After calculating a variety of different ratios that measure financial risk, I was able to get a better look at the company's use of leverage, liabilities, and off balance sheet financing. A few methods that allowed me to analyze the company's use of leverage were its debt to equity ratios, debt to assets ratios, and debt to capital ratios over the past 5 fiscal years. I was able to assess the company's liabilities by deeply examining which types of debt it held, which information I found in its 10k report. As for off balance sheet financing, I was able to examine the history of the company's operating leases as reported on its balance sheet from FY 2017 to FY 2021. After calculating all of these metrics and examining different measures of financial risk for HST, I compared them to three other leaders in their industry- NCLH (Norwegian Cruise Lines), RHP (Ryman Hospitality Properties), and MGM (MGM Resorts International) to see where the company falls in relation to their competition. 

Use of leverage

Debt to Equity Ratio

The first ratio I calculated to get a idea of the company's financial risk was its debt to equity ratio. The debt to equity ratio compares a company's total liabilities or debt to its total shareholder equity. A lower debt to equity ratio is more favorable to investors and the company's overall financial health since it means that their liabilities do not outweigh their equity and stock. Hosts' debt to equity ratio remains favorable throughout the five fiscal years I examined, staying under 1 the entire course of time. With the company's debt to equity ratio remaining consistent with an average of 0.55 from fiscal years 2017 to 2019, this indicates good standing and that the company on average used $0.55 in debt for every $1.00 of equity during these years. In 2020 however, we see a slight increase in its debt to equity ratio from 2019 going from 0.59 to 0.96. This uptick can be explained since Host took out more debt in 2020 to assist in running the business during the peak of COVID times. Although the trends so no concern, HST should make sure their debt to equity ratio over the years doesn't fall too low since that would mean they are relying too much on equities to fund their liabilities.

In comparison to major competitors in the hospitality industry, HSTs' debt to equity ratio is the lowest of the three companies I compared it with (NCLH, RHP, & MGM) as depicted by figure 3.2 above. In comparison to its competitors Host is doing an effective job at managing their investing and crediting, actually receiving more investing than they need crediting. NCLH and MGM follow slightly similar patterns to HST, but with a gradually rising uptick in the more recent years. RHP however, demonstrates the highest debt to equity ratio of all four companies examined. Even at its lowest, RHP is using much more debt than they are for every dollar of equity. In 2021, RHP sees this ratio value skyrocket to 13.6. This could be driven by requiring much more financing than years past to fund large scale investing activities they may have in the future. Finally, in the case of HST however, the company's leverage is just slightly below average of its industry, indicating that it is performing within normal ranges as should be expected. 

** Full calculations for debt to equity ratio can be found in the attached Excel file here

Debt to Assets Ratio

The next ratio I examined was HSTs' debt to asset ratio over the past 5 fiscal years. The debt to asset ratio measures how much of the company's assets are financed by debt. The lower the debt to asset ratio, the better, since it typically is less risky to the investor. With higher debt to asset ratios, it is more common to see higher leverage and higher risk of default to the company since they do not actually own their assets and cant use them as collateral. In the case of HST, its debt to asset ratio is sound overall, averaging at about 0.38 from 2017 to 2021. This means that for every $1.00 of assets HST has, on average, $0.38 is funded by debt. This ratio indicates that the company is in good financial standing and can hedge itself against default since they own about 62% of their assets.  

In comparison to some of its major competitors in the industry (NCHL, RHP & MGM) HST has the lowest debt to asset ratio as seen in figure 3.4 above. Norwegian Cruise Lines having the second highest, MGM following, and then RHP having the highest debt to asset ratio, which would appear to be the riskiest company to investors. In 2021, RHP owned the same amount of assets as they did liabilities which indicates the company is extremely leveraged, and other companies in the industry would be more attractive to investors. In the case of HST, the company seems to have great debt to asset management in comparison to the industry as a whole. 

** Full calculations for debt to assets ratio can be found in the attached Excel file here

Debt to Capital Ratio

One of the final ratios I calculated to analyze HSTs' leverage was its debt to capital ratio over the past five years. This ratio compares how much outstanding debt a company has as a percentage of its total capitalization. An aspect that makes this ratio useful in risk analysis is that it allows you to decipher what portion of outstanding debt is actually interest bearing debt to the company. This is something that a basic debt to equity ratio cannot decipher. I was able to calculate the debt to capital ratio by adding up all accounts of interest bearing debt, then dividing it by the market value of equity plus interest bearing debt. Interest bearing debt accounts in my analysis included the company's current portion of leases, its long term debt, and its long term leases. As consistent with the debt to equity ratio, shareholders like to see a lower debt to capital ratio, too. High debt to capital ratios indicate that the company is backed by more debt than it is equity and the probability of the company defaulting on its debts is greater. 

For HST, its debt to capital ratio is the lowest of the three competitors included in the analyses so far as depicted above in figure 3.6. Its average debt to capital ratio from the years 2017 to 2021 was 0.28 while NCHLs' five year average was 0.62, RHPs' 0.84, and MGMs' was 0.59. This means that for every dollar of equity HST has, $0.28 was funded from interest bearing debt accounts. This is a good indicator and means that the company would have over 80% of their capital to use in the case of default. 

