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.
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 the duration and
confidence and the value of the
shape public perception of travel to a particular location such as natural
disasters, weather, pandemics, 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;
• the impact of geopolitical developments outside
the pace of the economic recovery in
Kingdom's referendum to withdraw from the
growth in markets such as
all of which could affect the relative volatility of global credit markets
generally, global travel and lodging demand, including with respect to our
foreign hotel properties;
• risks that the recent travel ban to
immigration policies will suppress international travel to the United
States generally; • volatility in global financial and credit markets, and the impact of
budget deficits and potential
deficits through reductions in spending and similar austerity measures,
which could materially adversely affect
conditions, business activity, credit availability, borrowing costs, and
• operating risks associated with the hotel business, including the effect
of increasing operating or labor costs or changes in workplace rules that
affect labor costs;
• 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
our indebtedness or related to restrictive covenants in our debt agreements, including the risk that a default could occur;
• our ability to maintain our properties in a first-class manner, including
meeting capital expenditures requirements, and the effect of renovations,
including temporary closures, on our hotel occupancy and financial results;
• the ability of our hotels to compete effectively against other lodging
businesses in the highly competitive markets in which we operate in terms
of 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
• relationships with property managers and joint venture partners and our
ability to realize the expected benefits of our joint ventures and other strategic relationships;
• risks associated with a single manager, Marriott International, managing a
significant portion of our properties;
• changes in the desirability of the geographic regions of the hotels in our
portfolio or in the travel patterns of hotel customers; 19
• the ability of third-party internet and other travel intermediaries to
attract and retain customers;
• 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 effect of a data breach or significant disruption of hotel operator
information technology networks as a result of cyber attacks;
• 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
be established by
Host Inc.to continue to satisfy complex rules in order to qualify as REITs for federal income tax purposes and Host Inc.'sand
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 execute our dividend policy,
including factors such as investment activity, operating results and the
economic outlook, any or all of which may influence the decision of our
board of directors as to whether to pay future dividends at levels
previously disclosed or to use available cash to pay 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, 2016and in other filings with the Securities and Exchange Commission("SEC"). Although we believe that 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. 20 --------------------------------------------------------------------------------
Operating Results and Outlook Operating Results
The following table reflects certain line items from our statements of operations and significant operating statistics (in millions, except per share and hotel statistics):
Historical Income Statement Data: Quarter ended
2017 2016 Change 2017 2016 Change Total revenues
$ 1,254 $ 1,295(3.2 )% $ 4,043 $ 4,093 (1.2 )% Net income 105 108 (2.8 )% 478 643 (25.7 )% Operating profit 127 144 (11.8 )% 542 534 1.5 % Operating profit margin under GAAP 10.1 % 11.1 % (100 bps) 13.4 % 13.0 % 40 bps Adjusted EBITDA (1) $ 317 $ 342(7.3 )% $ 1,128 $ 1,123 0.4 % Diluted earnings per share 0.14 0.14 - 0.64 0.85 (24.7 )% NAREIT FFO and Adjusted FFO per diluted share (1) 0.33 0.37 (10.8 )% 1.27 1.28 (0.8 )% Comparable Hotel Data: 2017 Comparable Hotels (2) Quarter ended September 30,
2017 2016 Change 2017 2016 Change Comparable hotel revenues (1)
$ 1,136 $ 1,166(2.6 )% $ 3,621 $ 3,616 0.1 % Comparable hotel EBITDA (1) 296 313 (5.3 )% 1,015 1,010 0.5 % Comparable hotel EBITDA margin (1) 26.1 % 26.85 % (75 bps) 28.0 % 27.9 % 10 bps Change in comparable hotel RevPAR - Constant US$ (1.8 )% 1.0 % Change in comparable hotel RevPAR - Nominal US$ (1.7 )% 1.1 % Change in comparable domestic RevPAR (0.7 )% 1.6 % Change in comparable international RevPAR - Constant US$ (31.0 )% (17.6 )% ___________
(1) Adjusted EBITDA, NAREIT FFO and Adjusted FFO per diluted share and comparable
hotel operating results (including comparable hotel revenues and comparable
hotel EBITDA and margins) are non-GAAP (
principles) financial measures within the meaning of the rules of the
See "Non-GAAP Financial Measures" for more information on these measures,
including why we believe that 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 2017 and 2016 are based on 87
hotels as of
The third quarter was negatively affected by weakness in group revenue due to the shift of the Jewish holidays into the quarter and significant declines at our
Brazilproperties in comparison to the results during the Olympicsin 2016. In addition to the anticipated weakness due to the difficult quarter-over-quarter comparisons, 13 properties were affected by Hurricanes Harvey and Irma in August and September 2017, respectively, which negatively affected total revenues by approximately $12 millionthis quarter, with approximately 65% of the revenue lost coming from a decline in food and beverage revenues. These factors led to decreased RevPAR for the quarter, as well as a reduction in F&B revenues and profits, as both the decline in group revenue, and the shift in the mix of business due to the hurricanes, led to a reduction in F&B banquet and outlet business overall.
Comparable RevPAR on a constant US$ basis decreased 1.8% for the third quarter, due to a 30 basis point decrease in occupancy and a 1.5% decrease in average room rate. Year-to-date, comparable RevPAR on a constant US$ basis improved 1.0% as a result of a 40 basis point increase in occupancy and a 0.6% increase in average room rate. Comparable RevPAR for the quarter was negatively impacted 110 basis points as a result of difficult year-over-year comparisons in
Brazil(discussed below). Results were 21 -------------------------------------------------------------------------------- mixed across our remaining portfolio for the quarter, as declines in our Florida, Atlantaand Chicagomarkets were partially offset by strong performances in our Phoenix, Seattle, and San Franciscomarkets. In addition to the negative effect of the holiday shift in the third quarter of 2017, the disruption in business from the hurricanes are estimated to have reduced Comparable RevPAR by approximately 45 basis points for the third quarter based on pre-hurricane forecasts. On a constant US$ basis, RevPAR at our comparable international properties decreased 31.0% for the third quarter and 17.6% year-to-date. The decline was due to the highly unfavorable comparison to the prior year, when Brazilhosted the 2016 Olympicsand Paralympics, as well as economic and over-supply issues in Brazil. Operating profit Operating profit margins (calculated based on GAAP operating profit as a percentage of GAAP revenues) decreased 100 basis points, to 10.1%, for the third quarter and increased 40 basis points, to 13.4%, year-to-date. These operating profit margins are affected significantly by several items, including dispositions, depreciation and corporate expenses. Our comparable hotel EBITDA margins, which exclude these items, decreased 75 basis points, to 26.1%, for the third quarter and increased 10 basis points, to 28.0%, year-to-date. For the quarter, approximately 85% of the decline was due to the performance of the properties in Braziland the effects of the hurricanes described above. Year-to-date, we continue to see labor productivity improvements at certain of our properties, which are reflective of the time and motion studies we have initiated at some of our largest hotels over the past two years and continue to implement at our medium and smaller-sized hotels. These studies have resulted in hotel managers establishing more accurate labor model standards and improved and expanded forecasting tools, which allow them to more effectively schedule labor based on demand and to minimize excess staffing, thereby reducing costs.
Net income, Adjusted EBITDA and Adjusted FFO per Diluted Share
Net income for the quarter decreased
$3 milliondue to a decline in operating profit of 11.8%, partially offset by the increase in gain on sale of assets, net of tax. Year-to-date, net income decreased $165 million, primarily due to a decrease in gain on sale of assets, net of tax. Adjusted EBITDA decreased $25 millionfor the quarter due to a decrease in gain on business interruption settlements and a decline in operations. Year-to-date, Adjusted EBITDA increased $5 million. Based on actual results compared to the anticipated results for the quarter, we estimate that the impact of the hurricanes was approximately $7 millionin the quarter for both net income and Adjusted EBITDA. These changes resulted in no change in earnings per diluted share for the quarter and a decrease of $0.21, or 24.7%, year-to-date. Adjusted FFO per diluted share decreased $0.04, or 10.8%, in the quarter and $0.01, or 0.8%, for year-to-date, reflecting the operating results described above as well as an increase in interest expense. 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.
the United Stateseconomy continue to be cautiously optimistic for the remainder of 2017, as the country continues to experience low unemployment rates, corporate profits have improved and business investment has accelerated. While discussions on tax reform have picked up, the timing and economic impact of any legislation remains uncertain though we remain hopeful it will benefit the lodging industry. While the industry has experienced slightly above average supply growth in 2017, demand growth has outpaced supply, and the majority of markets are operating at peak occupancy levels. Yet, some of our markets, such as New Yorkand Houston, have continued to experience above-average supply growth in 2017 that has exceeded demand growth, which has made it more challenging for our operators to grow average rates. However, demand growth in these markets has remained strong overall and we continue to focus on shifting the mix of business toward more profitable channels. Our operations were affected by Hurricanes Harvey and Irma during the third quarter and continue to be impacted by damages sustained during the storms. All four of our hotels in Houstonwere able to remain operational during the hurricane. In Florida, due to evacuation mandates, seven of our nine consolidated properties were temporarily closed; however, all have since reopened, although approximately 320 rooms remain out of service. Based on the operating readiness and level of property damage sustained, we did not remove any properties from our comparable operations for the quarter and full year forecast. As a result, we estimate that comparable RevPAR growth for full year 2017 will be between 1.15% and 1.35% on a constant US$ basis. Additionally, we have recorded an insurance receivable of $31 million; however, we are still evaluating the complete property and business interruption impacts of the storms. 22 -------------------------------------------------------------------------------- The current outlook for the lodging industry is uncertain; therefore, there can be no assurances that any increases in hotel revenues or earnings will continue for any number of reasons, including, but not limited to, slower than anticipated growth in the economy, changes in travel patterns, and international economic and political instability.
