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 ofHost 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.
Forward-Looking Statements
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 duration and scope of the COVID-19 pandemic and its short and
longer-term impact on the demand for travel, transient and group business,
and levels of consumer confidence; actions governments, businesses and individuals take in response to the pandemic, including limiting or banning travel; the ability of our hotel managers to operate hotels in a way that facilitate social distancing, implement enhanced cleaning protocols and other COVID-19 mitigation practices; the impact of the pandemic and actions taken in response to the pandemic on global and
regional economies, travel, and economic activity, including the duration
and magnitude of its impact on unemployment rates, business investment and
consumer discretionary spending; the pace of recovery when the COVID-19
pandemic subsides; general economic uncertainty in
own hotels and a worsening of economic conditions or low levels of
economic growth in these markets; the effects on hotel operations of steps
we and our hotel managers take to reduce operating costs in response to
the COVID-19 pandemic;
• the effect on lodging demand of (i) changes in national and local economic
and business conditions, including concerns about the duration of the
economic recession as a result of the COVID-19 pandemic, global economic
prospects, consumer confidence and the value of the
(ii) factors that may shape public perception of travel to a particular
location such as natural disasters, weather, 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 economic growth in
withdrawal from the
credit markets generally, global travel and lodging demand withinthe United States ;
• risks that
COVID-19 pandemic and travel bans will suppress international travel to
• volatility in global financial and credit markets, in particular because
of the COVID-19 pandemic, and the impact of budget deficits and potential
spending and similar austerity measures, which could materially adversely
affect
availability, borrowing costs, and lodging demand;
• operating risks associated with the hotel business, including the effect
of labor stoppages or strikes, increasing operating or labor costs or
changes in workplace rules that affect labor costs and risks relating to
the response to the COVID-19 pandemic such as increased costs relating to
furloughed hotel employees as a result of measures taken by our hotel managers in response to the COVID-19 pandemic;
• 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 incur debt, pay dividends and make distributions resulting from
restrictive covenants in our debt agreements, which limit the amount of
distributions from
the amount of our indebtedness or related to restrictive covenants in our debt agreements, including the risk that a default could occur as a result of the decline in operations due to the COVID-19 pandemic; 21
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• our ability to maintain our hotels 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 hotels and the risk that
potential acquisitions or developments may not perform in accordance with
our expectations;
• the ability to complete hotel renovations on schedule and under budget and
the potential for increased costs and construction delays due to
government restrictions on non-essential activities and shortages of
supplies as a result of supply chain disruptions due to the COVID-19
pandemic;
• 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 hotels;
• changes in the desirability of the geographic regions of the hotels in our
portfolio or in the travel patterns of hotel customers;
• 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 hotels 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 byHost Inc. to continue to satisfy complex rules in order to qualify as REITs for federal income tax purposes andHost Inc.'s and
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 the need to preserve cash and financial
flexibility in response to the COVID-19 pandemic, 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 endedDecember 31, 2019 and in other filings with theSecurities 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. 22 --------------------------------------------------------------------------------
Operating Results and Outlook COVID-19 Response The COVID-19 pandemic has significantly adversely impactedU.S. and global economic activity and has contributed to significant volatility in financial markets. The economic impact of the outbreak began in the first quarter of 2020 as various restrictive measures remain in place in many jurisdictions where we own hotels, including quarantines, restrictions on travel, school closings, limitations on the size of gatherings and/or restrictions on types of business that may continue to operate. As a result, the COVID-19 pandemic continues to negatively impact almost every industry directly or indirectly, including a severe impact on theU.S. lodging industry generally and our company specifically. The ongoing effects of COVID-19 on our operations and future bookings have had, and will continue to have, a material negative impact on our financial results and cash flows, and such negative impact may continue well after restrictive measures imposed by federal, state, local and other government authorities to contain the outbreak have been lifted. In response to the pandemic, we have taken the following actions:
• As of
operations as of
property when it is anticipated to generate revenue greater than the incremental costs associated with staying open;
• Average occupancy (which includes the results of hotels with suspended
operations) has increased from 6.9% in April to 10.7% for the month of
June, due in part to accommodating alternative sources of demand,
including from governmental authorities and local organizations seeking
temporary accommodations for groups, such as medical personnel, first
