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HST > SEC Filings for HST > Form 10-Q on 2-May-2014All Recent SEC Filings

Show all filings for HOST HOTELS & RESORTS, INC.

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


2-May-2014

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 approximately 99% of its partnership interests. Host L.P. is a limited partnership operating through an umbrella partnership structure. The remaining common OP units are owned by various unaffiliated limited partners.

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 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 in order 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, 2013 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

Operating Results

The following table reflects certain line items from our statement of operations and significant operating statistics (in millions, except per share and hotel statistics):

Historical Income Statement Data:
                                                    Quarter ended March 31,            % Change
                                                    2014               2013          2013 to 2014
Total revenues                                  $      1,309       $      1,224                6.9 %
Net income                                               185                 60              208.3 %
Operating profit                                         134                 90               48.9 %
Operating profit margin under GAAP                      10.2 %              7.4 %              280 bps
Adjusted EBITDA (1)                             $        308       $        283                8.8 %

Diluted earnings per share                      $        .24       $        .08              200.0 %
NAREIT FFO per diluted share (1)                         .32                .29               10.3 %
Adjusted FFO per diluted share (1)                       .33                .28               17.9 %

Comparable Hotel Data:

                                                            2014 Comparable Hotels (2)
                                                    Quarter ended March 31,             Change
                                                    2014               2013          2013 to 2014
Comparable hotel revenues (1)                   $      1,204       $      1,126                6.9 %
Comparable hotel operating profit (1)                    289                257               12.5 %
Comparable hotel adjusted operating profit
margin (1)                                              24.0 %             22.8 %              120 bps
Change in comparable hotel RevPAR - Constant
US$                                                      6.8 %
Change in comparable hotel RevPAR - Nominal
US$                                                      6.2 %
Change in comparable domestic RevPAR                     6.6 %
Change in comparable international RevPAR -
Constant US$                                            10.3 %

(1) Adjusted EBITDA, NAREIT and Adjusted FFO per diluted share and comparable hotel operating results (including comparable hotel revenues and comparable hotel adjusted operating profit and margins) are non-GAAP (U.S. generally accepted accounting principles) financial measures within the meaning of the rules of the SEC. See "-Non-GAAP Financial Measures" for more information on these measures, including why we believe these supplemental measures are useful, reconciliations to the most directly comparable GAAP measure, and the limitations on the use of these supplemental measures.

(2) Comparable hotel operating statistics for 2014 and 2013 are based on 109 hotels as of March 31, 2014.

Total revenues increased $85 million to $1.3 billion for the first quarter driven by an increase in rooms revenues of $46 million and food and beverage revenue of $36 million. The growth in operating results were driven by an increase in comparable RevPAR of 6.8% on a constant US$ basis, reflecting strong growth in average room rates coupled with continued improvements in occupancy, and an increase of 9.4% in comparable food and beverage operations. The growth in room revenues was primarily driven by a strong increase in group business, particularly in New York and several of our west coast markets, which helped our operators shift the mix of business to higher-rated transient business. Additionally, this increase in group business helped drive a 13.5% increase in


comparable food and beverage banquet and audio/visual revenues. On a nominal US$ basis, which includes the effect of foreign currency fluctuations, comparable hotel RevPAR increased 6.2% for the first quarter.

Operating profit margins (calculated based on GAAP operating profit as a percentage of GAAP revenues) increased 280 basis points to 10.2% for the first quarter of 2014. These operating profit margins are affected significantly by several items, including operations from recently acquired hotels, depreciation, impairments, and corporate expenses. Our comparable hotel adjusted operating profit margins, which exclude these items, increased 120 basis points to 24.0%. These improvements were driven by the increase in average room rate, as well as a 21.1% increase in comparable food and beverage profit, reflecting the increase in the more profitable banquet and audio/visual business.

