Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed February 26, 2018. This is an annual report, not a standalone fourth-quarter filing. Host Inc. is a REIT and owns approximately 99% of Host L.P., which conducts the hotel business. Unless noted, financial figures are consolidated and in U.S. dollars.
Business context
Host owned 94 consolidated hotels at year-end 2017, primarily luxury and upper-upscale properties, and held non-controlling interests in hotel and timeshare joint ventures. As of February 2018, its portfolio comprised 93 hotels with approximately 52,000 rooms. Marriott-managed or franchised properties accounted for about 78% of 2017 revenues. Approximately 60% of room sales came from transient customers, 34% from group business and 6% from contract business.
Financial and operating results
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $5.387 billion | $5.430 billion | (0.8%) |
| Operating profit | $676 million | $684 million | (1.2%) |
| GAAP operating margin | 12.5% | 12.6% | (10 bps) |
| Net income | $571 million | $771 million | (25.9%) |
| Net income attributable to Host Inc. | $564 million | $762 million | (26.0%) |
| Diluted EPS | $0.76 | $1.02 | (25.5%) |
| Adjusted EBITDAre | $1.510 billion | $1.482 billion | +1.9% |
| NAREIT FFO per diluted share | $1.68 | $1.69 | (0.6%) |
| Adjusted FFO per diluted share | $1.69 | $1.69 | Flat |
- Comparable-hotel revenue rose 0.7%; comparable hotel EBITDA increased 1.0% to $1.348 billion and its margin increased 10 bps to 27.85%.
- Comparable RevPAR increased 1.3% in constant dollars (1.4% nominal); occupancy rose 60 bps to 79.2%, while average room rate increased 0.5% in constant dollars. Domestic RevPAR grew 1.7%; international RevPAR fell 12.2% in constant dollars.
- Rooms revenue was nearly flat, while food-and-beverage revenue declined 2.4%. Higher wages and benefits, property taxes and depreciation pressured costs; food-and-beverage expenses declined 3.9%.
- Cash provided by operations was $1.230 billion, down from $1.302 billion. Investing activities used $267 million and financing activities used $402 million. Capital expenditures totaled approximately $277 million.
- Year-end assets were $11.693 billion, including $913 million of cash and cash equivalents. Debt was $3.954 billion, up from $3.649 billion; 70% was fixed-rate. Weighted-average interest rate was 4.0%, and weighted-average debt maturity was 5.1 years.
Material changes and notable items
- Net income fell chiefly because gains on asset sales declined by $145 million, depreciation increased by $27 million, and interest expense increased by $13 million. Gains on asset sales were $108 million versus $253 million in 2016.
- Adjusted EBITDAre increased despite the lower reported revenue, reflecting improved hotel operations; portfolio acquisitions and dispositions also affected year-over-year comparisons. Host acquired The Don CeSar and W Hollywood and sold four hotels during 2017.
- Host recorded a $43 million impairment on W New York after a local ordinance interpretation reduced the property’s value. W New York was held for sale at year-end.
- Hurricanes Harvey and Irma disrupted operations in Houston and Florida. Host estimated $32 million of property damage, cleanup and related costs, recorded an insurance receivable for that amount, and had received $14 million by year-end. It also recognized $8 million of hurricane-related business-interruption proceeds.
- The 2017 income-tax provision was $80 million, versus $40 million in 2016. Items included $17 million of Australian capital-gains tax and an approximately $11 million charge from remeasuring deferred tax assets following U.S. tax reform; the company excluded the tax-reform impact from Adjusted FFO.
Liquidity, capital allocation and outlook
- Host reported $822 million of available capacity on its revolving credit facility and no significant consolidated debt maturities before 2020. It reported compliance with debt covenants; the credit-facility leverage ratio was 2.2x against a 7.25x maximum.
- In March 2017, Host issued $400 million of 3.875% senior notes due 2024 and amended its credit facility, extending the revolver and a $500 million term loan to 2021. Consolidated hotels were not encumbered by mortgage debt at year-end.
- Host declared $0.85 per common share in 2017, including a $0.05 fourth-quarter special dividend. The board authorized a $0.20 quarterly dividend in February 2018. The $500 million share-repurchase authorization had no 2017 purchases.
- Management forecast 2018 comparable-hotel RevPAR growth of 0.5%–2.5% in constant dollars. It expected occupancy to remain high but rate growth to be constrained by accelerating supply, online price transparency and alternative lodging. Management cautioned that economic and travel trends were uncertain.
- Planned 2018 capital expenditures were $475 million–$550 million, versus $277 million in 2017. A proposed $1 billion acquisition of three Hyatt hotels was expected to close in 2018, subject to customary conditions; Host also agreed to sell W New York for $190 million, with closing expected in the second quarter.
Risks, contingencies and other considerations
- Results are exposed to lodging-cycle and economic conditions, new hotel supply, travel demand, labor and other relatively inflexible operating costs, and concentrated exposure to major U.S. markets. Hurricanes and other natural disasters may cause losses not fully covered by insurance.
- Host relies on third-party hotel managers and has limited control over daily operations. Marriott’s management or franchise relationship represented about 78% of 2017 revenue, creating manager and brand concentration.
- At year-end, 30% of debt was floating-rate; management estimated that a 100-basis-point rate change would affect 2018 interest expense and cash flows by approximately $12 million.
- Unconsolidated joint ventures had $1.496 billion of debt, of which Host’s share was $472 million; this debt was generally non-recourse to Host. Operating lease obligations totaled $1.487 billion, including substantial long-dated ground leases.
- Host accrued approximately $3 million for legal proceedings and estimated aggregate potential losses of up to $15 million. It stated that material payments under disclosed guarantees were considered remote.
- Host identified REIT qualification, access to capital, cyber and data security, environmental obligations, insurance coverage, labor, and its long-term capital expenditure requirements as material risks. KPMG gave an unqualified opinion on the financial statements and, for Host Inc., internal control over financial reporting.
Important facts for investors to verify
- Whether the 2018 RevPAR outlook and projected high occupancy translated into sustained rate growth and comparable-hotel margin improvement.
- Actual insurance recovery and final costs associated with Hurricanes Harvey and Irma, and the realized effect of the W New York impairment and sale.
- Completion, financing and returns of the proposed Hyatt acquisition, and proceeds and use of funds from announced dispositions.
- Debt maturities, floating-rate exposure, covenant headroom, and the effect of planned capital spending on liquidity and distributions.
- How comparable-hotel and non-GAAP measures reconcile to GAAP results, particularly the impact of dispositions, impairment charges, and tax-reform items.