Dispositions. During the quarter, we sold
The Hilton Melbourne South Wharffor A$230 million( $184 million) and the Sheraton Indianapolis Hotelat Keystone Crossingfor $66 million. We also reached an agreement to sell the Key Bridge Marriottfor $190 million, including $8 millionof FF&E replacement funds, and as of September 30, 2017, it has been classified as held for sale. We expect the sale to be completed no later than the first quarter of 2018, subject to customary closing conditions. Subsequent to quarter end, we also sold a parcel of excess land at the previously sold Chicago Marriott O'Harefor approximately $10 million. Balance Sheet Debt transactions. During the quarter, in connection with the sale of the Hilton Melbourne South Wharfhotel, we repaid the A$86 million( $69 million) mortgage loan secured by the property and repaid A$50 million( $39 million) under the revolver portion of our credit facility. As of September 30, 2017, we had $807 millionof available capacity remaining under the revolver portion of our credit facility. Capital Investments Value enhancements. During the quarter, subject to customary appeals, we received approvals for the rezoning of the golf course land at The Phoenician, A Luxury Collection Resort. The revised plan includes an 18-hole golf course, new tennis complex and activity center and allows for 60 acres of residential development. The approved plan allows for a mix of single-family, townhome and condominium units with approximately 360 units. The property is being marketed to third parties for the residential development. In addition, we negotiated new management agreements for two properties in the third quarter, including the re-branding of The Ritz-Carlton, Buckheadin Atlantato The Whitley, a Luxury Collection Hotelthat will be managed by HEI Hotels & Resorts. Redevelopment and Return on Investment Capital Expenditures. Redevelopment and return on investment ("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, the repositioning of a hotel restaurant, the installation of energy efficient systems or the conversion of underutilized space to more profitable uses. Additionally, in conjunction with the acquisition of a property, we prepare capital and operational improvement plans designed to maximize profitability. During the third quarter, we completed the pool renovation and restaurant repositioning at The Phoenician as part of a multi-year project, as well as the redesign of restaurant and meeting space at The Ritz-Carlton, Buckhead. We deployed approximately $53 millionfor these projects during the first three quarters of 2017.
We expect that redevelopment and ROI projects for full year 2017 will be
Renewal and Replacement Capital Expenditures. These expenditures are designed to ensure that our standards for product quality are maintained and to enhance the overall competitiveness of our properties in the marketplace. We deployed
$155 millionon renewal and replacement capital expenditures during the first three quarters of 2017. During the third quarter, we completed the renovation of the 48,000-square foot ballroom at the New Orleans Marriott, as well as ballroom renovations at the JW Marriott Hotel Mexico City, the JW Marriott Atlanta Buckhead and The Ritz-Carlton, Naples. We expect that our investment in renewal and replacement expenditures in full year 2017 will total approximately $270 millionto $300 million, which includes additional expected spend of approximately $55 millionrelated to replacements for hurricane damage. 23 --------------------------------------------------------------------------------
Results of Operations
The following table reflects certain line items from our statements of operations (in millions, except percentages):
2017 2016 Change 2017 2016 Change Total revenues
$ 1,254 $ 1,295(3.2 )% $ 4,043 $ 4,093 (1.2 )% Operating costs and expenses: Property-level costs (1) 1,104 1,135 (2.7 ) 3,428 3,492 (1.8 ) Corporate and other expenses 24 28 (14.3 ) 79 82 (3.7 ) Gain on insurance and business interruption settlements 1 12 (91.7 ) 6 15 (60.0 ) Operating profit 127 144 (11.8 ) 542 534 1.5 Interest expense 43 38 13.2 125 116 7.8 Gain on sale of assets 59 14 321.4 105 245 (57.1 ) Provision for income taxes 42 19 121.1 63 42 50.0 Host Inc.: Net income attributable to non- controlling interests 1 1 - 6 7 (14.3 ) Net income attributable to Host Inc. 104 107 (2.8 ) 472 636 (25.8 ) Host L.P.: Net loss attributable to non-controlling interests (1 ) - N/M - (1 ) N/M Net income attributable to Host L.P. 106 108 (1.9 ) 478 644 (25.8 ) ___________
(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 and business interruption settlements.
Statement of Operations Results and Trends
For the third quarter and year-to-date 2017, the results of hotels acquired or sold during the comparable periods (collectively, our "Recent Acquisitions and Dispositions") reduced our year-over-year comparisons. Comparisons of our operations were affected by the acquisition of two hotels during the first quarter 2017: the
W Hollywoodacquired in March 2017and The Don CeSar and Beach House Suites complex acquired in February 2017. However, dispositions include the sale of four hotels in 2017 and ten hotels in 2016, which led to an overall net reduction in results. The table below presents the effects on earnings from our Recent Acquisitions and Dispositions (in millions, increase (decrease)): Quarter ended September 30,
2017 2016 Change 2017 2016 Change Revenues: Acquisitions
$ 24$ - $ 24$ 65 $ - $ 65Dispositions 6 45 (39 ) 46 203 (157 ) Total revenues $ 30 $ 45 $ (15 )$ 111 $ 203 $ (92 )Net income (excluding gain on sale, net of tax): Acquisitions $ 3$ - $ 3$ 14 $ - $ 14Dispositions 3 - 3 8 20 (12 ) Net income (excluding gain on sale, net of tax): $ 6$ - $ 6$ 22 $ 20 $ 224
The following table presents total revenues in accordance with GAAP and includes both comparable and non-comparable hotels (in millions, except percentages):
2017 2016 Change 2017 2016 Change Revenues: Rooms
$ 860 $ 879(2.2 )% $ 2,643 $ 2,655 (0.5 )% Food and beverage 314 336 (6.5 ) 1,152 1,183 (2.6 ) Other 80 80 - 248 255 (2.7 ) Total revenues $ 1,254 $ 1,295(3.2 ) $ 4,043 $ 4,093 (1.2 ) Rooms. Total rooms revenues decreased 2.2% and 0.5% for the quarter and year-to-date, respectively. For our comparable hotels, rooms revenues decreased 1.7% for the quarter, as an unfavorable holiday shift resulted in a decrease in group business, which led to declines in both average room rate and occupancy. Year-to-date, comparable rooms revenues increased 0.8% reflecting increases in both average room rate and occupancy. The net effects of our Recent Acquisitions and Dispositions reduced rooms revenues by $8 millionfor the quarter and $52 millionfor the year-to-date. Food and beverage. Total food and beverage ("F&B") revenues decreased 6.5% for the quarter and 2.6% year-to-date, reflecting the reduction in group business, which led to decreases in both outlet and banquet and audio visual revenue, as well as the negative impact of Hurricanes Harvey and Irma. Comparable F&B revenues decreased 5.6% for the quarter and 1.6% year-to-date. The net effect of our Recent Acquisitions and Dispositions reduced F&B revenues by $7 millionfor the quarter and $33 millionfor the year-to-date. Other revenues. Total other revenues were flat for the quarter and decreased 2.7% year-to-date, primarily due to the net effect of our Recent Acquisitions and Dispositions, which did not materially impact other revenues for the quarter but reduced other revenues by $7 millionyear-to-date. At our comparable hotels, other revenues increased 0.8% for the quarter and 1.1% year-to-date as an increase in rental income at the New York Marriott Marquisoffset a decline in attrition and cancellation revenues.