In 2020, all of the four companies I analyzed witnessed an increase in their debt to capital ratios. This is because interest bearing debt increased and the companies market values of equities decreased as the pandemic began to unravel. In 2021 NCHLs', RHPs', & MGMs' debt to capital ratio continued to increase and follow this 2020 pattern. HST however, actually saw a decrease in its debt to capital ratio back to its 2019 levels. This is because interest bearing debt for HST decreased from $6,151 million in 2020 to $5,455 million in 2021 and its market value of shareholder equity increased from $9,558 million in 2020 to $12,382 million in 2021. This change demonstrates that HST was able to decrease some of their long term debt and long term leases levels to get back into healthy financial standing after the pandemic. 

** Full calculations for debt to capital can be found in the attached Excel file here

Leverage Ratios Summary 

After using three different ratios to asses HSTs' financial risk, I was able to determine that the company is actually a leader in its industry for its financial soundness. With its debt to equity, debt to asset, and debt to capital ratios being the lowest of the four companies I analyzed, I was able to draw this conclusion. The company based on these ratios seems to be in good financial standing with minimal risk for the hospitality industry in general. Its five year average debt to equity ratio from 2017 to 2021 was 0.55 which signifies that their debt does not exceed their equity. Its average debt to asset ratio over the five years indicates that about 38% of their assets are financed, while 62% are owned outright without debt. And finally HSTs' five year average debt to capital ratio was 0.28 which indicates that their interest bearing debt is not responsible for generating a majority of their capital. Overall, after analyzing these three key ratios, I was able to determine that HST does not present immediate or long term concern of default in comparison to its competitors in the industry. 

Debt

Average cost of debt: 5.3%

The company's average cost of debt is currently at 5.3% according to figure 4.0 down below. I was able to determine this by examining the notes to financial statements section in the company's most recent 10k report. The company has maintained this rate for fiscal years 2019, 2020, and 2021. It is the weighted average discount rate of their operating leases. Accounts included in this average are current portion of leases, long-term debt, and long-term leases. 

Average maturity of debt: 48-50 years

For fiscal years 2019, 2020, and 2021, Host's average maturity of debt is about 49 years as you can calculate from figure 4.0 above. This was sourced alongside the average cost of debt which I found in the notes to financial statements section of the 10K as stated above. This means it takes the company on average 49 years to pay off long-term debts such as their leases. 

Industry metrics

Regarding its average cost of debt and average maturity of debt, Host is within the industry average. In comparison with Ryman Hospitality Properties (RHP), another large, hospitalty-focused real estate investment trust, Host has a lower average cost of debt at 5.3% while RHPs' cost of debt is 6.8%. As for average maturity of debt, RHPs' is about the same as Hosts' at about 48.1 years. These metrics demonstrate that Host is competitive in its industry and does not indicate the company is at financial risk. 

Operating liabilities

In 2019 GAAP changed its reporting standards to require all companies to report their operating leases on their balance sheet. This change affected many companies including Host. Before the new standard Host did not report their operating leases, however, in FY 2019 Host began reporting them under "long-term leases" in the total liabilities section of its balance sheet. 

The following accounts make up operating leases on the company's balance sheet: ground leases, office leases, leases on facilities from the company's former restaurant business (which have been subleased since), and leases entered into by hotels for various types of equipment. According to the company's 10K, leases with a term of 12 months or less are not reported on the balance sheet. Additionally, the company recognizes operating lease expenses on a straight-line basis over the lease term. 

As pictured in figure 5.0 below, in FY 2019 operating leases were $606 million, in 2020 $610 million, and in 2021 $564 million. According to this figure, there were no reported operating leases before 2019 as I mentioned earlier. I was able to adjust the balance sheet to reflect what operating leases would have been if they were required to be reported before the change in accounting standards. In order to predict what the operating leases would have looked like prior to 2019, I simply took the average of the operating lease expenses reported thereafter, which was about $593 million, which is highlighted in blue in figure 5.1.

** Full calculations can be found in the attached Excel file here

Ratios

I calculated before and after ratios to examine if there were any changes in the firms financial risk as a result of the GAAP accounting revisions in 2019. In figure 6.0 you will see the ratios as calculated with the original balance sheet before adjusting for operating leases. Figure 6.1 depicts the adjustments to account for the operating leases. Metrics that did not change from this adjustment were the current ratio, profit margin, TA turnover, and equity multiplier. All of these values remained consistent along with ROE since they do not involve any metrics affected by long term leases (operating leases) or total liability. On the other hand, one metric that was affected by the change in accounting standards included total liabilities to assets. I calculated total liabilities to assets by dividing the total liabilities (which included $593 million in operating leases) by total assets. This changed total liabilities from its original value of $4,524 million to $5,117 million and influenced the ratio as a whole to increase about 5% in FY 2017 and 2018. This isn't too concerning but it means that a higher percent of assets are being funded by debt. The firm would want to keep this ratio under atleast 50% to remain in healthy financial standing. 

** Full calculations can be found in the attached Excel file here