The trends and transactions described for Host Inc. affected similarly the operating results for Host L.P, as the only significant difference between the Host Inc. and the Host L.P. statements of operations relates to the treatment of income attributable to the third party limited partners of Host L.P. For the first quarter, net income for Host Inc. and Host L.P. improved $125 million to $185 million from the same period in the prior year. Net income benefited from the improvement in operating profit, as well as a decrease in interest expense of $18 million due to the repayment or refinancing of debt at lower interest rates, and an increase in gains on property transactions and other of $100 million. During the first quarter of 2014, Host Inc.'s diluted income per common share improved $0.16 per common share to $0.24 per common share. Host L.P.'s diluted income per common unit improved $0.16 per common unit to $0.24 per common unit.

Host Inc.'s Adjusted FFO per diluted share increased 17.9% to $.33 per diluted share for the first quarter of 2014. Adjusted EBITDA, which is defined as EBITDA adjusted for gains and losses related to real estate transactions, impairment expense, and other items, increased $25 million, or 8.8%, to $308 million.

Outlook

For the remainder of 2014, we believe that the broad economic trends that have translated into the steady improvement in lodging demand should continue to drive RevPAR growth and operating results. Specifically, based on our current group bookings, we believe increasing group demand will allow our operators to shift the business mix to higher-rated corporate group and transient demand, as opposed to lower-rated transient discount business, helping to drive profitability. As a result, we believe the majority of the RevPAR growth will be driven by improvements in average rate, and we expect occupancy growth will be similar to that experienced in 2013. For the full year 2014, we believe these trends will result in improved operating performance and comparable hotel RevPAR growth on a constant US$ basis of 5% to 6%. We anticipate that comparable food and beverage and other revenue will increase approximately 4% to 5% in 2014 driven in part by the expected increase in group demand.

While we believe that the lodging industry will continue to improve, there can be no assurances that any increases in hotel revenues or earnings at our properties will continue for any number of reasons, including, but not limited to, slower than anticipated growth in the economy and changes in travel patterns.

Investing activities

Acquisitions. We continue to seek investment opportunities in our target markets, which we have identified as those that are expected to have the greatest lodging demand growth, the fewest additions to supply, and consequently the strongest potential for revenue growth. We see increased competition for acquisitions in our target markets due to an abundance of capital and the current availability of inexpensive financing. Consequently, pricing for upper upscale and luxury assets has become more aggressive, and recent transaction values have approached replacement cost levels. Our acquisition strategy also includes the acquisition or development of midscale and upscale properties in select target markets. During the first quarter, we completed the acquisition of the 151-room Powell Hotel in San Francisco, including retail space and the fee simple interest in the land, for approximately $75 million. The property includes a significant long-term retail lease with Sephora, a leading provider of perfume and cosmetics. We intend to invest approximately $22 million in an extensive redevelopment of the property beginning early 2015.

Dispositions. We attempt to dispose of properties which are considered non-core assets when we believe the potential for growth is constrained or where we are able opportunistically to take advantage of the pricing in the market. On January 10, 2014, we sold an 89% interest in the Philadelphia Marriott Downtown based on a market value of $303 million. On February 12, 2014, we sold the Courtyard Nashua for a sales price of $10 million.


Capital Expenditures Projects. We continue to pursue opportunities to enhance asset value through select capital improvements, including projects that are designed specifically to increase the eco-efficiency of our hotels, incorporate elements of sustainable design and replace aging equipment and systems with more efficient technology. During the first quarter, we have completed renovations of 1,800 guestrooms, over 100,000 square feet of meeting space and approximately 42,000 square feet of public space.

Redevelopment and Return on Investment Capital Expenditures. Redevelopment and ROI projects primarily consist of large-scale redevelopment projects designed to increase cash flow and improve profitability by capitalizing on changing market conditions and the favorable locations of our properties, including projects such as the redevelopment of a hotel, repositioning of a hotel restaurant or the installation of energy efficient systems. During the first quarter of 2014 and 2013, we invested $11 million and $21 million, respectively, on redevelopment and ROI projects, of which $5 million in 2014 was invested in restaurant repositionings and energy projects. During 2014, we plan to spend between $70 million and $80 million for redevelopment and ROI projects. Significant redevelopment and ROI capital expenditures completed during the first quarter included the expansion of the 9,000 square foot Willow Stream Spa at The Fairmont Kea Lani, Maui and the repositioning of the Cast & Plow restaurant and public space at The Ritz-Carlton, Marina del Rey.

