Host Hotels & Resorts, Inc. — Q1 2010 Form 10-Q
Reporting period: Quarter ended March 26, 2010 (12 weeks), compared with the quarter ended March 27, 2009. Host owns 110 hotels, primarily in the luxury and upper-upscale sectors, and operates as a REIT through Host LP.
Financial and operating performance
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total revenue | $823 million | $864 million |
| Hotel sales | $793 million | $835 million |
| Operating profit (loss) | $(2) million | $20 million |
| Net loss attributable to Host | $(84) million | $(59) million |
| Loss per common share, basic and diluted | $(0.13) | $(0.12) |
| FFO per diluted share (non-GAAP) | $0.08 | $0.10 |
| Cash provided by operations | $49 million | $120 million |
Comparable hotel sales declined 3.9% to $813 million, and comparable hotel adjusted operating profit fell to $157 million from $187 million. Comparable RevPAR decreased 2.3% to $109.18: average room rate fell 8.7% to $166.66, partly offset by occupancy rising 4.3 percentage points to 65.5%. Interest expense increased to $96 million from $87 million, including $8 million of debt-extinguishment and prepayment-related costs. Corporate and other expenses rose $9 million, primarily due to higher share-based compensation expense.
At March 26, 2010, cash and cash equivalents were $1.245 billion, down from $1.642 billion at year-end. Total debt was $5.383 billion, compared with $5.837 billion; total liabilities were $5.741 billion and total assets $12.060 billion. The company reported $600 million available under its credit facility. Approximately 87% of debt was fixed-rate; the weighted-average interest rate was 6.6% and weighted-average maturity was 4.25 years. Capital expenditures were $50 million in the quarter.
Changes versus the prior comparable period
- Revenue declined 4.7% and hotel sales fell 5.0%; GAAP net loss attributable to Host widened to $84 million from $59 million.
- Hotel occupancy improved, but lower room rates continued to weigh on RevPAR and operating results. Management said occupancy gains increased near-term operating-margin pressure.
- Cash from operations decreased by $71 million. Cash used in financing was $407 million, mainly reflecting debt repayments and repurchases, partly offset by common-stock issuance.
- Debt declined by approximately $454 million from December 31, 2009. Host redeemed $346 million face amount of 7% Series M notes and repaid a $124 million mortgage on the Atlanta Marriott Marquis.
- FFO per diluted share declined from $0.10 to $0.08; diluted weighted-average shares increased to 648.7 million from 530.2 million.
Outlook, risks, and unusual items
- Management forecast comparable hotel RevPAR growth of 1% to 4% for full-year 2010. It described occupancy and booking-pace trends as improving, while noting that room-rate recovery may lag and shorter booking windows make results harder to predict. No full-year earnings or FFO guidance is provided in the supplied filing text.
- Planned 2010 capital expenditures were $300 million to $340 million, including renovations and a $190 million project at the San Diego Marriott Hotel & Marina. Management also said it intended to reduce leverage and had repaid $470 million of debt during 2010 through the filing date.
- Management cited persistent unemployment, uncertainty around the economic recovery, and the possible end of economic stimulus as risks. It also warned that costs associated with higher occupancy could pressure margins before room rates improve.
- The European joint venture has €717 million of non-recourse mortgage debt. Lenders waived covenant breaches on €70.5 million of loans for three Brussels hotels; negotiations remained ongoing for €342 million of loans due in 2013 secured by six cross-collateralized hotels. Lenders may accelerate those loans if negotiations fail and defaults are not cured. The loans are non-recourse to Host.
- Host reported compliance with credit-facility and senior-note covenants. Its credit-facility actual leverage ratio was 5.45x versus a 7.25x maximum; fixed-charge coverage was 1.69x versus a 1.10x minimum for 2010. The filing notes that declining operating results had weakened coverage ratios and increased leverage over the prior two years.
- Host accrued a $4 million potential litigation loss. It sold the Sheraton Braintree for approximately $9 million and recorded a nominal gain; The Ritz-Carlton, Dearborn was classified as held for sale, with a sale expected to close in Q2. In April 2010, Host acquired junior tranches of a European mortgage loan at a discount; the purchased tranches had €64 million face value and ranked behind €363 million of senior debt.
- The board reinstated a common dividend of $0.01 per share for 2010 and declared a preferred dividend of $0.5546875 per share, both paid April 15, 2010. Host also issued approximately 4.3 million common shares through its at-the-market program for net proceeds of $54.8 million during Q1.
Important facts for investors to verify
- Whether the projected 1%–4% full-year RevPAR growth is supported by continued occupancy gains and a recovery in room rates, particularly given shorter booking windows.
- Cash generation, planned capital spending, and liquidity needs alongside debt maturities, covenant headroom, and the company’s ongoing leverage-reduction plans.
- Developments in the European joint venture’s €342 million of loans under negotiation, including any cure, restructuring, or acceleration and the effect on Host’s investment.
- The effect of share issuance and potential dilution, the sustainability of dividends, and resolution or changes in the accrued litigation contingency.