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HST > SEC Filings for HST > Form 10-Q on 6-Aug-2013All Recent SEC Filings

Show all filings for HOST HOTELS & RESORTS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for HOST HOTELS & RESORTS, INC.


6-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this report. Host Inc. operates as a self-managed and self-administered REIT. Host Inc. is the sole general partner of Host L.P. and holds 98.7% of its partnership interests. Host L.P. is a limited partnership operating through an umbrella partnership structure. The remaining approximately 1.3% of Host L.P.'s common OP units are owned by various unaffiliated limited partners.

Change in Reporting Periods

Effective January 1, 2013, we report quarterly operating results on a calendar cycle, which now is consistent across all of our hotel managers and the majority of companies in the lodging industry. Historically, our annual financial statements have been reported on a calendar basis and are unaffected by this change. However, our quarterly operating results have been reported based on a 52-53 week fiscal calendar used by Marriott International, Inc. ("Marriott"), the manager of approximately 50% of our properties. For 2013, Marriott converted to reporting results based on a 12-month calendar year. During 2012, Marriott used a fiscal year ending on the Friday closest to December 31 and reported twelve weeks of operations for the first three quarters and sixteen weeks for the fourth quarter of the year for its Marriott-managed hotels. Accordingly, our first three quarters of operations in 2012 ended on March 23, June 15 and September 7. In contrast, managers of our other hotels, such as Ritz-Carlton, Hyatt, and Starwood, reported results on a monthly basis. During 2012, we did not report the month of operations that ended after our fiscal quarter until the following quarter for those hotels using a monthly reporting period because these hotel managers did not make mid-month results available to us. Accordingly, the month of operations that ended after our fiscal quarter was included in our quarterly results of operations in the following quarter for those calendar reporting hotel managers. As a result, our 2012 quarterly results of operations include results from hotel managers reporting results on a monthly basis as follows: first quarter (January, February), second quarter (March to May), third quarter (June to August) and fourth quarter (September to December).

We will not restate the previously filed 2012 quarterly financial statements, which are prepared in accordance with GAAP because certain property-level operating expenses for our Marriott-managed properties necessary to restate operations are unavailable on a daily basis. Because we rely upon our operators for the hotel operating results used in our financial statements, the unavailability of this information on a calendar quarter basis for 2012 made restating our financial statements in accordance with GAAP unfeasible. Accordingly, the corresponding 2012 quarterly historical operating results are not comparable to our 2013 quarterly results.

However, to enable investors to better evaluate our performance over comparable periods, we have presented certain 2012 quarterly results and operating statistics on a calendar year basis of reporting, which we will refer to as "2012 As Adjusted" results. The financial information for the 2012 As Adjusted periods presented herein was calculated based on our actual reported operating results for the quarter and year-to-date periods ended June 15, 2012, adjusted as follows:

Our 59 hotels operated by Marriott traditionally have reported operations on the basis of a 52-53 week fiscal calendar. For the second quarter, operations from March 24, 2012 through June 15, 2012 were included. Based on daily revenue information provided by Marriott, our 2012 second quarter As Reported results for these properties were adjusted to include $101 million of revenue for the 15 days from June 16, 2012 through June 30, 2012 (that previously were included in our results of operations for the third quarter 2012) and to exclude $60 million of revenues for the eight days from March 24, 2012 through March 31, 2012 to determine the 2012 As Adjusted second quarter revenues. Our 2012 As Adjusted year-to-date revenues have been adjusted to include the same 15 days of revenues from June 16, 2012 through June 30, 2012.

Because Marriott is unable to provide us with operating expenses for our Marriott-operated hotels on a daily basis, we derived estimated expenses based on an internally developed allocation methodology based on historical expenses provided by Marriott consistent with its prior 52-53 week reporting calendar. Our 2012 second quarter As Reported operating expenses were adjusted to include approximately $77 million of estimated expenses incurred from June 16, 2012 through June 30, 2012 and to exclude approximately $43 million of operating expenses for the period from March 24, 2012 through March 31, 2012 to determine the 2012 As Adjusted second quarter expenses. Our 2012 As Adjusted year-to-date expenses have also been adjusted to include the 15 days from June 16, 2012 through June 30, 2012.