Property-level Operating Expenses
The following table presents property-level operating expenses in accordance with GAAP and includes both comparable and non-comparable hotels (in millions, except percentages): Quarter ended
2017 2016 Change 2017 2016 Change Expenses: Rooms
$ 227 $ 2250.9 % $ 676 $ 674 0.3 % Food and beverage 242 257 (5.8 ) 794 830 (4.3 ) Other departmental and support expenses 309 321 (3.7 ) 952 981 (3.0 ) Management fees 53 54 (1.9 ) 178 177 0.6 Other property-level expenses 97 96 1.0 294 289 1.7 Depreciation and amortization 176 182 (3.3 ) 534 541 (1.3 ) Total property-level operating expenses $ 1,104 $ 1,135(2.7 ) $ 3,428 $ 3,492 (1.8 ) Our operating costs and expenses, which have both fixed and variable components, are affected by changes in occupancy, inflation, and revenues (which affect management fees), though the effect on specific costs will differ. Our wages and benefits account for approximately 57% of the operating expenses at our hotels (excluding depreciation). Other property-level expenses consist of property taxes, the amounts and structure of which are highly dependent on local jurisdiction taxing authorities, and property and general liability insurance, all of which do not necessarily increase or decrease based on similar changes in revenues at our hotels. 25
Rooms. Rooms expenses increased 0.9% and 0.3% for the third quarter and
year-to-date 2017, respectively, which reflects an increase of 1.6% and 2.0% for
the quarter and year-to-date, respectively, at our comparable hotels. The
increase was driven by overall growth in wage rates. The net effect of our
Recent Acquisitions and Dispositions reduced rooms expenses
Food and beverage. F&B expenses decreased 5.8% for the quarter and 4.3% year-to-date. The net effect of our Recent Acquisitions and Dispositions reduced F&B expenses by
$5 millionand $23 millionfor the quarter and year-to-date, respectively. For our comparable hotels, F&B expenses decreased 5.2% for the quarter and 3.0% year-to-date, consistent with the decline in comparable F&B revenues. Other departmental and support expenses. Other departmental and support expenses decreased $12 millionfor the third quarter and $29 millionyear-to-date, primarily due to a decrease of $7 millionfor the quarter and $31 millionyear-to-date from the net effect of our Recent Acquisitions and Dispositions. On a comparable hotel basis, other departmental and support expenses decreased $5 millionfor the quarter and were flat year-to-date. Management fees. Base management fees, which generally are calculated as a percentage of total revenues, decreased $2 millionin the third quarter and $4 millionyear-to-date, due primarily to the net effect of our Recent Acquisitions and Dispositions. Incentive management fees, which are generally based on the level of operating profit at each property after we receive a priority return on our investment, increased $1 millionfor the third quarter and $4 millionyear-to-date. Other property-level expenses. These expenses generally do not vary significantly based on occupancy and include expenses such as property taxes and insurance. Other property level expenses increased $1 millionfor the third quarter and $5 millionyear-to-date. Other property-level expenses at our comparable hotels were flat for the quarter. Year-to-date, comparable other property-level expenses increased 2.7% year-to-date, primarily due to increases in property taxes and ground rent, partially offset by a decrease in insurance expense. The net effect of our Recent Acquisitions and Dispositions reduced other property-level expenses by $1 millionfor the quarter and $6 millionyear-to-date.
Other Income and Expense
Corporate and other expenses. The following table details our corporate and other expenses for the quarter and year-to-date (in millions):
Quarter ended Year-to-date ended September 30, September 30, 2017 2016 2017 2016
General and administrative costs
70 $ 74 Non-cash stock-based compensation 3 2 8 8
Litigation accruals and acquisition costs, net - - 1 - Total
$ 24 $ 28$ 79 $ 82 Interest expense. Interest expense increased due to the issuance of the Series G senior notes in the first quarter 2017. The following table details our interest expense for the quarter and year-to-date (in millions): Quarter ended Year-to-date ended September 30, September 30, 2017 2016 2017 2016
Cash interest expense(1)
$ 41 $ 35 $ 120 $ 110Non-cash interest expense 2 3 5 6 Total interest expense $ 43 $ 38 $ 125 $ 116___________
(1) Including the change in accrued interest, total cash interest paid was
Gain on sale of assets. During the third quarter and year-to-date 2017, we recognized a gain on sale of assets of
$59 millionand $105 million, respectively, due primarily to the sale of two hotels in the third quarter and four hotels year-to-date. We recognized a gain on sale of assets of $14 millionand $245 millionduring the third quarter and year-to-date 2016, respectively, due to the sale of two hotels during the third quarter and ten hotels year-to-date. 26 --------------------------------------------------------------------------------
Equity in earnings of affiliates. Equity in earnings of affiliates decreased
Provision for income taxes. We lease substantially all our properties to consolidated subsidiaries designated as taxable REIT subsidiaries ("TRS") for federal income tax purposes. The difference between hotel-level operating cash flow and the aggregate rent paid to
Host L.P.by the TRS represents its taxable income or loss, with regard to which we record an income tax provision or benefit. The increase in the income tax provision recorded in the third quarter and year-to-date 2017 compared to the same periods in 2016 relates to an increase of taxable income of the TRS and the Australian capital gains tax (approximately $22 million) associated with the sale of the Hilton Melbourne South Wharfon July 28, 2017.
We discuss operating results for our hotels on a comparable basis. Comparable hotels are those properties that we have consolidated for the entirety of the reporting periods being compared. Comparable hotels do not include the results of hotels acquired or sold, that incurred significant property damage or business interruption, or have undergone large scale capital projects during these periods. As of
September 30, 2017, 87 of our 94 owned hotels are classified as comparable hotels. See " Comparable Hotel Operating Statistics" for a complete description of our comparable hotels. We also discuss our comparable RevPAR results by geographic market and mix of business (i.e. transient, group, or contract). 27
The following tables set forth performance information for our comparable hotels
by geographic market as of
Comparable Hotelsby Market in Constant US$ (by RevPAR)
As of September 30, 2017 Quarter ended September 30, 2017 Quarter ended September 30, 2016 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 Hawaii 3 1,682
