million and any material developments.