For our 57 hotels operated by managers other than Marriott (including those by Ritz-Carlton, Hyatt and Starwood) that traditionally have reported operations on a calendar month basis, our 2012 As Adjusted quarter results include $210 million of revenues and $154 million of operating expenses for these hotels for the full calendar month of June 2012 that previously were included in our results of operations for the third quarter 2012 and excluded $226 million of revenues and $163 million of operating expenses for these hotels for the full calendar month of March 2012, which were included in our first quarter "As Adjusted" results. Our 2012 As adjusted year-to-date results have also been adjusted to include the full calendar month of June 2012 for these hotels.


For all other income statement line items presented for the 2012 As Adjusted quarter and year-to-date periods ended June 30, 2012, including depreciation, interest income and expense and other corporate expenses, as well as those used in the reconciliations for our non-GAAP measures, our As Adjusted results reflect such amounts for the full calendar quarter and year-to-date periods ended June 30, 2012, respectively, based on historical information.

Forward-Looking Statements

In this report on Form 10-Q, we make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by their use of terms and phrases such as "anticipate," "believe," "could," "expect," "may," "intend," "predict," "project," "plan," "will," "estimate" and other similar terms and phrases, including references to assumptions and forecasts of future results. Forward-looking statements are based on management's current expectations and assumptions and are not guarantees of future performance. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results to differ materially from those anticipated at the time the forward-looking statements are made.

The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

the effect on lodging demand of (i) changes in national and local economic and business conditions, including concerns about global economic prospects and the speed and strength of a recovery, and (ii) other factors such as natural disasters, weather, changes in the international political climate, and the occurrence or potential occurrence of terrorist attacks, all of which will affect occupancy rates at our hotels and the demand for hotel products and services;

operating risks associated with the hotel business, including the effect of increasing labor costs or changes in workplace rules that affect labor costs;

the continuing volatility in global financial and credit markets, and the impact of budget deficits and pending and future U.S. governmental action to address such deficits through reductions in spending and similar austerity measures, which could materially adversely affect the U.S. and global economic conditions, business activity, credit availability, borrowing costs, and lodging demand;

the impact of geopolitical developments outside the U.S., such as the sovereign credit issues in certain countries in the European Union, or unrest in the Middle East, which could affect the relative volatility of global credit markets generally, global travel and lodging demand, including for our foreign hotel properties;

the effect of rating agency downgrades of our debt securities on the cost and availability of new debt financings;

the reduction in our operating flexibility and the limitation on our ability to pay dividends and make distributions resulting from restrictive covenants in our debt agreements, which limit the amount of distributions from Host L.P. to Host Inc., and other risks associated with the level of our indebtedness or related to restrictive covenants in our debt agreements, including the risk of default that could occur;

our ability to maintain our properties in a first-class manner, including meeting capital expenditures requirements, and the effect of renovations on our hotel occupancy and financial results;

our ability to compete effectively in areas such as access, location, quality of accommodations and room rate structures;

our ability to acquire or develop additional properties and the risk that potential acquisitions or developments may not perform in accordance with our expectations;

relationships with property managers and joint venture partners and our ability to realize the expected benefits of our joint ventures and other strategic relationships;

our ability to recover fully under our existing insurance policies for terrorist acts and our ability to maintain adequate or full replacement cost "all-risk" property insurance policies on our properties on commercially reasonable terms;

the effects of tax legislative action and other changes in laws and regulations, or the interpretation thereof, including the need for compliance with new environmental and safety requirements; and

the ability of Host Inc. and each of the REIT entities acquired, established or to be established by Host Inc. to continue to satisfy complex rules to qualify as REITs for federal income tax purposes, Host L.P's ability to satisfy the rules required to maintain its status as a partnership for federal income tax purposes, and Host Inc.'s and Host L.P.'s ability and the ability of our subsidiaries, and similar entities to be acquired or established by us to operate effectively within the limitations imposed by these rules.


We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions, including those risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2012 and in other filings with the Securities and Exchange Commission ("SEC"). Although we believe the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that we will attain these expectations or that any deviations will not be material.

