Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Figures are in millions of dollars unless noted. Host Inc. is a REIT that owns approximately 98.7% of Host L.P.; their consolidated financial information is substantially the same.
Business context and reporting period
Host owns luxury and upper-upscale hotels, primarily in the United States. At June 30, 2013, its consolidated portfolio included 118 hotels, with 109 classified as comparable.
Comparisons with 2012 require care: beginning in 2013, quarterly reporting moved to calendar periods. The filed 2012 GAAP quarters were not restated and are not directly comparable. Management therefore emphasizes estimated “2012 As Adjusted” calendar-period comparisons; some adjustments, particularly operating expenses, rely on estimates.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 As Adjusted | Six months 2013 | Six months 2012 As Adjusted |
|---|---|---|---|---|
| Total revenue | $1,420 | $1,355 | $2,663 | $2,592 |
| Operating profit | $208 | $162 | $299 | $246 |
| Operating margin | 14.6% | 12.0% | 11.2% | 9.5% |
| Net income | $121 | $63 | $181 | $122 |
| Net income attributable to Host Inc. | $119 | $62 | $175 | $117 |
| Adjusted EBITDA | $431 | $350 | $714 | $607 |
| Adjusted FFO per diluted share | $0.45 | $0.33 | $0.73 | $0.57 |
Comparable RevPAR increased 6.1% for Q2 and 5.7% year to date, driven by higher average room rates and modestly higher occupancy. Comparable operating profit margins, a non-GAAP measure, rose 180 basis points for Q2 and 140 basis points year to date.
At June 30, total assets were $12,665 and total debt was $4,724, down from $5,411 at December 31, 2012. Cash and equivalents were $393; revolver capacity available was $798. Debt had a 5.0% average interest rate and 5.6-year average maturity; 76% bore fixed rates. Operating cash flow was $460 for the six months, versus $302 in the prior reported period. Investing activities used $25 net, financing activities used $454, and cash declined $19 to $393.
Material changes and notable items
- Comparable owned-hotel revenue grew 6.3% in Q2 and 4.5% year to date. Comparable RevPAR growth reflected room-rate increases of 4.5% and 4.3%, respectively, with occupancy up 1.2 and 1.0 percentage points.
- Host acquired the 426-room Hyatt Place Waikiki Beach for approximately $138.5 and sold The Ritz-Carlton, San Francisco for $161. It also sold the Atlanta Marriott Marquis for $293 in Q1 and excess land near Newport Beach for $24, recording a $21 gain.
- Debt actions included issuing $400 of 3.75% notes due 2023 and redeeming $400 of 9% notes and $200 of 6.75% notes, plus repaying a $246 mortgage. In March, holders exchanged $174 of 3.25% debentures for approximately 11.7 million Host Inc. shares.
- Host issued 10.9 million shares year to date for net proceeds of approximately $188. The Q2 dividend was $0.11 per share, up $0.01 from the previous quarter.
- Q2 interest expense included debt-extinguishment costs; excluding those costs, interest expense declined versus the adjusted prior-year period. Gains, acquisition costs, litigation expense and discontinued operations also affect reported results.
Outlook, risks and contingencies
Management forecast 2013 comparable hotel RevPAR growth of 5.5%–6.25% and total owned-hotel revenue growth under GAAP of 6.8%–7.7%. It expected transient demand to remain strong, group demand to be softer in summer and stronger in Q4, and second-half food-and-beverage revenue growth of approximately 3%. Planned 2013 capital spending was $280–$300 for renewals and replacements, $90–$100 for redevelopment and ROI projects, and $35–$45 for acquisition-related projects.
Management cited economic uncertainty, unemployment, U.S. fiscal and monetary policy, government-spending reductions, European weakness, rising utility and labor costs, and softer group bookings as risks. It also noted anticipated lodging supply growth in New York and reduced government-related travel affecting Washington, D.C.
The San Antonio Marriott Rivercenter ground-lease litigation is a material contingency. After the Texas Supreme Court denied review, Host said it intended to seek rehearing and had accrued approximately $67, including $8 in Q2; $25 was held in restricted escrow. The outcome remains uncertain. Separately, Host accrued approximately $11 for other legal matters and estimated aggregate potential losses of up to $53, excluding the San Antonio matter.
The San Francisco hotel sale included a deferred gain of approximately $25: $14 was expected to be recognized after post-closing conditions, while the remaining amount is subject to performance guarantees through 2016, capped at $4 annually and $11 in total. Host stated that it was in compliance with its financial covenants and that disclosure controls were effective.
Most important facts for investors to verify
- How calendar-period adjustments and estimated 2012 operating expenses affect the comparability of reported growth.
- Whether RevPAR and group-demand trends support management’s 2013 outlook, and whether projected capital spending is achieved.
- The status and potential cash impact of the San Antonio litigation, including the appeal and escrow reserve.
- Debt maturities and refinancing requirements, including the 2015 holder put option on exchangeable debentures, and the availability of revolver capacity.
- The realization of deferred sale gains and exposure under the San Francisco hotel performance guarantees.
- The contribution of asset sales, equity issuance, debt-extinguishment items and other nonrecurring effects to cash flow and earnings growth.