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HST > SEC Filings for HST > Form 10-Q on 1-Aug-2014All Recent SEC Filings

Show all filings for HOST HOTELS & RESORTS, INC.

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


1-Aug-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;


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; and

risks associated with our ability to effectuate our dividend policy, including factors such as investment activity, operating results and the economic outlook which may influence our board of director's decision whether to pay future dividends at levels previously disclosed or to use available cash to make special dividends.

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 June 30,                          Year-to-date ended June 30,
                              2014              2013         Change            2014                2013          Change
Total revenues             $     1,431       $     1,399         2.3 %     $       2,740       $       2,624         4.4 %
Net income                         159               121        31.4 %               344                 181        90.1 %
Operating profit                   225               205         9.8 %               359                 295        21.7 %
Operating profit margin
under GAAP                        15.7 %            14.7 %       100 bps            13.1 %              11.2 %       190 bps
Adjusted EBITDA (1)        $       411       $       431        (4.6 )%    $         719       $         714         0.7 %

Diluted earnings per
share                      $       .21       $       .16        31.3 %     $         .44       $         .24        83.3 %
NAREIT FFO per diluted
share (1)                          .43               .39        10.3 %               .75                 .68        10.3 %
Adjusted FFO per diluted
share (1)                          .43               .45        (4.4 )%              .76                 .73         4.1 %


Comparable Hotel Data:
                                                            2014 Comparable Hotels (2)
                              Quarter ended June 30,                          Year-to-date ended June 30,
                              2014              2013         Change            2014                2013          Change
Comparable hotel
revenues (1)               $     1,350       $     1,305         3.4 %     $       2,553       $       2,431         5.0 %
Comparable hotel
operating profit (1)               400               379         5.5 %               689                 636         8.3 %
Comparable hotel
adjusted operating
profit margin (1)                 29.6 %            29.0 %        60 bps            27.0 %              26.2 %        80 bps
Change in comparable
hotel RevPAR - Constant
US$                                5.1 %                                             5.9 %
Change in comparable
hotel RevPAR - Nominal
US$                                4.8 %                                             5.4 %
Change in comparable
domestic RevPAR                    4.5 %                                             5.5 %
Change in comparable
international RevPAR -
Constant US$                      16.2 %                                            13.3 %

(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 June 30, 2014.


The growth in revenues for the second quarter and year-to-date was driven by an increase in rooms revenues as comparable hotel RevPAR, on a constant US$ basis, increased 5.1% for the second quarter, reflecting a 4.1% increase in average room rates and an increase in occupancy to 81%, primarily due to strong transient business. Group business increased 2.1% for the quarter, primarily reflecting a 6.6% decline in April group results due to the Easter holiday shift to the second quarter in 2014. RevPAR increased 5.9% year-to-date on a constant dollar basis, reflecting a 4.3% increase in average room rates and a slight increase in occupancy to 77.5% due to improvements in both group and transient business. On a nominal US$ basis, which includes the effect of foreign currency fluctuations, comparable hotel RevPAR increased 4.8% and 5.4%, respectively, for the second quarter and year-to-date. Comparable food and beverage revenues increased 0.8% for the quarter. Food and beverage revenues decreased by $3 million for the quarter and increased $33 million year-to-date. For the quarter, food & beverage revenues were affected negatively by the weakness in group business. The growth in revenues for all revenue categories were affected negatively by the timing of hotels acquired and sold during the comparable periods, which resulted in a net decrease of $25 million in total revenues for the quarter and $35 million year-to-date.

Operating profit margins (calculated based on GAAP operating profit as a percentage of GAAP revenues) increased 100 basis points and 190 basis points for the second quarter and year-to-date 2014, respectively, as compared to the same periods in 2013. These operating profit margins are affected significantly by several items, including operations from recently acquired hotels, depreciation, impairment expense, and corporate expenses. Our comparable hotel adjusted operating profit margins, which exclude these items, increased 60 basis points and 80 basis points for the second quarter and year-to-date 2014, respectively, compared to 2013. The improvement in operating profit margins was driven by the improvements in average room rates at the properties and well-managed operating costs, which increased 2.6% for the quarter and 3.8% year-to-date at our comparable hotels, respectively.

