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Host Hotels & Resorts, Inc. Reports Results for the First Quarter of 2011

2011-04-28

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Host Hotels Hotel revenues for owned hotels increased $54 million, or 7%, for the quarter compared to the first quarter of 2010.

Host Hotels & Resorts, Inc. (NYSE: HST), today announced results of operations for the first quarter ended March 25, 2011.

Hotel revenues for owned hotels increased $54 million, or 7%, for the quarter compared to the first quarter of 2010. Total revenue increased $80 million, or 10%, of which $27 million was due to the inclusion of property-level revenues for 53 leased, select-service hotels for which the Company previously recorded rental income. Our 2010 and 2011 acquisitions contributed $21 million of revenues in the quarter. See the notes to the consolidated statements of operations for further information.
Net loss was $60 million, or $.09 per diluted share, for the first quarter of 2011 compared to a net loss of $84 million, or $.13 per diluted share, for the first quarter of 2010.
FFO increased 57% to $77 million, or $.11 per diluted share, for the first quarter of 2011 compared to $49 million, or $.08 per diluted share, for the first quarter of 2010. The Company's operating results include transactions, such as gains or losses on debt extinguishments, litigation costs and acquisition costs that can significantly affect earnings and FFO per diluted share. The net effect of these items was a decrease to earnings per diluted share and FFO per diluted share of $.01 for both the first quarter of 2011 and 2010.
Adjusted EBITDA, which is Earnings before Interest Expense, Income Taxes, Depreciation, Amortization and other items, increased 14% to $144 million for the quarter.

Adjusted EBITDA, FFO, FFO per diluted share and comparable hotel adjusted operating profit margins (discussed below) are non-GAAP (generally accepted accounting principles) financial measures within the meaning of the rules of the Securities and Exchange Commission (SEC). See the discussion included in this press release for information regarding these non-GAAP financial measures.

OPERATING RESULTS

Comparable hotel RevPAR increased 5.4% for the first quarter as a result of the improvement in average room rate of 4.8% combined with a slight increase in occupancy. The first quarter results do not reflect the month of March for the Company's hotels that report results on a calendar basis (approximately 42% of comparable hotels by revenue). On a calendar quarter basis, which includes the March results for these hotels, as well as the final week of March for the Company's Marriott hotels, comparable hotel RevPAR increased 6.9% compared to first quarter of 2010. Two of the Company's larger properties, the Sheraton New York Hotel & Towers and the Philadelphia Marriott Downtown, were severely disrupted by major renovation projects during the quarter. On a calendar quarter basis, excluding the results of the Sheraton New York Hotel & Towers and the Philadelphia Marriott Downtown, comparable hotel RevPAR would have increased by an additional 150 basis points.

Despite the improvements in RevPAR, comparable hotel adjusted operating profit margins for the first quarter decreased 10 basis points compared to 2010, largely due to higher payroll taxes, property-level bonuses, and lower attrition and cancellation revenue. These items disproportionately effected the first quarter and collectively reduced margins by approximately 85 basis points. Comparable hotel adjusted operating profit margins for the quarter were further reduced by 60 basis points due to the substantial disruption at the Sheraton New York Hotel & Towers and the Philadelphia Marriott Downtown.

ACQUISITIONS

During the quarter, the Company invested over $1 billion to complete the acquisitions of the New York Helmsley Hotel, the Manchester Grand Hyatt San Diego Hotel and a portfolio of seven hotels in New Zealand. The Company also obtained an $80 million mortgage loan in conjunction with the acquisition in New Zealand.

EUROPEAN JOINT VENTURE

On April 27, 2011, the Company reached an agreement to expand its investment in the European joint venture through the establishment of a new fund (the “Euro Fund Two”). The new fund will have a target size of approximately euro 450 million of new equity and a total investment of approximately euro 1 billion. Each of the current partners in the European joint venture will own a 33.3% limited partner interest in the Euro Fund Two, while an affiliate of the Company will have a 0.1% general partner interest. As part of the expansion, the Company is contributing the Le Meridien Piccadilly to the joint venture for a transfer price of 64 million pounds Sterling. The agreement and the transfer of the Le Meridien Piccadilly is subject to certain regulatory approvals.