Operating Results and Outlook

As of August 5, 2013, our consolidated portfolio consists of 24 luxury hotels with 11,554 rooms that represent 25% of our owned hotel revenues, 82 upper upscale hotels with 48,218 rooms that represent 73% of our owned hotel revenues, and 12 hotels of other property types with 2,888 rooms that represent 2% of our owned hotel revenues. For a general overview of our business, see our most recent Annual Report on Form 10-K.

Due to the difference in the reporting period between the second quarter of 2013 (April 1, 2013 through June 30, 2013) and the second quarter of 2012 (March 24, 2012 through June 15, 2012), our results of operations as presented in accordance with GAAP are not comparable to the prior year. As discussed previously, when compared to the 2012 as reported amounts, the second quarter operations for 2013 include an additional 15 days for our Marriott properties for June 16 through June 30, as well as the month of June for our non-Marriott properties, which were reported in the third quarter of 2012, and exclude eight days of operations for our Marriott properties for the period of March 24 through March 31, as well as the month of March for our non-Marriott properties, as these are now included in our first quarter 2013 results. Similarly, when compared to the 2012 as reported amounts, the year-to-date operations for 2013 include an additional 15 days for our Marriott properties, as well as the month of June for our non-Marriott properties. Therefore, management's discussion of the results of operations will focus on the June 30, 2013 operations compared to the June 30, 2012 As Adjusted period, as a supplemental measure of performance to describe the current trends in our operations.

The following charts reconcile significant statement of operation line items between the quarter and year-to-date ended June 15, 2012 as reported and the quarter and year-to-date ended June 30, 2012 As Adjusted (in millions):

                                                                                  Income from
                                                              Operating           Continuing
                                           Revenues            Profit             Operations            Net Income
For the quarter ended June 15, 2012 (As
Reported)                                 $    1,326         $       177         $          80         $         83
Marriott-managed properties - June 16,
2012 through June 30, 2012                       101                  24                    24                   24
Marriott-managed properties - March 24,
2012 through March 31, 2012                      (60 )               (17 )                 (17 )                (17 )
Non-Marriott-managed properties - June
2012 operations                                  210                  56                    56                   56
Non-Marriott-managed properties - March
2012 operations                                 (226 )               (63 )                 (63 )                (63 )
Depreciation expense - June 16, 2012
through June 30, 2012 less March 24, 2012
through March 31, 2012                            -                  (13 )                 (13 )                (13 )
Interest expense - June 16, 2012 through
June 30, 2012 less March 24, 2012 through
March 31, 2012                                    -                   -                     (5 )                 (5 )
Hotels leased from HPT and other                   4                  (2 )                  (3 )                 (2 )
For the quarter ended June 30, 2012 (As
Adjusted)                                 $    1,355         $       162         $          59         $         63

                                                                                  Income from
                                                              Operating           Continuing
                                           Revenues            Profit             Operations            Net Income
For the year-to-date period ended
June 15, 2012 (As Reported)               $    2,270         $       193         $          25         $         83
Marriott-managed properties - June 16,
2012 through June 30, 2012                       101                  24                    24                   24
Non-Marriott-managed properties - June
2012 operations                                  210                  56                    56                   56
Depreciation expense - June 16, 2012
through June 30, 2012                             -                  (24 )                 (24 )                (24 )
Interest expense - June 16, 2012 through
June 30, 2012                                     -                   -                    (13 )                (13 )
Hotels leased from HPT and other                  11                  (3 )                  (5 )                 (4 )
For the year-to-date period ended
June 30, 2012 (As Adjusted)               $    2,592         $       246         $          63         $        122


Total comparable revenues at our owned hotels increased 6.3% and 4.5% for the second quarter and year-to-date of 2013, respectively, compared to the corresponding 2012 As Adjusted periods. Comparable RevPAR for the quarter and year-to-date increased 6.1% and 5.7%, respectively, on an As Adjusted basis primarily driven by increases in average room rates of 4.5% and 4.3% for the quarter and year-to-date, respectively, and modest increases in occupancy. For the quarter and year-to-date, transient revenue increased 6.4% and 7.7%, respectively, reflecting increases in both occupancy and average room rates. Group revenue increased 6.2% and 1.3%, respectively, as second quarter results reflected much stronger room rates as well as an increase in occupancy. For the quarter, group revenue was positively impacted by the timing of the Easter holiday (which occurred during the first quarter in 2013 and the second quarter in 2012). Additionally, during the second quarter, food and beverage revenues grew sharply after a decline in the first quarter, as food and beverage revenues at our comparable hotels increased $24 million, or 6.6%, reflecting strong banquet sales.