$ 325.4492.4 % $ 300.75 $ 316.6792.5 % $ 292.772.7 % Seattle 2 1,315 267.84 93.6 250.75 258.78 90.9 235.26 6.6 New York 8 6,961 271.00 91.3 247.53 280.23 89.8 251.75 (1.7 ) San Francisco 4 2,912 256.52 89.4 229.21 252.99 86.8 219.71 4.3 Boston 4 3,185 244.72 88.5 216.68 242.48 90.5 219.42 (1.2 ) San Diego 3 2,981 225.90 86.5 195.47 213.13 91.4 194.80 0.3 Los Angeles 7 2,843 214.72 87.7 188.40 216.17 86.9 187.75 0.3 Chicago 6 2,392 204.47 88.5 180.94 216.88 87.0 188.71 (4.1 ) Denver 2 735 190.27 88.6 168.50 189.33 85.5 161.91 4.1 Washington, D.C. 12 6,024 193.93 82.5 160.05 193.50 81.4 157.43 1.7 Atlanta 5 1,939 189.32 75.9 143.69 189.85 80.3 152.43 (5.7 ) Florida 8 4,559 181.83 62.1 112.92 182.06 68.0 123.72 (8.7 ) Houston 4 1,716 168.11 66.3 111.49 167.78 67.7 113.58 (1.8 ) Phoenix 4 1,518 142.34 65.7 93.47 147.53 58.0 85.57 9.2 Other 9 5,784 160.58 71.9 115.42 169.12 71.5 120.96 (4.6 ) Domestic 81 46,546 219.88 81.6 179.38 221.01 81.8 180.69 (0.7 ) Canada 2 849 192.87 79.4 153.11 198.84 76.7 152.45 0.4 Latin America 4 962 167.13 58.7 98.08 299.89 67.9 203.58 (51.8 ) International 6 1,811 181.13 68.4 123.87 249.47 72.0 179.62 (31.0 ) All Markets - Constant US$ 87 48,357 218.65 81.1 177.30 221.95 81.4 180.65 (1.8 ) Comparable Hotels in Nominal US$
As of September 30, 2017 Quarter ended September 30, 2017 Quarter ended September 30, 2016 Average Average Percent No. of No. of Average Occupancy Average Occupancy Change in Properties Rooms Room Rate
Percentage RevPAR Room Rate Percentage RevPAR RevPAR Canada 2 849
$ 192.8779.4 % $ 153.11 $ 191.0376.7 % $ 146.464.5 % Latin America 4 962 167.13 58.7 98.08 290.57 67.9 197.25 (50.3 ) International 6 1,811 181.13 68.4 123.87 240.91 72.0 173.45 (28.6 ) Domestic 81 46,546 219.88 81.6 179.38 221.01 81.8 180.69 (0.7 ) All Markets 87 48,357 218.65 81.1 177.30 221.67 81.4 180.41 (1.7 ) 28
Comparable Hotels by Market in Constant US$ (by RevPAR) As of September 30, 2017 Year-to-date ended September 30, 2017 Year-to-date ended September 30, 2016 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 Hawaii 3 1,682
$ 339.8690.9 % $ 308.79 $ 326.2891.4 % $ 298.383.5 % New York 8 6,961 263.14 86.7 228.26 268.49 86.4 232.10 (1.7 ) San Francisco 4 2,912 260.60 84.6 220.45 264.71 84.7 224.10 (1.6 ) Seattle 2 1,315 242.23 86.8 210.24 226.40 81.8 185.30 13.5 Boston 4 3,185 237.07 82.5 195.54 231.85 82.1 190.45 2.7 San Diego 3 2,981 223.18 84.3 188.08 210.42 86.0 181.05 3.9 Washington, D.C. 12 6,024 224.01 80.8 181.02 212.48 79.6 169.20 7.0 Los Angeles 7 2,843 208.11 85.1 177.05 206.35 84.5 174.42 1.5 Florida 8 4,559 235.84 73.2 172.56 230.87 75.5 174.35 (1.0 ) Chicago 6 2,392 197.01 79.6 156.82 201.88 77.6 156.57 0.2 Phoenix 4 1,518 208.06 74.1 154.14 213.44 68.4 146.04 5.5 Atlanta 5 1,939 192.65 78.1 150.46 192.39 79.4 152.70 (1.5 ) Denver 2 735 181.43 82.1 149.03 181.35 76.0 137.85 8.1 Houston 4 1,716 179.40 71.8 128.87 182.61 73.6 134.44 (4.1 ) Other 9 5,784 177.70 74.2 131.85 180.51 72.4 130.72 0.9 Domestic 81 46,546 228.30 80.8 184.44 226.16 80.3 181.55 1.6 Canada 2 849 179.33 65.9 118.18 176.57 63.9 112.79 4.8 Latin America 4 962 177.99 59.2 105.44 232.98 66.5 154.82 (31.9 ) International 6 1,811 178.65 62.4 111.41 207.10 65.2 135.13 (17.6 ) All Markets - Constant US$ 87 48,357 226.85 80.1 181.70 225.58 79.7 179.81 1.0
As of September 30, 2017 Year-to-date ended September 30, 2017 Year-to-date ended September 30, 2016 Average Average Percent No. of No. of Average Occupancy Average Occupancy Change in Properties Rooms Room Rate Percentage RevPAR Room Rate Percentage RevPAR RevPAR Canada 2 849
$ 179.3365.9 % $ 118.18 $ 174.3263.9 % $ 111.356.1 % Latin America 4 962 177.99 59.2 105.44 223.43 66.5 148.48 (29.0 ) International 6 1,811 178.65 62.4 111.41 200.90 65.2 131.08 (15.0 ) Domestic 81 46,546 228.30 80.8 184.44 226.16 80.3 181.55 1.6 All Markets 87 48,357 226.85 80.1 181.70 225.39 79.7 179.66 1.1 Our top performing domestic markets for the quarter were Phoenixand Seattle, with RevPAR growth of 9.2% and 6.6%, respectively. In Phoenix, growth was led by a 12.1% increase in RevPAR at The Westin Kierland Resort & Spa, driven by strong corporate group room nights. Seattlesaw gains in both occupancy and rate, with the W Seattlecontinuing to experience positive effects from the completed rooms renovation last year. In the southern and central United States, our Floridaproperties were negatively affected by Hurricane Irma, as just two of our Floridaassets remained open throughout the storm. Likewise, our Houstonproperties were impacted by Hurricane Harvey. RevPAR declined 1.8% due to a shift from transient to group business, mainly related to recovery efforts. Atlantaunderperformed the market due to an occupancy decline of 440 basis points, largely due to renovations at three of our properties. Chicagounderperformed the portfolio due to soft transient demand and fewer city-wide events. In the west region, our San Franciscoand Denvermarkets outperformed the portfolio. The San Francisco RevPAR growth was primarily driven by occupancy gains at the San Francisco Marriott Marquisand the San Francisco Marriott Fisherman's Wharf. RevPAR at our Denverproperties increased due to strong group volume. In Hawaii, group and transient rate gains at the Hyatt Regency Maui Resort & Spawere the primary contributor to the RevPAR growth in the market. On the east coast, our Washington, D.C.properties outperformed the portfolio, while our New Yorkproperties were in-line with the portfolio. In Washington, D.C., the RevPAR growth of 1.7% mainly was due to occupancy gains from strong city-wide events. In New York, RevPAR decreased due to rate declines across all the assets, despite an increase in occupancy. 29 -------------------------------------------------------------------------------- On a constant dollar basis, our international markets experienced a decline in RevPAR of 31.0% for the quarter. The decline was primarily due to the highly unfavorable comparison to the prior year, when Brazilhosted the 2016 Olympicsand Paralympics, as well as economic and over-supply issues in Brazil.
Hotels Sales by Business Mix
The majority of our customers fall into three broad categories: transient, group, and contract business. The information below is derived from business mix data for 87 of our hotels for which business mix data is available from our managers. For additional detail on our business mix, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our most recent Annual Report on Form 10K. For the third quarter, our revenue decline was driven by a decrease in group revenue of 7.0%, with a decline in room nights sold of 6.9% and a decline in average rate of 0.2%. Group volume was negatively impacted by the shift of both Jewish holidays into the third quarter in 2017, as well as the difficult comparison with the
Olympicsin the third quarter of 2016 for our properties in Brazil. Transient revenue declined 1.0%, despite a 1.3% increase in room nights, as hotels sought to replace lost group rooms through discount channels. Contract business was our strongest performing segment with a 20.2% increase in revenue due to a 21.8% increase in room nights. This performance was due to additional airline contracts at hotels in markets where new supply or demand concerns warranted negotiating multi-year contracts at favorable rates.
Year-to-date, group and transient revenue declined by 0.5% and 0.1%, respectively. The decline in group revenue was driven by a 1.9% decrease in corporate groups and a 0.5% decrease in association group, partially offset by an increase in other group, which includes social, military, education, religious, fraternal and youth and amateur sports teams. Our strongest performing segment year-to-date was contract business, which grew 19.7%.