Acquisition Capital Expenditures. In conjunction with the acquisition of a property, we prepare capital and operational improvement plans designed to maximize profitability. During the first quarter of 2014 and 2013, we spent approximately $3 million and $15 million, respectively, on acquisition capital projects and expect to invest between $30 million and $35 million during 2014. During the first quarter, we completed the first phase of the renovation of over 100,000 square feet of meeting space and expansion of the fitness center at the Manchester Grand Hyatt San Diego.

Renewal and Replacement Capital Expenditures. We spent $76 million and $87 million on renewal and replacement capital expenditures during the first quarter of 2014 and 2013, 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. During the first quarter of 2014, we completed the renovation of all guest rooms at The Westin Indianapolis and the Newport Beach Marriott Hotel & Spa and almost 12,000 square feet of public space at the Sheraton San Diego Hotel & Marina. We expect that our investment in renewal and replacement expenditures in 2014 will total approximately $320 million to $340 million.

Financing activities

Debt Transactions. During the quarter, we completed the following transactions:

On February 28, 2014, we repaid the $300 million mortgage loan secured by The Ritz-Carlton, Naples and Newport Beach Marriott Hotel at maturity.

In February 2014, we redeemed $150 million of our 6% Series Q senior notes due 2016 for an aggregate price of $152 million.

On January 10, 2014, we repaid $225 million on the revolver portion of our credit facility and currently have $782 million of remaining available capacity.


Results of Operations

The following tables reflect certain line items from our statements of
operations (in millions, except percentages):




                                          Quarter ended March 31,            % Change
                                          2014               2013          2013 to 2014
 Total revenues                       $      1,309       $      1,224                6.9 %
 Operating costs and expenses:
 Property-level costs (1)                    1,144              1,108                3.2
 Corporate and other expenses                   34                 26               30.8
 Operating profit                              134                 90               48.9
 Interest expense                               58                 76              (23.7 )
 Benefit for income taxes                        7                  7                  -
 Income from continuing operations              76                 34              123.5
 Income from discontinued
 operations                                      -                 26                N/M
 Gain on sale of property, net of
 tax                                           109                  -                N/M

 Host Inc.:
 Net income attributable to
 non-controlling interests            $          6       $          4               50.0 %
 Net income attributable to Host
 Inc.                                          179                 56              219.6

 Host L.P.:
 Net income attributable to
 non-controlling interests            $          4       $          3               33.3 %
 Net income attributable to Host
 L.P.                                          181                 57              217.5

(1) Amount represents total operating costs and expenses from our unaudited condensed consolidated statements of operations less corporate and other expenses and gain on insurance settlements.

N/M=Not meaningful.

2014 Compared to 2013

The comparisons of our hotel revenues and expenses are affected by the results of the hotels acquired and sold during the comparable periods (collectively, our "Recent Acquisitions and Dispositions"). Our first quarter 2014 operations benefited from the results of the Powell Hotel, acquired in January 2014 and the Hyatt Place Waikiki Beach, acquired in May 2013. This was offset by the results for two hotels sold in 2014, which operations prior to sale now are included in continuing operations due to the adoption of ASU 2014-08 Reporting for Discontinued Operations.

Hotel Sales Overview

The following table presents total revenues (in millions, except percentages)
and includes both comparable and non-comparable hotels:



                                  Quarter ended March 31,           % Change
                                  2014               2013         2013 to 2014
          Revenues:
          Rooms               $        808       $        762               6.0 %
          Food and beverage            405                369               9.8
          Other                         96                 93               3.2
          Total revenues      $      1,309       $      1,224               6.9

Rooms. Rooms revenues increased $46 million, or 6.0%, to $808 million compared to the first quarter of 2013. The improvement in rooms revenues reflects a 6.2% increase in RevPAR at our comparable hotels, which is discussed in more detail below, as well as RevPAR improvements from recently renovated properties that are not considered comparable. The increase in rooms revenues was offset partially by a net decrease of $5 million due to the results of our Recent Acquisitions and Dispositions.