RETURN ON INVESTMENT EXPENDITURES

During the first quarter, the Company invested $46 million in return on investment (ROI) projects. These projects are designed to increase cash flow and improve profitability by capitalizing on changing market conditions and the favorable locations of the Company's properties. During the quarter, these expenditures included approximately $30 million for significant redevelopment projects in progress at the Sheraton New York, the Sheraton Indianapolis and the San Diego Marriott Marquis & Marina. On February 28, 2011, the San Diego Marriott Marquis & Marina became only the fifth hotel in the country to earn the premier Marquis distinction from Marriott, as key elements of its extensive, multi-year renovation project were completed. Significant improvements include an entirely new arrival experience, updated lobby and concierge level, completely remodeled guest rooms and a state-of-the-art-fitness center overlooking a new pool area. The Company expects that its investment in ROI expenditures for 2011 will total approximately $230 million to $250 million.

RENEWAL AND REPLACEMENT EXPENDITURES

The Company also spent approximately $48 million in the first quarter for renewal and replacement expenditures designed to ensure that the high-quality standards of both the Company and its operators are maintained. Major renovation projects that were completed during the first quarter include 98,700 square feet of meeting space at the Sheraton Boston, 87,500 square feet of meeting space at the Philadelphia Marriott Downtown, 36,000 square feet of meeting space at the Hyatt Regency Washington on Capitol Hill and the renovation of 1,001 rooms at the San Antonio Marriott Rivercenter. The Company expects that renewal and replacement expenditures for 2011 will total approximately $300 million to $325 million.

BALANCE SHEET

On March 1, 2011, the Company repaid the CAD129 million ($132 million) mortgage debt on a portfolio of four hotels in Canada. The Company drew CAD100 million ($103 million) from its credit facility in the form of bankers' acceptances with an initial average interest rate of 2.18% to fund a portion of this repayment. As of March 25, 2011 the Company has approximately $154 million of cash and cash equivalents and $438 million of available capacity under its credit facility.

DIVIDEND

On March 17, 2011, the Company's board of directors authorized a regular quarterly cash dividend of $0.02 per share on its common stock, an increase of $0.01 per share from the prior quarter. The dividend was paid on April 15, 2011 to stockholders of record on March 31, 2011. Based on the current guidance for 2011, the Company intends to declare, subject to approval by the Company's board of directors, an aggregate annual dividend of between $0.10 and $0.15 per share.

2011 OUTLOOK

The Company anticipates that for 2011:

Comparable hotel RevPAR will increase 6% to 8%;
Operating profit margins under GAAP would increase approximately 210 basis points to 260 basis points; and
Comparable hotel adjusted operating profit margins will increase approximately 100 basis points to 140 basis points.

Based upon these parameters, the Company estimates that its full year 2011 guidance is as follows:

income per diluted share should be approximately $.01 to $.06;
net income should be approximately $8 million to $42 million;
FFO per diluted share should be approximately $.88 to $.93 (including the effect of a reduction of $.02 due to debt extinguishment costs and pursuit costs for completed acquisitions); and
Adjusted EBITDA should be approximately $1,010 million to $1,045 million.

See the 2011 Forecast Schedules and Notes to Financial Information for other assumptions used in the forecasts and items that may affect forecasted results. Effective January 1, 2011, the Company modified its definition of Adjusted EBITDA to exclude pursuit costs for completed acquisitions as these costs, which were previously capitalized, are now required to be expensed. See the Notes to Financial Information for more information on this change.

ABOUT HOST HOTELS & RESORTS

Host Hotels & Resorts, Inc. is an S&P 500 and Fortune 500 company and is the largest lodging real estate investment trust and one of the largest owners of luxury and upper-upscale hotels. The Company currently owns 106 properties in the United States and 16 international properties totaling approximately 65,000 rooms, and also holds a non-controlling interest in a joint venture in Europe that owns 11 hotels with approximately 3,500 rooms. Guided by a disciplined approach to capital allocation and aggressive asset management, the Company partners with premium brands such as Marriott®, Ritz-Carlton®, Westin®, Sheraton®, W®, St. Regis®, Le Meridien®, The Luxury Collection®, Hyatt®, Fairmont®, Four Seasons®, Hilton®, Swissotel®, ibis® and Novotel®* in the operation of properties in over 50 major markets worldwide.

