Components of Revenue

According to figure 1.0 down below, you can see Hosts' revenues segmented by the countries they originate from; The United States, Canada, or Mexico. The United States makes up the majority of Hosts' revenue while on the other hand, Mexico accounts for the least, bringing in only 8 million dollars or 0.28% of their 2021 revenue. Canada falls in the middle bringing in 0.55% of 2021 revenues. This pattern is consistent in fiscal years 2020, 2019, and years prior. 

As shown by figure 1.1 down below, Host has three main components of revenue and they are as follows: rooms, food and beverage, and "other.' Rooms make up the largest share of their 2021 revenue (64%), food and beverage (23%), and lastly "other" which consists of ancillary revenues, entertainment, and guest services (12%). 

From fiscal year 2019 to 2020 revenues sharply decreased by over 70% as a result of the COVID-19 pandemic. With the lockdown from the pandemic, HST was not able to generate revenues from their operations. In fiscal year 2021 the company was able to slowly bounce back raising revenues by 55% from 2020. Although 2021 revenues are not where they used to be prior to the pandemic, the growth from the year prior is exceptional. 

Revenue Recognition

Host has a relatively simple revenue recognition method since they mainly provide services to their customers and some operational level goods such as food and beverages as depicted in Figure 2.0. The company's operating results represent revenues generated by property level operations. They use the sales-basis method, according to their 10K, payments are due from customers when services are provided to them. Due to the short term nature of the company's contracts and synchronous payments from customers, HST has no material unearned revenues at year end. 

Two of the largest competitors in the industry, Ryman Hospitality Properties (RHP) and Park Hotels and Resorts (PK) recognize their revenue in a similar manner to Host. After reading both companies 10K's I was able to determine that these companies also recognize revenues as services are provided or goods are delivered. Services the competitors provide include rooms and entertainment. Goods provided by competitors include food, beverage, and ancillary revenues, all of which are recognized at a point in time, just as Host does. 

Vertical Analyses

HST Vertical Analysis

Using S&P Capital IQ I was able to download the company's income statement that includes the past 5 years of financial data. I was then able to conduct a vertical analysis as pictured down below in figure 3.0. I examined the accounts ranging under revenue until net income and what their values were as a percent of sales. Starting with one of the first accounts, I was able to determine that COGS makes up a large percent of Host's revenues. The COGS expense is relatively stable, prior to COVID-19 its three year average was 71%. We see a drastic jump in the COGS as a percent of sales in 2020 due to a sharp drop in revenues from 3,431 million in FY 2019 to 976 million in FY 2020. From the company's 10k I was able to take a more precise look at what made up the COGS. Expenses included in COGS were as follows: rooms, food & beverage, management fees, and property level expenses to name just a few. According to the company's 10k report, hotel operating expenses represent approximately 97% of the company's total operating costs and expenses as seen in figure 3.1 down below. As for the company's gross profit, this account remains consistent with the exception of FY 2020. Although it is consistent, on average prior to COVID-19 gross profit makes up only 28% of their revenues, which could be stronger. As for net income, this account varies highly since it is dependent on earnings before taxes.

** Full calculations for the HST vertical analysis can be found in the attached Excel file here

Competitor Vertical Analysis

After conducting a vertical analysis for HST, I also conducted one for one of their largest competitors, Ryman Hospitality Properties (RHP) as depicted in figure 3.2 down below. In general, RHP has a stronger income statement than HST, however with the pandemic, in some areas HST experienced fewer losses than RHP. One of the first things I was able to notice through the vertical analysis was that RHP's cost of goods sold was slightly lower than Hosts, especially before the pandemic. This may be because RHP does a better job at managing hotel-level expenses but on the other hand, maybe their quality and level of luxury is not at high as Hosts. As for gross profit, RHP outperforms Host in every year of the analysis, mainly due to their lower cost of goods sold as mentioned previously. Another difference I spotted in the vertical analysis was that RHP has a higher general selling and administrative expense than Host, perhaps this is because Host operates as a self-administered real estate investment trust to the company's advantage. Moving on, one of the larger things that stood out to me was that RHP's operating income (EBIT) made up a larger percentage of revenues in comparison to Host prior to COVID. Net income followed the same trend for RHP for fiscal years 2017 and 2018 but not in 2019 and beyond. In 2019 net income made up 16% of revenues for Host and only 9% for RHP meaning that Host was actually better at generating income from its revenues during this year. This may be because Earnings before taxes made up a higher percentage of revenues than RHP, overall putting Host in the lead for that year. Additionally, Host's earnings from continued operations outperformed RHP's as a % of revenues, which demonstrates that Host's net income is driven by sustainable and continuous operations. 

** Full calculations for the Competitor vertical analysis can be found in the attached Excel file here

Quality of Earnings

After analyzing the drivers of revenue for Host over the past five fiscal years, I would say their quality of earnings is mixed. The first step in determining this was examining the gain (or loss) on sale of assets as seen in figure 3.2 above. For Host, in FY 2017 the gains from the sales of assets made up just under 2% of their revenue, which is acceptable. However, in FY 2018, the gains from selling assets made up 11% of their revenues that year, although it is not overly concerning, Host should make sure that their revenues are driven by sustainable income and not just one-time sales. After searching through the company's10k report from 2018, I was able to determine that this gain was a result of a disposition of four major hotels as seen in figure 3.3 down below. In the year following 2018, the gain on sale of assets makes up 0% of total revenues, meaning their earnings were sustainable, but then again jumps back up to 13% and 10% of revenues in 2020 and 2021 respectively. After searching through the company's most recent 10k report I was able to find that they sold one hotel in 2020 with gains of $148 million and six in 2021 with gains of $305 million. Although acquisitions and dispositions are crucial to a company in such an industry, it is important that Host maintain a high quality of earnings, making sure their income is not fluctuating as a result of these one-time operations.