Operating margins (calculated based on GAAP operating profit as a percentage of revenues) increased 260 basis points and 170 basis points for the quarter and year-to-date of 2013, respectively, as compared to the corresponding 2012 As Adjusted periods. Operating margins are affected significantly by several items, including results from our non-comparable hotels and depreciation expense. Our comparable hotel adjusted operating profit margins, which exclude, among other items, operations from our non-comparable hotels, depreciation and corporate expenses, increased 180 basis points and 140 basis points for the quarter and year-to-date, respectively, on an As Adjusted basis. Margin growth was driven by the growth in revenues from room rate improvements and increased food and beverage profit. The primary driver of the food and beverage revenue growth was the more profitable banquet segment, as opposed to outlet business which has higher incremental costs. The improvements in operating margins led to a corresponding growth in GAAP operating profit of $46 million, or 28.4%, for the second quarter and $53 million, or 21.5%, for the year-to-date compared to corresponding 2012 As Adjusted periods.

Outlook. We believe that the positive trends and strong lodging fundamentals seen during the first half of the year will continue throughout 2013. Lodging demand growth is driven primarily by overall GDP growth, business investment, consumer confidence, employment growth, and international travel. While the recent recovery has been less robust than historical norms, it has been strong enough to generate significant improvement in lodging demand over the last three years. Over the same period, demand has meaningfully exceeded supply growth in the industry and, assuming the U.S. economy continues to expand at or above current rates, we would expect that trend to continue. We believe the low supply growth in upper upscale hotels has resulted from the long planning cycle, lack of available credit in prior years, and upper upscale hotels in gateway markets continuing to trade below replacement cost. One market that is the exception is New York, where total lodging supply growth has been higher and is expected to increase 7% next year. Internationally, our investment in Europe continues to be effected by economic weakness, which has led to slower growth in lodging demand.

We also believe the strategic location of our assets in key markets has helped drive improvements in our results. Since 2002, the percentage of revenues from our target markets in the U.S. and internationally has increased from approximately 55% to almost 75%. These hotels, which are located in gateway cities such as Boston, New York, Chicago, Los Angeles, San Francisco, and Seattle, continue to benefit from strong overseas arrivals which have increased 25% since 2009 (based on data provided by the U.S. Department of Commerce, Office of Travel & Tourism Industries). Based on consensus estimates, we expect that the U.S. economy will likely grow for the remainder of the year at a rate similar to or slightly better than what was achieved in the second quarter and that business investment and international travel will continue to grow faster than GDP.

We expect that the revenue growth in the third quarter will be driven by transient business, which will offset weakness in group demand. During the downturn in 2009, the demand in our transient segments declined by roughly 4%, while demand in our group segment fell roughly 19%. As of mid-year 2013, both transient and group segments have recovered significantly from their 2009 levels despite relatively weak economic growth. Transient demand now exceeds its 2007 peak levels with average rates approaching their prior peak levels. Group room nights remain roughly 9% below the prior peak but with average room rates exceeding their prior peak. Our group demand started the year with strong advanced bookings compared to the prior year, however the combination of a major decline in government group business, and softer short-term group bookings has resulted in overall group demand slightly below last year's levels. Despite the softer group demand, our total occupancy levels now equal or exceed the levels we achieved in 2007. For the remainder of the year, we would expect that transient travel will remain strong, while group demand will be weaker during the summer and much stronger in the fourth quarter.

With occupancy surpassing prior peak levels, we expect RevPAR growth to be primarily driven by improvements in average rate, which typically drives more profit than growth in occupancy. We believe the increased profitability will only partially be offset by increased operating expenses such as rising utility costs and incentive management fees. Additionally, we expect overall food and beverage revenues to grow approximately 3% in the second half of the year because of the slower recovery in group demand, which has restrained growth in our more profitable banquet business. We believe that these trends will result in improved operating performance and comparable hotel RevPAR growth of 5.5% to 6.25% and total owned hotel revenues growth under GAAP of 6.8% to 7.7% for 2013.