HOST HOTELS & RESORTS, INC.
Consolidated Balance Sheets (a)
(in millions, except shares and per share amounts)

	March 25,	December 31,
	2011	2010
	(unaudited)
ASSETS

Property and equipment, net	$ 11,485	$ 10,514
Due from managers	54	45
Investments in affiliates	158	148
Deferred financing costs, net	41	44
Furniture, fixtures and equipment replacement fund	221	152
Other	339	354
Restricted cash	41	41
Cash and cash equivalents	154	1,113
Total assets	$ 12,493	$ 12,411

LIABILITIES, NON-CONTROLLING INTERESTS AND EQUITY

Debt
Senior notes, including $1,163 million and $1,156 million, respectively, net of discount, of Exchangeable Senior Debentures	$ 4,257	$ 4,249
Credit facility	162	58
Mortgage debt	973	1,025
Other	146	145
Total debt	5,538	5,477
Accounts payable and accrued expenses	166	208
Other	213	203
Total liabilities	5,917	5,888

Non-controlling interests-Host Hotels & Resorts, L.P.	193	191

Host Hotels & Resorts, Inc. stockholders’ equity:
Common stock, par value $.01, 1,050 million shares authorized; 682.5 million shares and 675.6 million shares issued and outstanding, respectively	7	7
Additional paid-in capital	7,356	7,236
Accumulated other comprehensive income	29	25
Deficit	(1,039)	(965)
Total equity of Host Hotels & Resorts, Inc. stockholders	6,353	6,303
Non-controlling interests-other consolidated partnerships	30	29
Total equity	6,383	6,332
Total liabilities, non-controlling interests and equity	$ 12,493	$ 12,411

(a) Our consolidated balance sheet as of March 25, 2011 has been prepared without audit. Certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP have been omitted.

HOST HOTELS & RESORTS, INC.
Consolidated Statements of Operations (a)
(unaudited, in millions, except per share amounts)

	Quarter ended
	March 25,	March 26,
	2011	2010

Revenues
Rooms	$ 523	$ 484
Food and beverage	270	252
Other	54	57
Total hotel revenues for owned hotels	847	793
Other revenues (b)	56	30
Total revenues	903	823
Expenses
Rooms	151	140
Food and beverage	201	187
Other departmental and support expenses	239	222
Management fees	32	29
Other property-level expenses (b)	117	86
Depreciation and amortization	141	136
Corporate and other expenses	25	25
Total operating costs and expenses	906	825
Operating loss	(3)	(2)
Interest income	4	1
Interest expense (c)	(82)	(96)
Net gains on property transactions and other	2	-
Gain (loss) on foreign currency transactions and derivatives	1	(2)
Equity in losses of affiliates	(2)	(5)
Loss before income taxes	(80)	(104)
Benefit for income taxes	20	22
Loss from continuing operations	(60)	(82)
Income (loss) from discontinued operations	-	(2)
Net loss	(60)	(84)
Less: Net loss attributable to non-controlling interests	-	-
Net loss attributable to Host Hotels & Resorts, Inc.	(60)	(84)
Less: Dividends on preferred stock	-	(2)
Net loss available to common stockholders	$ (60)	$ (86)
Basic and diluted earnings (loss) per common share:
Continuing operations	$ (.09)	$ (.13)
Discontinued operations	-	-
Basic and diluted loss per common share	$ (.09)	$ (.13)

