Host Hotels & Resorts, Inc. (HST) – the lodging real estate investment trust (REIT) – disclosed third-quarter 2013 adjusted funds from operations (FFO) per share of 25 cents, missing the Zacks Consensus Estimate by a penny.
However, this exceeded the year-ago figure of 23 cents by 8.7%. Quarterly results benefited from the significant rise in total owned hotels revenues and comparable hotel Revenue Per Available Room (RevPAR).
Including certain non-recurring items, FFO was 25 cents per share, up 25.0% from 20 cents in the prior-year quarter.
Total revenue came in at $1,223 million, which marginally missed the year-ago figure of $1,224 million and also the Zacks Consensus Estimate of $1,240 million.
Notably, on Jan 1, 2013, Host Hotels shifted to calendar quarter reporting periods, instead of the fiscal quarter reporting period that it followed earlier. Consequently, the company adjusted the 2012 fiscal figures on a calendar-quarter basis.
Behind the Headlines
Total owned hotel revenue climbed 5.5% year over year to $1,214 million, driven by the impressive performance of its comparable and non-comparable properties.
During the reported quarter, comparable hotel RevPAR climbed 5.5% year over year to $150.23, primarily driven by continued improvement in average room rates and occupancy. Average room rates and occupancy increased 4.8% year over year to $191.63 and occupancy rose 50 basis points (bps) to 78.4% on a year-over-year basis.
On the other hand, comparable hotel adjusted operating profit margin remained flat year over year at 23.7% and adjusted earnings before interest, tax, depreciation and amortization (EBITDA) surged 0.7% to $270 million on a year-over-year basis.
Portfolio Restructuring Activity
During the quarter, Host Hotels spent $24 million in redevelopment and return on investment (ROI) expenditures. The company also expended nearly $76 million in renewal and replacement expenses. Additionally, Host Hotels used up approximately $7 million for capital and operational improvement of the acquired asset.
In the quarter under review, Host Hotels' European joint venture (JV) bought a Starwood Hotels & Resorts Worldwide Inc. (HOT) branded property – Sheraton Stockholm Hotel – in Sweden for around €102 million. Also, subsequent to quarter end, the European JV offloaded the Courtyard Paris La Defense West – Colombes for €19 million.
Moreover, Host Hotels divested a Marriott International, Inc. (MAR) branded property – Portland Marriott Downtown Waterfront – for about $87 million, subsequent to quarter-end. The company expects to generate a profit of around $40 million in fourth-quarter 2013.
Liquidity
As of Sep 30, 2013, Host Hotels had cash and cash equivalents of $354 million, compared with $393 million at the prior-quarter end. The company has $771 million of capacity available under its credit facility at the end of the reported quarter.
During the third-quarter, Host Hotels issued 6.0 million common shares in at-the-market offering and generated net proceeds of approximately $109 million.
Dividend
During the quarter, Host Hotels raised its quarterly cash dividend by 9.1% sequentially to 12 cents per share from 11 cents. The dividend was paid on Oct 15, 2013 to stockholders of record on Sep 30.
Narrowed Outlook
For 2013, Host Hotels revised its outlook and now expects its adjusted FFO per share in the range of $1.28 – $1.30 (prior guidance being $1.28 to $1.32).
The updated guidance is based on expectations of an increase of 5.5% to 5.7% (prior guidance being 5.5% to 6.25%) in comparable hotel RevPAR and comparable hotel adjusted operating profit margins in the range of 100 – 105 bps (prior guidance being 100 bps–120 bps).
Our Take
An earnings miss at Host Hotels is disappointing but we believe that given its solid portfolio of luxury and upper upscale hotels, the company would be able to deliver better results in the quarters ahead. Notably, the strategic portfolio restructuring activities bode well for the Host Hotels’ long-term growth.
Also, the dividend hike for the 11th consecutive time boosts investors’ confidence in the stock and thus seems promising. Going forward, we believe that the company’s properties across hard-to-replicate areas have the potential for significant capital appreciation.
Host Hotels currently carries a Zacks Rank #3 (Hold). Another REIT that is performing well is CubeSmart (CUBE) carrying 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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