Host Hotels Beats on Both Lines

Zacks

Host Hotels & Resorts, Inc. (HST), a real estate investment trust (:REIT), reported fourth quarter 2012 adjusted FFO (funds from operations) per share of 40 cents, beating the Zacks Consensus Estimate by 3 cents. This also exceeded the year-ago adjusted FFO by 25%. The result came on the back of strong performance of the company’s operating properties.

For full year 2012, the core FFO per share increased 19.6% to $1.10 from 92 cents in 2011. This was also well ahead of the Zacks Consensus Estimate of $1.03.

Including non-recurring items, FFO in the reported quarter was $303 million or 40 cents per share compared with $233 million or 31 cents. For 2012, it came in at $790 million or $1.04 per share compared with $658 million or 89 cents in 2011.

Beneath the Headlines

During the quarter, total revenue increased 6.9% to $1,746 million from $1,634 million in the year-ago quarter. The reported revenue substantially beat the Zacks Consensus Estimate of $1,731 million. For full year 2012, total revenues hiked 7.4% to $5,286 million from $4,924 million in 2011. This, however, missed the Zacks Consensus Estimate of $5,293 million.

The increases in quarterly and yearly revenues were driven by solid RevPAR (revenue per available room) increase at the company's owned hotels. Notably, the full-year figure was largely impacted by results of the 10 hotels acquired during 2011 and Grand Hyatt Washington acquired during the second quarter of 2012.

During the fourth quarter, comparable hotel RevPAR climbed 5.8% to $144.09 from $136.25, driven by a rise in occupancy and average daily rates. Average room rates increased 2.8% to $198.53 from $193.04 in prior-year quarter. On the other hand, occupancy rose 20 bps (basis points) to 72.6% from 70.6% in the year-ago period.

Driven by considerable rise in revenues, comparable hotel adjusted operating margin increased 80 bps to 24.6% from 23.8% in the year-ago period. Adjusted EBITDA (earnings before interest, tax, depreciation and amortization) surged 22.1% to $426 million from $349 million in the prior-year quarter.

Investments

During the fourth quarter, Host Hotels spent around $39 million on acquisition projects. In concurrence with the acquisition of the property, the company invested in improvement plans to maximize profitability the property.

During the quarter, the company completed the refurbishment of around 750 guestrooms and opened a new lounge in the Harbor Tower of the Manchester Grand Hyatt San Diego. Also, it commenced redevelopment of all the rooms of the Grand Hyatt Washington worth $23 million.

Also, Host Hotels invested around $22 million in the fourth quarter toward redevelopment and return on investment projects, which are expected to enhance the company’s profitability amid the challenging market conditions.

Also, the company invested roughly $121 million during the quarter for restoration and replacement of properties. Major renovation and replacement projects include the renewal of 459 rooms at the Washington Marriott at Metro Center, 504-room North Tower of the Orlando World Center Marriott and 130,000 square feet of meeting space at The Westin Kierland Resort & Spa.

Dispositions

During the quarter, the company sold its 94.8% interest in the Toronto Airport Marriott (424-room) and generated a net proceed of around CAD32 million ($32 million).

Subsequent to the end of the quarter, Host Hotels sold the Atlanta Marriott Marquis (1,663 rooms) for $293 million. The company will recognize a gain of around $21 million on the sale in the first quarter of 2013.

Other Notable Transactions

During the quarter, Host Hotels entered into a joint venture (:JV) with Hyatt Residential Group – an affiliate of Hyatt Hotels Corporation (H) – to develop and operate a 131-unit vacation ownership project in Maui, Hawaii on Ka’anapali Beach. The project titled “Hyatt Ka’anapali Beach, a Hyatt Residence Club” is expected to open during late 2014.

Also, Host Hotels acquired 5 hotels in Europe through a JV, in which it holds a 33.4% ownership interest. The properties were purchased from Whitehall Real Estate Funds, an affiliate of The Goldman Sachs Group, Inc. (GS), for an aggregate amount of about €440 million.

The acquired portfolio includes the 757-room Paris Marriott Rive Gauche Hotel & Conference Center, the 402-room Renaissance Amsterdam Hotel, the 327-room Renaissance Paris La Defense Hotel, the 150-room Courtyard Paris La Defense West - Colombes as well as the 97-room Renaissance Paris Vendome Hotel.

Liquidity

Host Hotels also aimed to reduce its cost of debt and extend its debt maturities to strengthen its balance sheet. Year-to-date, the company has issued $1.5 billion of debt with a weighted average interest rate of 3.7% and has utilized the proceeds to repay $1.9 billion of debt with a weighted average interest rate of 6.7%.

As of Dec 31, 2012, Host Hotels had $417 million worth of cash and cash equivalents and $737 million available under its credit facility.

Dividend

On Feb 19, 2013, Host Hotels announced a dividend of 10 cents per share on its common stock. This represented a quarterly dividend increase of 11% from the earlier dividend of 9 cents. The new dividend will be paid on Apr 15, 2013 to stockholders of record as of Mar 28, 2013.

2013 Outlook

For 2013, Host Hotels expects its adjusted FFO per share to come in the range of $1.19–$1.27 per share.

Our Viewpoint

Significant acquisitions and JV deals have been continuously boosting the company’s performance for quite a long time. Also, the company’s luxury and upper upscale hotels across hard-to-replicate areas have the potential for significant capital appreciation.

Moreover, Host Hotels has been consistently making concerted efforts towards increasing shareholders’ wealth, which is also noteworthy. We expect all these to provide an upside potential for the company going forward.

Host Hotels currently holds a Zacks Rank #3 (Hold). Another REIT, Simon Property Group Inc. (SPG) is more favorably placed and holds a Zacks Rank #2 (Buy).

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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