Liquidity and Capital Resources
Liquidity and Capital Resources of
Host Inc.and Host L.P.The liquidity and capital resources of Host Inc.and Host L.P.are derived primarily from the activities of Host L.P., which generates the capital required by our business from hotel operations, the incurrence of debt, the issuance of OP units or the sale of properties. Host Inc.is a REIT and its only significant asset is the ownership of partnership interests of Host L.P.; therefore, its financing and investing activities are conducted through Host L.P., except for the issuance of its common and preferred stock. Proceeds from stock issuances by Host Inc.are contributed to Host L.P.in exchange for OP units. Additionally, funds used by Host Inc.to pay dividends or to repurchase its stock are provided by Host L.P.Therefore, while we have noted those areas in which it is important to distinguish between Host Inc.and Host L.P., we have not included a separate discussion of liquidity and capital resources as the discussion below applies to both Host Inc.and Host L.P.Overview. We look to maintain a capital structure and liquidity profile with an appropriate balance of cash, debt, and equity in order to provide financial flexibility given the inherent volatility of the lodging industry. We believe this strategy will result in a lower overall cost of capital, allow us to complete opportunistic investments and acquisitions and will position us to manage potential declines in operations throughout the lodging cycle. Over the past several years, we have decreased our leverage as measured by our net debt-to-EBITDA ratio and reduced our debt service obligations, leading to an increase in our fixed charge coverage ratio. We intend to use available cash predominantly for acquisitions or other investments in our portfolio. If we are unable to find appropriate investment opportunities, we will consider other uses for our cash, such as a return of capital through dividends or common stock repurchases, the amounts of which will be determined by our operations and other market factors. Significant factors we review to determine the amount and timing of common stock repurchases include our current stock price compared to our determination of the underlying value of our assets, current and forecast operating results and the completion of hotel sales. We have structured our debt profile to maintain a balanced maturity schedule and to minimize the number of assets that are encumbered by mortgage debt. Currently, none of our consolidated hotels are encumbered by mortgage debt. We have access to multiple types of financing, as all of our debt consists of senior notes and borrowings under our credit facility, none of which are collateralized by specific hotels. We believe that we have sufficient liquidity and access to capital markets in order to take advantage of opportunities to enhance our portfolio, withstand declines in operating cash flow, pay near-term debt maturities, and fund our capital expenditures programs. We may continue to access capital markets if favorable conditions exist in order to enhance our liquidity and to fund cash needs. Cash Requirements. We use cash for acquisitions, capital expenditures, debt payments, operating costs, and corporate and other expenses, as well as for dividends and distributions to stockholders and OP unitholders and stock and OP unit repurchases. As a REIT, Host Inc.is required to distribute to its stockholders at least 90% of its taxable income, excluding net capital gain, on an annual basis. On October 16, 2017, we paid a dividend of $0.20per share on Host Inc.'scommon stock, which totaled approximately $148 million. 30 -------------------------------------------------------------------------------- Capital Resources. As of September 30, 2017, we had $789 millionof cash and cash equivalents. We depend primarily on external sources of capital to finance growth, including acquisitions. As a result, the liquidity and debt capacity provided by our credit facility and the ability to issue senior unsecured debt are key components of our capital structure. Our financial flexibility (including our ability to incur debt, make distributions and make investments) is contingent on our ability to maintain compliance with the financial covenants of such indebtedness, which include, among other things, the allowable amounts of leverage, interest coverage and fixed charges. If, at any time, we determine that market conditions are favorable, after taking into account our liquidity requirements, we may cause Host L.P.to issue senior notes or debentures exchangeable for shares of Host Inc.common stock. Given the total amount of our debt and our maturity schedule, we will continue to redeem or refinance senior notes and mortgage debt from time to time, taking advantage of favorable market conditions. In February 2017, Host Inc.'sBoard of Directors authorized repurchases of up to $250 millionof senior notes and mortgage debt other than in accordance with its terms, of which the entire amount remains available under this authority. We may purchase senior notes for cash through open market purchases, privately negotiated transactions, a tender offer or, in some cases, through the early redemption of such securities pursuant to their terms. Repurchases of debt will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. Any refinancing or retirement before the maturity date will affect earnings and NAREIT FFO per diluted share as a result of the payment of any applicable call premiums and the acceleration of previously deferred financing costs. In addition, while we intend to use any available cash predominantly for acquisitions or other investments in our hotel portfolio, to the extent we do not identify appropriate investments, we may elect in the future to use available cash for other purposes, including share repurchases, subject to market conditions. Accordingly, in light of our priorities in managing our capital structure and liquidity profile and given prevailing conditions and relative pricing in the capital markets, we may, at any time, subject to applicable securities laws, be considering, or be in discussions with respect to the repurchase or issuance of exchangeable debentures and/or senior notes or the repurchase or sale of common stock. Any such transactions may, subject to applicable securities laws, occur simultaneously. Additionally, in February 2017, Host Inc.'sBoard of Directors authorized a new program to repurchase up to $500 millionof Host Inc.common stock. The common stock may be purchased from time to time depending upon market conditions, and may be purchased in the open market or through private transactions or by other means, including principal transactions with various financial institutions, like accelerated share repurchases, forwards, options and similar transactions and through one or more trading plans designed to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. The plan does not obligate us to repurchase any specific number or any specific dollar amount of shares and may be suspended at any time at our discretion. We have not repurchased any shares under this program.
Sources and Uses of Cash. Our sources of cash include cash from operations, proceeds from debt and equity issuances, and proceeds from asset sales. Uses of cash include acquisitions, investments in our joint ventures, capital expenditures, operating costs, debt repayments, and repurchases of and distributions to equity holders.
Cash Provided by Operations. Our cash provided by operations decreased
Cash Provided by (Used in) Investing Activities. Net cash used in investing activities was
$200 millionduring the first three quarters of 2017 compared to net cash provided by investing activities of $15 millionfor the first three quarters of 2016. Cash used in investing activities primarily consisted of capital expenditures for our existing portfolio and the acquisition of The Don CeSar, W Hollywoodand the Miami Marriott Biscayne Bayground lease in 2017. Cash used for renewal and replacement capital expenditures for the first three quarters of 2017 and 2016 was $155 millionand $222 million, respectively, while cash used for capital expenditures invested in ROI/redevelopment projects and acquisition capital expenditures during the same period was $53 millionand $192 million, respectively. This use of cash was offset partially by proceeds from the sale of four hotels in 2017 and ten hotels in 2016. 31 --------------------------------------------------------------------------------
The following tables summarize significant acquisitions and dispositions that
have been completed as of
Transaction Date Description of Transaction Investment Acquisitions
March 2017 Acquisition of the Miami Marriott Biscayne Bay ground lease
$ (38 )March 2017 Acquisition of the W Hollywood (219 ) February 2017 Acquisition of The Don CeSar and Beach House Suites complex (214 ) Total acquisitions $ (471 )Transaction Date Description of Transaction Net Proceeds(1) Sales Price Dispositions September 2017 Disposition of Sheraton Indianapolis at Keystone Crossing $ 64 $ 66 July 2017 Disposition of the Hilton Melbourne South Wharf(2) 182 184 April 2017 Disposition of Sheraton Memphis Downtown 66 67 January 2017 Disposition of JW Marriott Desert Springs Resort & Spa 160 172 Total dispositions $ 472 ___________
(1) Proceeds are net of transfer taxes, other sales costs and FF&E replacement
funds deposited directly to the property or hotel manager by the purchaser.
(2) Immediately prior to the sale, we acquired the 25% interest from the
non-controlling partner for
Cash Used in Financing Activities. Year-to-date 2017, net cash used in financing activities was
$244 millioncompared to net cash used of $789 millionfor the year-to-date 2016. Cash provided by financing activities in 2017 included the issuance of the Series G senior notes. Cash used in financing activities in 2017 primarily consisted of dividend payments and the repayment of mortgage debt, while 2016 also included the repurchase of Host Inc.common stock. The following tables summarize significant issuances, net of deferred financing costs and issuance discounts, or repayments of debt, including premiums, that have been completed through October 31, 2017(in millions): Transaction Date Description of Transaction Net Proceeds Debt Issuances March 2017 Proceeds from the issuance of $400 million3.875% Series G senior notes $ 395 Total issuances $ 395 Transaction Transaction Date Description of Transaction Amount Debt Repayments
Melbourne South Wharf $ (69 ) January - 2017 Net repayment on the revolver portion of credit September facility (39 ) Total cash repayments
$ (108 )
The following table summarizes significant equity transactions that have been
Transaction Transaction Date Description of Transaction Amount Equity of
Host Inc.January - October 2017 Dividend payments (1)(2) $ (628 )Cash payments on equity transactions $ (628 )___________
(1) In connection with the dividends,
million to its common OP unit holders.
(2) Includes the cash payment for the fourth quarter 2016 dividend that was paid
January 2017. 32
September 30, 2017, our total debt was $4.0 billion, with an average interest rate of 3.9% and an average maturity of 5.4 years. Additionally, 70% of our debt has a fixed rate of interest and none of our hotels are encumbered by mortgage debt. Financial Covenants Credit Facility Covenants. Our credit facility contains certain important financial covenants concerning allowable leverage, unsecured interest coverage, and required fixed charge coverage. There were no changes to these financial covenants in connection with the May 2017amendment and restatement of the credit facility. Total debt used in the calculation of our leverage ratio is based on a "net debt" concept, under which cash and cash equivalents in excess of $100 millionare deducted from our total debt balance for purposes of measuring compliance. To the extent that no amounts are outstanding under the credit facility, breaching these covenants is not an event of default thereunder.
We are in compliance with all of our financial covenants under the credit
facility. The following table summarizes the results of the financial tests
required by the credit facility as of
Covenant Requirement Actual Ratio for all years Leverage ratio 2.3 x Maximum ratio of 7.25x Fixed charge coverage ratio 6.5 x Minimum ratio
Unsecured interest coverage ratio (1) 9.6 x Minimum ratio of 1.75x ___________
(1) If, at any time, our leverage ratio exceeds 7.0x, our minimum unsecured
interest coverage ratio will be reduced to 1.5x.