Food and beverage. Food and beverage ("F&B") revenues increased $36 million, or 9.8%, to $405 million compared to the first quarter of 2013. For our comparable hotels, F&B revenues increased 9.4% for the quarter, driven by increased volume at our New York market properties related to the Super Bowl. Additionally, the Sheraton New York Times Square Hotel and Newark Liberty International Airport Marriott benefited from substantial renovations, which were completed in 2013. In addition, several properties had double-digit F&B revenue increases, including San Diego Marriott Marquis & Marina, Sheraton San Diego Hotel & Marina, JW Marriott Desert Springs Resort & Spa, and San Francisco Marriott Marquis. The increase in F&B revenues was offset partially by a net decrease of $5 million as a result of our Recent Acquisitions and Dispositions.

Other revenues . Other revenues increased $3 million, or 3.2%, to $96 million for the first quarter of 2014, compared to the first quarter of 2013 due to increased (i) golf revenues, (ii) attrition and cancellation fees and (iii) rental income and commissions. The increase in other revenues from owned hotels was offset partially by a net decrease of $1 million due to the results of our Recent Acquisitions and Dispositions.

Comparable Portfolio Operating Results. We discuss operating results for our hotels on a comparable basis. Comparable hotels are those properties that we have consolidated for the entirety of the reporting periods being compared. Comparable hotels do not include the results of properties acquired or sold, or that incurred significant property damage or business interruption or have undergone large scale capital projects during these periods. As of March 31, 2014, 109 of our 114 owned hotels have been classified as comparable hotels. See "Comparable Hotel Operating Statistics" for a complete description of our comparable hotels. We also discuss our comparable operating results by property type (i.e. urban, suburban, resort or airport), geographic market and mix of business (i.e. transient, group or contract).

Comparable Hotel Sales by Geographic Market

The following table sets forth performance information for our comparable hotels by geographic market as of March 31, 2014 and 2013, respectively:

                  Comparable Hotels by Market in Constant US$



                       As of March 31, 2014                  Quarter ended March 31, 2014                   Quarter ended March 31, 2013
                                                                          Average                                        Average                      Percent
                    No. of             No. of           Average          Occupancy                     Average          Occupancy                    Change in
Market            Properties            Rooms          Room Rate        Percentage       RevPAR       Room Rate        Percentage       RevPAR         RevPAR
Boston                      5               3,432     $    172.94              60.9 %   $ 105.36     $    163.11              66.4 %   $ 108.30             (2.7 )%
New York                    9               7,224          246.13              77.6       190.89          232.73              78.7       183.14              4.2
Philadelphia                2                 776          192.34              78.6       151.17          198.64              63.0       125.20             20.7
Washington,
D.C.                       12               6,016          205.70              69.6       143.14          210.95              68.0       143.40             (0.2 )
Atlanta                     6               2,280          171.62              74.8       128.36          162.00              72.2       116.95              9.8
Florida                     7               3,230          245.25              85.8       210.43          239.05              84.2       201.27              4.6
Chicago                     7               2,857          142.64              59.6        85.01          148.46              58.9        87.47             (2.8 )
Denver                      3               1,363          145.62              62.0        90.33          136.61              55.4        75.72             19.3
Houston                     4               1,706          191.53              79.9       152.98          175.59              82.3       144.53              5.8
Phoenix                     4               1,522          245.17              82.6       202.58          235.30              79.1       186.12              8.8
Seattle                     3               1,774          163.37              72.1       117.75          150.31              66.1        99.38             18.5
San Francisco               5               3,701          214.98              77.6       166.78          185.71              71.7       133.15             25.3
Los Angeles                 8               3,228          171.01              81.2       138.80          159.34              80.3       127.88              8.5
San Diego                   5               4,691          196.10              80.4       157.68          185.32              73.4       136.09             15.9
Hawaii                      2               1,256          401.96              86.4       347.40          371.82              89.4       332.31              4.5
Other                      13               7,929          166.94              68.4       114.17          165.23              68.3       112.79              1.2
Domestic                   95              52,985          203.71              74.0       150.65          195.20              72.4       141.29              6.6

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