(a) Our consolidated statements of operations presented above have been prepared without audit. Certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP have been omitted.
(b) On July 6, 2010, we terminated the subleases for the hotels that we lease from Hospitality Properties Trust ("HPT"). As a result of the transaction, we now record the gross hotel revenues and expenses of these hotels as opposed to rental income earned under the subleases; however, we are still subject to the rental expense due to HPT. Therefore, other revenue for the first quarter of 2011 includes $45 million related to these properties (which represents the associated hotel sales) compared to $18 million in the first quarter of 2010 (which represents the associated rental income). Similarly, other property-level expenses for the first quarter of 2011 includes $51 million related to these properties (which represents property-level expenses, as well as the rental expense due to HPT) compared to $18 million of rental expense in the first quarter of 2010.
(c) Interest expense includes non-cash charges of $7 million and $8 million related to the exchangeable debentures for 2011 and 2010, respectively.

HOST HOTELS & RESORTS, INC.
Comparable Hotel Operating Data
Schedule of Comparable Hotel Results (a)
(unaudited, in millions, except hotel statistics)

		Quarter ended
		March 25,	March 26,
		2011	2010

Number of hotels		107	107
Number of rooms		58,558	58,558
Percent change in comparable hotel RevPAR		5.4%	-
Operating profit margin under GAAP (b)		(0.3)%	(0.2)%
Comparable hotel adjusted operating profit margin (b)		19.4%	19.5%

Comparable hotel sales
Room		$ 505	$ 479
Food and beverage		268	254
Other		53	56
Comparable hotel sales (c)		826	789
Comparable hotel expenses
Room		144	136
Food and beverage		198	186
Other		30	30
Management fees, ground rent and other costs		294	283
Comparable hotel expenses (d)		666	635
Comparable hotel adjusted operating profit		160	154
Non-comparable hotel results, net (e)		9	4
Income (loss) from hotels leased from HPT and office buildings		(6)	1
Depreciation and amortization		(141)	(136)
Corporate and other expenses		(25)	(25)
Operating loss		$ (3)	$ (2)

(a) See the Notes to the Financial Information for discussion of non-GAAP measures, reporting periods and comparable hotel results.
(b) Operating profit margins are calculated by dividing the applicable operating profit (loss) by the related revenue amount. GAAP margins are calculated using amounts presented in the consolidated statement of operations. Comparable margins are calculated using amounts presented in the above table.
(c) The reconciliation of total revenues per the consolidated statements of operations to the comparable hotel sales is as follows:

		Quarter ended
		March 25,	March 26,
		2011	2010
	Revenues per the consolidated statements of operations	$ 903	$ 823
	Non-comparable hotel sales	(44)	(23)
	Hotel sales for the property for which we record rental income, net	13	13
	Revenues for hotels leased from HPT and office buildings	(46)	(19)
	Adjustment for hotel sales for comparable hotels to reflect Marriott’s fiscal year for Marriott-managed hotels	-	(5)
	Comparable hotel sales	$ 826	$ 789

(d) The reconciliation of operating costs per the consolidated statements of operations to the comparable hotel expenses is as follows:

		Quarter ended
		March 25,	March 26,
		2011	2010
	Operating costs and expenses per the consolidated statements of operations	$ 906	$ 825
	Non-comparable hotel expenses	(35)	(19)
	Hotel expenses for the property for which we record rental income	13	13
	Expense for hotels leased from HPT and office buildings	(52)	(18)
	Adjustment for hotel expenses for comparable hotels to reflect Marriott’s fiscal year for Marriott-managed hotels	-	(5)
	Depreciation and amortization	(141)	(136)
	Corporate and other expenses	(25)	(25)
	Comparable hotel expenses	$ 666	$ 635

(e) Non-comparable hotel results, net, includes the results of operations of our non-comparable hotels whose operations are included in our consolidated statements of operations as continuing operations and the difference between the number of days of operations reflected in the comparable hotel results and the number of days of operations reflected in the consolidated statements of operations.