Senior Notes Indenture Covenants
Covenants for Senior Notes Issued After We Attained an Investment Grade Rating
We are in compliance with all of the financial covenants applicable to our
Series D, Series E, Series F and Series G senior notes. The following table
summarizes the results of the financial tests required by the senior notes
indentures for our Series D, Series E, Series F and Series G senior notes and
our actual credit ratios as of
Actual Ratio Covenant
Unencumbered assets tests 493 % Minimum ratio
Total indebtedness to total assets 20 % Maximum ratio
Secured indebtedness to total assets <1 % Maximum ratio
EBITDA-to-interest coverage ratio 9.1 x Minimum ratio
Covenants for Senior Notes Issued Before We Attained an Investment Grade Rating
The terms of our senior notes that were issued before we attained an investment grade rating contained provisions providing that many of the restrictive covenants in the senior notes indenture would not apply should
Host L.P.attain an investment grade rating. Accordingly, because our senior notes currently are rated investment grade by both Moody's and Standard & Poor's, the covenants in our senior notes indenture (for all series prior to the Series D senior notes) that previously limited our ability to incur indebtedness or pay dividends no longer are applicable. Even if we were to lose the investment grade rating, however, we would be in compliance with all of our financial covenants under the senior notes indenture. The following table summarizes the actual credit ratios for our existing senior notes (other than the Series D, Series E, Series F and Series G senior notes) as of September 30, 2017and the covenant requirements contained in the senior notes indenture that would be applicable at such times as our existing senior notes no longer are rated investment grade by either Moody's or Standard & Poor's: Actual Ratio* Covenant
Unencumbered assets tests 499 % Minimum ratio
Total indebtedness to total assets 20 % Maximum ratio
Secured indebtedness to total assets <1 % Maximum ratio
EBITDA-to-interest coverage ratio 9.1 x Minimum ratio of 2.0x ___________ 33
* Because of differences in the calculation methodology between our Series D,
Series E, Series F and Series G senior notes and our other senior notes with
respect to covenant ratios, our actual ratios for the two sets of senior notes
are slightly different.
For additional detail on our credit facility and senior notes, see our Annual
Report on Form 10-K for the year ended
Host Inc.is required to distribute at least 90% of its annual taxable income, excluding net capital gain, to its stockholders in order to maintain its qualification as a REIT, including taxable income recognized for federal income tax purposes but with regard to which we do not receive cash. Funds used by Host Inc.to pay dividends on its common stock are provided through distributions from Host L.P.As of September 30, 2017, Host Inc.is the owner of approximately 99% of the Host L.P.common OP units. The remaining common OP units are owned by third party limited partners. Each Host L.P.OP unit may be redeemed for cash or, at the election of Host Inc., Host Inc.common stock based on the conversion ratio. The conversion ratio is 1.021494 shares of Host Inc.common stock for each Host L.P.OP unit. Investors should take into account the non-controlling interest in the Host L.P.common OP units when analyzing common dividend payments by Host Inc.to its stockholders, as these common OP unitholders share, on a pro rata basis, in cash distributed by Host L.P.to all of its common OP unitholders. For example, if Host Inc.paid a $1per share dividend on its common stock, it would be based on the payment of a $1.021494per common OP unit distribution by Host L.P.to Host Inc., as well as to the other Host L.P.common OP unitholders. Host Inc.'spolicy on common dividends generally is to distribute, over time, 100% of its taxable income, which is dependent primarily on Host Inc.'sresults of operations, as well as gains and losses on property sales. Host Inc.paid a regular quarterly cash dividend of $0.20per share on its common stock on October 16, 2017to stockholders of record on September 29, 2017. All future dividends are subject to approval by Host Inc.'sBoard of Directors. While Host Inc.intends to use available cash predominantly for acquisitions or other investments in its portfolio, to the extent that we do not identify appropriate investments, we may decide in the future to use available cash for other items, such as common stock repurchases or increased dividends, the amount of which dividends could be in excess of taxable income.
European Joint Venture
September 30, 2017, hotel investments by the Euro JV total approximately €1.5 billion, with €0.7 billion of mortgage debt. All of the mortgage debt of the Euro JV is non-recourse to us and our partners and a default thereunder does not trigger a default under any of our debt. Our investment, total partners' funding, and debt outstanding as of September 30, 2017are as follows: Host's Portion of Host's Net Total Partner Non-Recourse Investment Funding % of Total Commitment Debt balance Debt (in millions) (in millions) (in millions) (in millions)
Euro JV Fund I € 124 € 463 67 % (1) € 305 €
98 EuroJV Fund II 91 301 67 % 394 132 € 215 € 764 € 699 € 230 ___________
(1) The remaining commitment for Fund I is limited to investments in the current
portfolio of hotels, including capital expenditures and debt repayments.
The following table sets forth operating statistics for the
10 EuroJV hotels consisting of 3,902 rooms as of September 30, 2017and 2016, all of which are comparable: Comparable Euro JV Hotelsin Constant Euros Quarterended September 30,
2017 2016 Change 2017 2016 Change Average room rate € 222.07 € 223.65 (0.7 )% € 217.66 € 215.71 0.9 % Average occupancy 81.9 % 78.8 % 310 bps 78.3 % 74.3 % 410 bps RevPAR € 181.94 € 176.25 3.2 % € 170.48 € 160.18 6.4 % 34
The Euro JV's comparable hotel RevPAR increased approximately 3.2% and 6.4% on a constant Euro basis for the third quarter and year-to-date, respectively, primarily due to improvement in occupancy driven by group performance.
Critical Accounting Policies
Our unaudited condensed consolidated financial statements have been prepared in conformity with GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe that the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on experience and on various other assumptions that we believe to be reasonable under the circumstances. All of our significant accounting policies, including certain critical accounting policies, are disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2016. For a detailed discussion of the new accounting standards, see "Note 2. Summary of Significant Accounting Policies" in this quarterly report.
To facilitate a quarter-to-quarter comparison of our operations, we present certain operating statistics (i.e., RevPAR, average daily rate and average occupancy) and operating results (revenues, expenses, hotel EBITDA and associated margins) for the periods included in this report on a comparable hotel basis in order to enable our investors to better evaluate our operating performance.
Because these statistics and operating results relate only to our hotel properties, they exclude results for our non-hotel properties and other real estate investments. We define our comparable hotels as properties:
(i) that are owned or leased by us and the operations of which are
included in our consolidated results for the entirety of the reporting periods being compared; and (ii) that have not sustained substantial property damage or business interruption, or undergone large-scale capital projects (as defined further below) during the reporting periods being compared. The hotel business is capital-intensive and renovations are a regular part of the business. Generally, hotels under renovation remain comparable hotels. A large scale capital project that would cause a hotel to be excluded from our comparable hotel set is an extensive renovation of several core aspects of the hotel, such as rooms, meeting space, lobby, bars, restaurants, and other public spaces. Both quantitative and qualitative factors are taken into consideration in determining if the renovation would cause a hotel to be removed from the comparable hotel set, including unusual or exceptional circumstances such as: a reduction or increase in room count, rebranding, a significant alteration of the business operations, or the closing of the hotel during the renovation. We do not include an acquired hotel in our comparable hotel set until the operating results for that hotel have been included in our consolidated results for one full calendar year. For example, we acquired The Don CeSar in February of 2017. The hotel will not be included in our comparable hotel set until
January 1, 2019. Hotels that we sell are excluded from the comparable hotel set once the transaction has closed. Similarly, hotels are excluded from our comparable hotel set from the date that they sustain substantial property damage or business interruption or commence a large-scale capital project. In each case, these hotels are returned to the comparable hotel set when the operations of the hotel have been included in our consolidated results for one full calendar year after completion of the repair of the property damage or cessation of the business interruption, or the completion of large-scale capital projects, as applicable. Of the 94 hotels that we owned on September 30, 2017, 87 have been classified as comparable hotels. The operating results of the following hotels that we owned as of September 30, 2017are excluded from comparable hotel results for these periods: • The Denver Marriott Tech Center, removed in the first quarter of 2016 (business disruption due to extensive renovations, including conversion of 64 rooms to 41 suites, conversion of the concierge lounge into three meeting rooms, and the repositioning of the public space and food and beverage areas); • The Hyatt Regency San Francisco Airport, removed in the first quarter of 2016 (business disruption due to extensive renovations, including all guestrooms and bathrooms, meeting space, the repositioning of the atrium into a new restaurant and lounge, and conversion of the existing restaurant to additional meeting space);
2015 (business interruption due to the demolition of the existing conference center and construction of the new exhibit hall); 35
• The Phoenician (acquired in
quarter of 2016, business disruption due to extensive
including all guestrooms and suites, a redesign of the lobby
public areas, renovation of pools, recreation areas and a
and a re-configured spa and fitness center);
during 2015 for extensive renovations and reopened in January
• The Don CeSar and Beach House Suites complex (acquired
The operating results of 14 hotels disposed of in 2017 and 2016 are not included in comparable hotel results for the periods presented herein. None of our hotels have been excluded from our comparable hotel results due to Hurricanes Harvey or Irma.