The increase in net income for the second quarter of 2014 primarily reflects the improvement in operations, described above, and a $48 million, or 47%, decline in interest expense. The improvements in net income were partially offset by several recent transactions, including (i) the second quarter 2013 gain of $21 million on sale of four acres of excess land adjacent to the Newport Beach Marriott Resort & Spa (ii) the timing of acquisitions and dispositions and
(iii) cost (primarily selling expenses) recorded for the Maui timeshare, which is currently under development. The significant decline in interest expense reflects an improvement of $17 million due to the refinancing or repayment of debt that has resulted in lower weighted average interest rates and a decrease in total debt and a decline in debt extinguishment costs of $30 million for the quarter. Year-to-date 2014, net income also benefited from $108 million of gains on property sales. 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 second quarter and year-to-date 2014, Host Inc.'s diluted income per common share improved $0.05 per common share and $0.20 per common share, respectively. Host L.P.'s diluted income per common unit improved $0.05 per common unit for the second quarter 2014 and improved $0.21 per common unit for year-to-date 2014.

Comparable hotel adjusted operating profit increased $21 million, or 5.5%, for the quarter and increased $53 million, or 8.3%, year-to-date. However, for the quarter, Adjusted EBITDA declined $20 million and Adjusted FFO per diluted share decreased $.02 while, year-to-date, Adjusted EBITDA increased by $5 million and Adjusted FFO per diluted share increased $.03 compared to the corresponding 2013 periods. Comparisons of Adjusted EBITDA and Adjusted FFO per diluted share to prior periods were also negatively affected by the recent transactions described above by $39 million and $57 million for the quarter and year-to-date, respectively.

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. Forecasts for full year 2014 GDP and investment growth in the U.S. have declined significantly since January, as the weather-induced slump and the expiration of unemployment benefits in the first quarter of the year had a much more severe affect than initially anticipated. However, consumer confidence has been strong in recent months, and growth is expected to accelerate in the last two quarters. While we believe these economic trends will continue to effect individual markets unevenly, based on our current overall group bookings, we believe that 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 5.75% to 6.25%.


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.

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. Year-to-date, we have completed renovations of 2,800 guestrooms, over 100,000 square feet of meeting space and approximately 60,000 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. Approximately $29 million of cash was used for these projects during the first half of 2014, compared to $47 million used during the first half of 2013. During 2014, we plan to spend between $65 million and $75 million for redevelopment and ROI projects. Significant redevelopment and ROI capital expenditures completed during the second quarter included the renovation of approximately 10,000 square feet of restaurant and pubic space at the Denver Marriott West.

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 two quarters of 2014, we spent approximately $7 million on acquisition capital projects, compared to $22 million during the first two quarters of 2013. For the full year 2014, we expect to invest between $25 million and $30 million.

Renewal and Replacement Capital Expenditures. We spent $71 million and $147 million on renewal and replacement capital expenditures during the second quarter and year-to-date of 2014, respectively, compared to $76 million and $163 million during the second quarter and year-to-date of 2013. 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 second quarter of 2014, we completed the renovation of 428 rooms in the south tower of the Sheraton Boston Hotel along with 2,700 square feet of restaurant and public space. We expect that our investment in renewal and replacement expenditures in 2014 will total approximately $330 million to $350 million.

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.

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. During the second half of 2014, we anticipate asset sales totaling approximately $200 million, although given the nature of these transactions, there can be no assurances that we will complete these sales in this time period.

Financing activities

Debt Transactions. On June 27, 2014, we completed the amendment and restatement of our revolving credit facility, scheduled to mature in 2015, and our term loan, scheduled to mature in 2017, extending the final maturity for both to 2019, including extensions. The new credit facility also improved pricing and based on Host L.P.'s current unsecured long-term debt rating, the all-in-pricing for borrowings was reduced 30 basis points on the revolver and 32.5 basis points on the term loan. Therefore, U.S. dollar denominated borrowings today on the revolver and term loan would result in an initial all-in rate of 1.35% and 1.28%, respectively.