While we believe that the lodging industry will continue to improve, several key factors continue to negatively affect the economic recovery and add to general market uncertainty. These factors include, but are not limited to:
(i) continued high levels of unemployment; (ii) uncertainty in and possible changes to U.S. fiscal and monetary policies, including reduced government spending due to the sequester and potential tightening of monetary policy; and
(iii) the uncertain economic environment in Europe. Therefore, there can be no assurance that any increases in hotel revenues or earnings at our properties or improvement in margins will continue for any number of reasons, including those listed above.

Investing activities outlook

Acquisitions. On May 31, 2013, we acquired the 426-room Hyatt Place Waikiki Beach in Honolulu, Hawaii for approximately $138.5 million. In connection with the acquisition, we incurred $1 million of acquisition costs and acquired a $0.5 million FF&E replacement fund.

Dispositions. On June 28, 2013, we sold The Ritz-Carlton, San Francisco for $161 million, including the FF&E replacement fund of $9 million. The net proceeds will be used for general corporate purposes. We have recorded a gain of approximately $25 million, $14 million of which we expect to recognize in the third quarter upon completion of certain post-closing conditions. The remainder of the deferred gain is subject to performance guarantees through which we have guaranteed certain annual net operating profit levels for the hotel through 2016, with a maximum payment of $4 million per year, not to exceed $11 million in total.

Value Enhancement Projects. We look to enhance the value of our portfolio by identifying and executing strategies designed to achieve the highest and best use of all aspects of our properties. We believe that the successful execution of these projects will create significant value for the company. On April 1, 2013, we sold approximately four acres of excess land adjacent to our Newport Beach Marriott Hotel & Spa to a luxury homebuilder for $24 million and recognized a $21 million gain on the sale. The land, which previously was used for tennis courts, has been approved for the development and sale of 79 luxury condominiums.

Redevelopment and Return on Investment Capital Expenditures. Redevelopment and ROI projects primarily consist of large-scale redevelopment projects. Approximately $47 million of cash was used for these projects during the first half of 2013 compared to $98 million during the first half of 2012. During 2013, we plan to spend between $90 million and $100 million for redevelopment and ROI projects. Significant ROI capital expenditures during the second quarter included the completion of the lobby renovation at the Philadelphia Airport Marriott and of the restaurant and bar renovation at the Hyatt Regency Reston.

Acquisition Capital Expenditures. In conjunction with the acquisition of a property, we prepare capital and operational improvement plans designed to maximize profitability and to enhance the guest experience. During the second quarter, we completed the renovation of all 1,625 guest rooms at the Manchester Grand Hyatt San Diego. During the first two quarters of 2013, we spent approximately $22 million on acquisition projects compared to $64 million during the first two quarters of 2012. For the full year of 2013, we expect to invest between $35 million and $45 million.

Renewal and Replacement Capital Expenditures. We spent $76 million and $163 million on renewal and replacement expenditures during the second quarter and year-to-date of 2013, respectively, compared to $79 million and $179 million during the second quarter and year-to-date of 2012, respectively. These expenditures are designed to ensure that our high standards for product quality are maintained and to enhance the overall competitiveness of our properties in the marketplace. Major projects during the second quarter of 2013 included the completion of the renovation of 1,452 guestrooms, 47 suites and the concierge lounge at the San Francisco Marriott Marquis and the guestroom and lobby renovation at the San Diego Marriott Mission Valley. We expect that our investment in renewal and replacement expenditures in 2013 will total approximately $280 million to $300 million.

Financing activities outlook

We have continued to progress on our long-term goal of strengthening our balance sheet by lowering our debt-to-equity ratio and extending debt maturities by strategically raising and deploying capital, thereby improving our overall leverage and coverage ratios. We believe, based on the overall strength of our balance sheet, that we have sufficient liquidity and access to the capital markets in order to pay our near-term debt maturities, fund our capital expenditure program and take advantage of investment opportunities (for a detailed discussion, see "-Liquidity and Capital Resources").


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