CONSTANT US$, NOMINAL US$ AND CONSTANT EUROS
Operating results denominated in foreign currencies are translated using the prevailing exchange rates on the date of the transaction, or monthly based on the weighted average exchange rate for the period. For comparative purposes, we also present the RevPAR results for the prior year assuming the results of our foreign operations were translated using the same exchange rates that were effective for the comparable periods in the current year, thereby eliminating the effect of currency fluctuation for the year-over-year comparisons. We believe that this presentation is useful to investors as it provides clarity with respect to the growth in RevPAR in the local currency of the hotel consistent with the manner in which we would evaluate our domestic portfolio. However, the estimated effect of changes in foreign currency has been reflected in the actual and forecast results of net income, EBITDA, earnings per diluted share and Adjusted FFO per diluted share. Nominal US$ results include the effect of currency fluctuations, consistent with our financial statement presentation.
We present RevPAR results for our joint venture in
Non-GAAP Financial Measures
We use certain "non-GAAP financial measures," which are measures of our
historical or future financial performance that are not calculated and presented
in accordance with GAAP, within the meaning of applicable
• Earnings Before Interest Expense, Income Taxes, Depreciation and Amortization ("EBITDA") and Adjusted EBITDA, as a measure of performance for
Host Inc.and Host L.P., • Funds From Operations ("FFO") and FFO per diluted share, both calculated in accordance with National Association of Real Estate Investment Trusts("NAREIT") guidelines and with certain
from those guidelines, as a measure of performance for Host
• Comparable hotel operating results, as a measure of performance for
Host Inc.and Host L.P.
The following discussion defines these measures and presents why we believe they are useful supplemental measures of our performance.
Set forth below for each such non-GAAP financial measure is a reconciliation of the measure with the financial measure calculated and presented in accordance with GAAP that we consider most directly comparable thereto. We also have included in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures" in our Annual Report on Form 10-K for the year ended
December 31, 2016, further explanations of the adjustments being made, a statement disclosing the reasons why we believe the presentation of each of the non-GAAP financial measures provide useful information to investors regarding our financial condition and results of operations, the additional purposes for which we use the non-GAAP financial measures and limitations on their use.
EBITDA and Adjusted EBITDA
Earnings before Interest Expense, Income Taxes, Depreciation and Amortization ("EBITDA") is a commonly used measure of performance in many industries. Management believes EBITDA provides useful information to investors regarding our results of operations because it helps us and our investors evaluate the ongoing operating performance of our properties after removing the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization). Management 36 -------------------------------------------------------------------------------- also believes the use of EBITDA facilitates comparisons between us and other lodging REITs, hotel owners who are not REITs and other capital-intensive companies. Management uses EBITDA to evaluate property-level results and as one measure in determining the value of acquisitions and dispositions and, like FFO and Adjusted FFO per diluted share, it is widely used by management in the annual budget process and for compensation programs.
Historically, management has adjusted EBITDA when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance and that the presentation of Adjusted EBITDA, when combined with the primary GAAP presentation of net income (loss), is beneficial to an investor's complete understanding of our operating performance. Adjusted EBITDA also is a relevant measure in calculating certain credit ratios. We adjust EBITDA for the following items, which may occur in any period, and refer to this measure as Adjusted EBITDA:
• Real Estate Transactions - We exclude the effect of gains and losses,
including the amortization of deferred gains, recorded on the disposition or acquisition of depreciable assets and property insurance gains in our consolidated statement of operations
believe that including them in Adjusted EBITDA is not
reflecting the ongoing performance of our assets. In addition, material gains or losses from the depreciated value of the
assets could be less important to investors given that the
asset book value often does not reflect its market value (as noted below for FFO).
• Equity Investment Adjustments - We exclude the equity in earnings
(losses) of unconsolidated investments in partnerships and
ventures as presented in our consolidated statement of
because it includes our pro rata portion of depreciation,
and interest expense, which are excluded from EBITDA. We
pro rata share of the Adjusted EBITDA of our equity investments as we believe this more accurately reflects the performance of our investments. The pro rata Adjusted EBITDA of equity investments is defined as the EBITDA of our equity investments, adjusted for any gains or losses on property transactions, multiplied by our
ownership in the partnership or joint venture.
• Consolidated Partnership Adjustments - We deduct the non-controlling
partners' pro rata share of the Adjusted EBITDA of our
partnerships as this reflects the non-controlling owners'
the EBITDA of our consolidated partnerships. The pro rata Adjusted EBITDA of non-controlling partners is defined as the EBITDA of our consolidated partnerships, adjusted for any gains or losses on property transactions, multiplied by the non-controlling partners' percentage ownership in the partnership or joint venture.
• Cumulative Effect of a Change in Accounting Principle - Infrequently,
Financial Accounting Standards Board("FASB") promulgates
accounting standards that require the consolidated statement of operations to reflect the cumulative effect of a change in
principle. We exclude these one-time adjustments because they do not reflect our actual performance for that period. • Impairment Losses - We exclude the effect of impairment expense recorded because we believe that including it in Adjusted EBITDA is not consistent with reflecting the ongoing performance of our assets. In addition, we believe that impairment expense, which is based on historical cost book values, is similar to gains (losses) on dispositions and depreciation expense, both of which also are excluded from EBITDA.
• Acquisition Costs - Under GAAP, costs associated with completed
property acquisitions are expensed in the year incurred. We
the effect of these costs because we believe they are not
of the ongoing performance of the company. • Litigation Gains and Losses - We exclude the effect of gains or losses associated with litigation recorded under GAAP that we consider outside the ordinary course of business. We believe that including these items is not consistent with our ongoing operating
In unusual circumstances, we also may adjust EBITDA for gains or losses that management believes are not representative of our current operating performance. The last such adjustment was in 2013. 37 --------------------------------------------------------------------------------
The following table provides a reconciliation of the differences between EBITDA and Adjusted EBITDA and net income, the financial measure calculated and presented in accordance with GAAP that we consider the most directly comparable:
Reconciliation of Net Income to EBITDA and Adjusted EBITDA for
Host Inc.and Host L.P. (in millions) Quarter ended Year-to-date ended September 30, September 30, 2017 2016 2017 2016 Net income (1) $ 105 $ 108 $ 478 $ 643Interest expense 43 38 125 116 Depreciation and amortization 176 182 534 541 Income taxes 42 19 63 42 EBITDA (1) 366 347 1,200 1,342 Gain on dispositions (2) (58 ) (12 ) (101 ) (242 ) Gain on property insurance settlement (1 ) - (1 ) (1 ) Acquisition costs - - 1 - Equity investment adjustments: Equity in earnings of affiliates (4 ) (8 ) (19 ) (19 ) Pro rata Adjusted EBITDA of equity investments 16 17 55 51 Consolidated partnership adjustments: Pro rata Adjusted EBITDA attributable to non- controlling partners in other consolidated partnerships (2 ) (2 ) (7 ) (8 ) Adjusted EBITDA (1) $ 317 $ 342 $ 1,128 $ 1,123___________
(1) Net Income, EBITDA, Adjusted EBITDA, NAREIT FFO and Adjusted FFO include a
2016, respectively, for the sale of the portion of land attributable to
individual units sold by the
(2) Reflects the sale of four hotels in 2017 and ten hotels in 2016.
FFO Measures We present NAREIT FFO and NAREIT FFO per diluted share as non-GAAP measures of our performance in addition to our earnings (loss) per share (calculated in accordance with GAAP). We calculate NAREIT FFO per diluted share as our NAREIT FFO (defined as set forth below) for a given operating period, as adjusted for the effect of dilutive securities, divided by the number of fully diluted shares outstanding during such period in accordance with NAREIT guidelines. NAREIT defines FFO as net income (loss) (calculated in accordance with GAAP), excluding gains (losses) from sales of real estate, the cumulative effect of changes in accounting principles, real estate-related depreciation, amortization and impairments, and adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect our pro rata share of the FFO of those entities on the same basis. 38 -------------------------------------------------------------------------------- We also present Adjusted FFO per diluted share when evaluating our performance because management believes that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance. Management historically has made the adjustments detailed below in evaluating our performance, in our annual budget process, and for our compensation programs. We believe that the presentation of Adjusted FFO per diluted share, when combined with both the primary GAAP presentation of earnings per share and FFO per diluted share as defined by NAREIT, provides useful supplemental information that is beneficial to an investor's complete understanding of our operating performance. We adjust NAREIT FFO per diluted share for the following items, which may occur in any period, and refer to this measure as Adjusted FFO per diluted share:
• Gains and Losses on the Extinguishment of Debt - We exclude the effect
of finance charges and premiums associated with the
debt, including the acceleration of the write-off of deferred financing costs from the original issuance of the debt being redeemed or retired and incremental interest expense incurred during the refinancing period. We also exclude the gains on debt
the original issuance costs associated with the retirement of preferred stock. We believe that these items are not reflective of our ongoing finance costs.