	Quarter ended
	March 25,	March 26,
	2011	2010
Hotel Operating Statistics for All Properties (l)
Average daily rate	$ 176.16	$ 166.59
Average occupancy	66.2%	65.4%
RevPAR	$ 116.61	$ 108.97

(a) Each OP Unit is redeemable for cash or, at the option of the Company, 1.021494 common shares of Host. At March 25, 2011 and December 31, 2010, there were 10.7 million and 10.5 million common OP Units, respectively, held by non-controlling interests that were redeemable into 10.9 million and 10.7 million shares, respectively, of Host common stock.
(b) Share prices are the closing price as reported by the New York Stock Exchange.
(c) Amount reflects market price of a single $1,000 debenture as quoted by Bloomberg L.P.
(d) On March 17, 2011, the Company declared a first quarter common cash dividend of $0.02 per share.
(e) On June 18, 2010, the Company redeemed its 8 7/8% Class E cumulative redeemable preferred stock at a redemption price of $25.00 per share, plus accrued dividends.
(f) The 6% Series U senior notes issued on October 25, 2010 were exchanged for 6% Series V senior notes in February 2011. The terms were substantially identical, except the new series of notes were issued in a registered offering under the Securities Act of 1933 and are, therefore, freely transferable by the holders.
(g) The principal balance of the Exchangeable senior debentures is $1,251 million. The principal balance outstanding of the 2 5/8% Exchangeable Senior Debentures due 2027 (the "2007 Debentures") and the 2 1/2% Exchangeable Senior Debentures due 2029 (the "2009 Debentures") is $526 million and $400 million, respectively. The discounts related to these exchangeable debentures are amortized through the first date at which the holders can require Host to repurchase the exchangeable debentures for cash (April 2012 for the 2007 Debentures and October 2015 for the 2009 Debentures). The discount related to the 3 1/4% Exchangeable Senior Debentures due 2024 (the "2004 Debentures") has been fully amortized as of December 31, 2010.
(h) The interest rate shown is the weighted average rate of the outstanding credit facility at March 25, 2011. At March 25, 2011, we have $438 million of available capacity under the revolver portion of the credit facility.
(i) Mortgage debt is secured by real estate assets with an undepreciated book value of $1.6 billion and has a weighted average interest rate of 4.7% at both March 25, 2011 and December 31, 2010, maturing through December 2023. The book value of the assets securing mortgage debt does not represent the current fair value of the assets.
(j) In accordance with GAAP, total debt includes the debt of entities that we consolidate, but do not own 100% of the interests, and excludes the debt of entities that we do not consolidate, but have a non-controlling ownership interest and record our investment therein under the equity method of accounting. As of March 25, 2011, our non-controlling partners’ share of consolidated debt is $67 million and our share of debt in unconsolidated investments is $319 million.
(k) Total debt as of March 25, 2011 and December 31, 2010 includes net discounts of $89 million and $95 million, respectively.
(l) The operating statistics reflect all consolidated properties as of March 25, 2011 and March 26, 2010, respectively. The operating statistics include the results of operations through their date of disposition for two properties disposed of in 2010.

HOST HOTELS & RESORTS, INC.
Reconciliation of Net Loss to EBITDA, Adjusted EBITDA
and Funds From Operations per Diluted Share
(unaudited, in millions, except per share amounts)

	Quarter ended
	March 25,	March 26,
	2011	2010


Net loss	$ (60)	$ (84)
Interest expense	82	96
Depreciation and amortization	141	136
Income taxes	(20)	(22)
EBITDA	143	126
Acquisition costs	3	-
Amortization of deferred gains	(1)	-
Equity investment adjustments:
Equity in losses of affiliates	2	5
Pro rata EBITDA of equity investments	2	-
Consolidated partnership adjustments:
Pro rata EBITDA attributable to non-controlling partners in other consolidated partnerships	(5)	(5)
Adjusted EBITDA	$ 144	$ 126

	Quarter ended
	March 25,	March 26,
	2011	2010
Net loss	$ (60)	$ (84)
Less: Dividends on preferred stock	-	(2)
Net loss available to common stockholders	(60)	(86)
Adjustments:
Amortization of deferred gains and other property transactions, net of taxes	(1)	-
Depreciation and amortization	141	137
Partnership adjustments	(2)	(1)
FFO of non-controlling interests of Host LP	(1)	(1)
Funds From Operations	$ 77	$ 49