Results of Operations

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




                                  Quarter ended June 30,                           Year-to-date ended June 30,
                                  2014              2013          % Change          2014                2013           % Change
Total revenues                 $     1,431       $     1,399            2.3 %   $       2,740       $       2,624            4.4 %
Operating costs and
expenses:
Property-level costs (1)             1,177             1,157            1.7             2,321               2,266            2.4
Corporate and other expenses            29                37          (21.6 )              63                  63              -
Operating profit                       225               205            9.8               359                 295           21.7
Interest expense                        55               103          (46.6 )             113                 179          (36.9 )
Gain on sale of assets                   -                21            N/M               111                  32            N/M
Provision for income taxes              15                15              -                11                   7           57.1
Income from continuing
operations                             159               116           37.1               344                 150          129.3
Income from discontinued
operations                               -                 5            N/M                 -                  31            N/M

Host Inc.:
Net income attributable to
non-controlling interests      $         4       $         2          100.0     $          10       $           6           66.7
Net income attributable to
Host Inc.                              155               119           30.3               334                 175           90.9

Host L.P.:
Net income attributable to
non-controlling interests      $         2       $         1          100.0     $           5       $           4           25.0
Net income attributable to
Host L.P.                              157               120           30.8               339                 177           91.5

(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 second quarter and year-to-date periods for 2014 operations were affected by the sale of two hotels in 2014, most notably the Philadelphia Marriott Downtown, which operations prior to sale are included in continuing operations. This decrease in operations was offset by the results of the Powell Hotel, acquired in January 2014 and the Hyatt Place Waikiki Beach, acquired in May 2013.

Hotel Sales Overview

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



                          Quarter ended June 30,                           Year-to-date ended June 30,
                          2014              2013          % Change          2014                2013           % Change
Revenues:
Rooms                  $       921       $       891            3.4 %   $       1,729       $       1,654            4.5 %
Food and beverage              415               418           (0.7 )             820                 787            4.2
Other                           95                90            5.6               191                 183            4.4
Total revenues         $     1,431       $     1,399            2.3     $       2,740       $       2,624            4.4


Rooms. The improvement in room revenues reflects the overall improvement in comparable RevPAR, partially offset by the effect of our Recent Acquisitions and Dispositions. For the second quarter, comparable hotel RevPAR, on a constant US$ basis, increased 5.1%, driven by average rate improvement of 4.1%. The results for the second quarter were affected negatively by the shift of the Easter and Passover holidays from March of 2013 to April of 2014. For the year-to-date, comparable hotel RevPAR, on a constant US$ basis, increased 5.9%. The increases in rooms revenues were offset partially by a net decrease of $16 million and $21 million for the quarter and year-to-date periods, respectively, due to the results of our Recent Acquisitions and Dispositions.

Food and beverage. The decline in food and beverage ("F&B") revenues for the quarter is due to the effects of our Recent Acquisitions and Dispositions, partially offset by a 0.8% improvement in F&B revenues at our comparable hotels. For the quarter, the shift in business mix from group to transient resulted in slower growth in banquet and audio visual revenues. Year-to-date, F&B revenues at our comparable hotels increased 4.8% driven by strong growth in banquet and audio visual revenues in the first quarter, partially offset by slower growth in the second quarter. F&B revenues for the quarter and year-to-date were affected negatively by $7 million and $12 million, respectively, due to the results of our Recent Acquisitions and Dispositions.

Other revenues. For the second quarter and year-to-date 2014, other revenues increased $5 million and $8 million, respectively, due to increases in parking, rental and lease income.

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 June 30, 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 tables set forth performance information for our comparable hotels by geographic market as of June 30, 2014 and 2013, respectively:

                  Comparable Hotels by Market in Constant US$



                          As of June 30, 2014                 Quarter ended June 30, 2014                   Quarter ended June 30, 2013
                                                                          Average                                       Average                      Percent
. . .
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