• Acquisition Costs - Under GAAP, costs associated with completed
property acquisitions are expensed in the year incurred. We
the effect of these costs because we believe they are not
of the ongoing performance of the company. • Litigation Gains and Losses - We exclude the effect of gains or losses associated with litigation recorded under GAAP that we consider outside the ordinary course of business. We believe that including these items is not consistent with our ongoing operating
In unusual circumstances, we also may adjust NAREIT FFO for gains or losses that management believes are not representative of our current operating performance. The last such adjustment was in 2013. 39 -------------------------------------------------------------------------------- The following table provides a reconciliation of the differences between our non-GAAP financial measures, NAREIT FFO and Adjusted FFO (separately and on a per diluted share basis), and net income, the financial measure calculated and presented in accordance with GAAP that we consider most directly comparable: Host Inc. Reconciliation of Net Income to NAREIT and Adjusted Funds From Operations per Diluted Share (in millions, except per share amount) Quarter ended Year-to-date ended September 30, September 30, 2017 2016 2017 2016 Net income (1)
$ 105 $ 108 $ 478 $ 643Less: Net income attributable to non-controlling interests (1 ) (1 ) (6 ) (7 ) Net income attributable to Host Inc. 104 107 472 636 Adjustments: Gain on dispositions (2) (58 ) (12 ) (101 ) (242 ) Tax on dispositions 22 - 22 9 Gain on property insurance settlement (1 ) - (1 ) (1 ) Depreciation and amortization 175 181 532 538 Equity investment adjustments: Equity in earnings of affiliates (4 ) (8 ) (19 ) (19 ) Pro rata FFO of equity investments 11 13 39 38 Consolidated partnership adjustments: FFO adjustment for non-controlling partnerships (1 ) (1 ) (2 ) (3 ) FFO adjustments for non-controlling interests of Host L.P. (1 ) (2 ) (6 ) (3 ) NAREIT FFO (1) 247 278 936 953 Adjustments to NAREIT FFO: Acquisition costs - - 1 - Loss on debt extinguishment - - 1 - Adjusted FFO (1) $ 247 $ 278 $ 938 $ 953For calculation on a per share basis(3): Diluted weighted average shares outstanding - EPS, NAREIT FFO and Adjusted FFO 739.0 741.1 738.7 745.2 NAREIT FFO and Adjusted FFO per diluted share $ .33 $ .37 $ 1.27 $ 1.28___________
(1-2) Refer to the corresponding footnote on the Reconciliation of Net Income to
EBITDA and Adjusted EBITDA for
(3) Earnings per diluted share and NAREIT FFO and Adjusted FFO per diluted share
are adjusted for the effects of dilutive securities. Dilutive securities may
include shares granted under comprehensive stock plans, preferred OP units
held by non-controlling partners, exchangeable debt securities and other
non-controlling interests that have the option to convert their limited partner interests to common OP units. No effect is shown for securities if they are anti-dilutive.
We present certain operating results of our hotels, such as hotel revenues, expenses, food and beverage profit and EBITDA (and the related margins), on a comparable hotel, or "same store," basis as supplemental information for investors. For an explanation of which properties we consider to be "comparable hotels", see "
Comparable Hotel Operating Statistics" above. 40 -------------------------------------------------------------------------------- The following tables presents certain operating results and statistics for our comparable hotels for the periods presented herein and a reconciliation of the differences between comparable hotel EBITDA, a non-GAAP financial measure, and net income, the financial measure calculated and presented in accordance with GAAP that we consider most directly comparable. Similar reconciliations of the differences between (i) comparable hotel revenues and (ii) our revenues as calculated and presented in accordance with GAAP (each of which is used in the applicable margin calculation), and between (iii) comparable hotel expenses and (iv) operating costs and expenses as calculated and presented in accordance with GAAP, are also included in the reconciliation: Comparable Hotel Results for Host Inc. and Host L.P. (in millions, except hotel statistics) Quarter ended Year-to-date ended September 30, September 30, 2017 2016 2017 2016 Number of hotels 87 87 87 87 Number of rooms 48,357 48,357 48,357 48,357 Change in comparable hotel RevPAR - Constant US$ (1.8 )% - 1.0 % - Nominal US$ (1.7 )% - 1.1 % - Operating profit margin (1) 10.1 % 11.1 % 13.4 % 13.0 % Comparable hotel EBITDA margin (1) 26.1 % 26.85 % 28.0 % 27.9 % Food and beverage profit margin (1) 22.9 % 23.5 % 31.1 % 29.8 % Comparable hotel food and beverage profit margin (1) 22.9 % 23.3 % 30.9 % 29.9 % Net income $ 105 $ 108 $ 478 $ 643Depreciation and amortization 176 182 534 541 Interest expense 43 38 125 116 Provision for income taxes 42 19 63 42 Gain on sale of property and corporate level income/expense (39 ) 7 (45 ) (185 ) Non-comparable hotel results, net (2) (31 ) (41 ) (140 ) (147 ) Comparable hotel EBITDA $ 296 $ 313 $ 1,015 $ 1,010Quarter ended September 30, 2017
Adjustments Adjustments Depreciation and Depreciation and Non-comparable hotel corporate level Comparable Non-comparable hotel corporate level Comparable GAAP Results results, net(2) items
Hotel ResultsGAAP Results results, net(2) items Hotel ResultsRevenues Room $ 860 $ (71 ) $ - $ 789 $ 879 $ (76 ) $ - $ 803 Food and beverage 314 (35 ) - 279 336 (40 ) - 296 Other 80 (12 ) - 68 80 (13 ) - 67 Total revenues 1,254 (118 ) - 1,136 1,295 (129 ) - 1,166 Expenses Room 227 (18 ) - 209 225 (19 ) - 206 Food and beverage 242 (27 ) - 215 257 (30 ) - 227 Other 459 (43 ) - 416 471 (51 ) - 420 Depreciation and amortization 176 - (176 ) - 182 - (182 ) - Corporate and other expenses 24 - (24 ) - 28 - (28 ) -
Gain on insurance and business
interruption settlements (1 ) 1 - - (12 ) 12 - - Total expenses 1,127 (87 ) (200 ) 840 1,151 (88 ) (210 ) 853
Operating Profit - Comparable
Hotel EBITDA$ 127 $ (31 ) $ 200 $ 296 $ 144 $ (41 ) $ 210 $ 313 41
-------------------------------------------------------------------------------- Year-to-date ended
September 30, 2017
Adjustments Adjustments Non-comparable Depreciation and Non-comparable Depreciation and hotel results, corporate level Comparable hotel results, corporate level Comparable GAAP Results net(2) items
Hotel ResultsGAAP Results net(2) items Hotel ResultsRevenues Room $ 2,643$ (244 ) $ - $ 2,399 $ 2,655$ (275 ) $ - $ 2,380Food and beverage 1,152 (133 ) - 1,019 1,183 (148 ) - 1,035 Other 248 (45 ) - 203 255 (54 ) - 201 Total revenues 4,043 (422 ) - 3,621 4,093 (477 ) - 3,616 Expenses Room 676 (58 ) - 618 674 (68 ) - 606 Food and beverage 794 (90 ) - 704 830 (104 ) - 726 Other 1,424 (140 ) - 1,284 1,447 (173 ) - 1,274 Depreciation and amortization 534 - (534 ) - 541 - (541 ) - Corporate and other expenses 79 - (79 ) - 82 - (82 ) -
Gain on insurance and business
interruption settlements (6 ) 6 - - (15 ) 15 - - Total expenses 3,501 (282 ) (613 ) 2,606 3,559 (330 ) (623 ) 2,606
Operating Profit - Comparable
Hotel EBITDA$ 542 $ (140 ) $ 613 $ 1,015$ 534 $ (147 ) $ 623 $ 1,010___________
(1) Profit margins are calculated by dividing the applicable operating profit by
the related revenue amount. GAAP operating profit margins are calculated
using amounts presented in the consolidated statements of operations.
Comparable hotel margins are calculated using amounts presented in the above
(2) Non-comparable hotel results, net, includes the following items: (i) the
results of operations of our non-comparable hotels and sold hotels, which
operations are included in our consolidated statements of operations as
continuing operations, (ii) gains on insurance settlements and business
interruption proceeds, and (iii) the results of our office spaces and other
non-hotel income. 42
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