responders and military personnel and a slight increase in leisure
demand from month to month; • Working with our hotel managers, implemented portfolio-wide cost reductions, including significantly reducing staffing levels by furloughing as much as 80% of the hotel workforce, reducing shared services fees, suspending food and beverage outlet operations, closing guestroom floors and meeting space, and temporarily suspending brand
standards, resulting in a reduction in hotel operating costs across the
portfolio by approximately 70% in the second quarter, compared to the prior year;
• Paid health benefits of approximately
for hotel employees furloughed by our managers and special pay,
including
also accrued
be made in the third quarter; • Suspended contributions to our hotels' FF&E escrow accounts and
suspended or deferred non-essential capital projects, which we expect
will reduce full year capital expenditures spending by approximately
$100 million to$125 million compared to the forecast range as reported in our Annual Report on Form 10-K; • Successfully amended the credit agreement governing our$1.5 billion revolving credit facility and two$500 million term loans. Under the amendment, the quarterly-tested financial covenants were waived
beginning
date for the third quarter of 2021; • Suspended regular quarterly dividends and stock repurchases until further notice. All future dividends are subject to approval by the Board of Directors; and • Expect to reduce corporate expenses by 10-15% for the full year compared to the prior year, through reduced travel, compensation and other overhead. As a result of the initiatives discussed above, we have significantly reduced our monthly cash expenditures for the second quarter. The following presents the second quarter 2020 results (in millions): Quarter ended April May June June 30, 2020 Revenues$ 24 $ 30 $ 49 $ 103 Net loss (120 ) (114 ) (122 ) (356 ) Hotel-level operating loss (1) (73 ) (53 ) (37 ) (163 ) 23
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Significant expenditures for the second quarter included in our cash burn include (in millions):
Quarter ended June 30, 2020 GAAP net cash used in operating activities $ (172 ) Cash burn (1) (399 ) Components of cash burn: Hotel-level operating loss (1) (163 ) Interest payments (46 ) Cash corporate and other expenses (21 ) Capital expenditures (169 ) ___________
(1) Hotel-level operating loss and cash burn are non-GAAP (
Accepted Accounting Principles) financial measures within the meaning of the
rules of the
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.
In addition, we continue to evaluate the stimulus relief available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and theFederal Reserve's Primary Market Corporate Credit Facility (PMCCF). We understand that our operators have filed or will file for the Employee Retention Credit to partially offset the costs for their furloughed hotel employees under Title II of the CARES Act, and any benefit received by our operators through the Employee Retention Credit would benefit us as we bear the expense for the wages and benefits of all persons working at our hotels. We have not filed for any relief under the CARES Act. The impact of the COVID-19 pandemic on the company remains fluid, as does our corporate and property-level response, together with the response of our hotel operators. There remains a great deal of uncertainty surrounding the trends and duration of the COVID-19 pandemic and we are monitoring developments on an ongoing basis. We, and our hotel managers, may take additional actions in response to future developments. 24 --------------------------------------------------------------------------------
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 June 30, Year-to-date ended June 30, 2020 2019 Change 2020 2019 Change Total revenues$ 103 $ 1,483 (93.1 )%$ 1,155 $ 2,873 (59.8 )% Net income (loss) (356 ) 290 N/M (359 ) 479 N/M Operating profit (loss) (353 ) 280 N/M (364 ) 496 N/M Operating profit (loss) margin under GAAP (342.7 )% 18.9 % N/M (31.5 )% 17.3 % N/M EBITDAre and Adjusted EBITDAre (1)$ (190 ) $ 460 N/M$ (26 ) $ 867 N/M Diluted earnings (loss) per common share (0.50 ) 0.39 N/M (0.50 ) 0.64 N/M NAREIT FFO and Adjusted FFO per diluted share (1) (0.26 ) 0.53 N/M (0.03 ) 1.01 N/MAll Owned Hotel Data (2): Quarter ended June 30, Year-to-date ended June 30, 2020 2019 Change 2020 2019 Change All owned hotel revenues (pro forma) (1)$ 103 $ 1,398 (92.6 )%$ 1,155 $ 2,712 (57.4 )% All owned hotel EBITDA (pro forma) (1) (160 ) 446 N/M 18 846 (97.9 )% All owned hotel EBITDA margin (pro forma) (1) (155.3 )% 31.9 % N/M 1.6 % 31.2 % (2,960 bps) Change in all owned hotel Total RevPAR - Constant US$ (92.9 )% (57.9 )% Change in all owned hotel RevPAR - Constant US$ (93.0 )% (59.2 )% Change in all owned hotel RevPAR - Nominal US$ (93.0 )% (59.3 )% Change in domestic RevPAR (93.0 )% (59.2 )% Change in international RevPAR - Constant US$ (95.0 )% (58.8 )% ___________
(1) EBITDAre, Adjusted EBITDAre, NAREIT FFO per diluted share and Adjusted FFO
per diluted share and all owned hotel operating results (including hotel
revenues and hotel EBITDA and margins) are non-GAAP financial measures within
the meaning of the rules of the
more information on these measures, including why we believe these
supplemental measures are useful, reconciliations to the most directly
comparable GAAP measure, and the limitations on the use of these supplemental
measures.
(2) Due to the COVID-19 pandemic and its effects on operations, we are presenting
hotel operating results on an
results are presented for all consolidated properties owned as of
2020 and do not include the results of operations for properties sold in
2019. Additionally, operating results for acquisitions in the current and
prior year are reflected for full calendar years, to include results for
periods prior to our ownership. N/M=Not meaningful 25
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Operations
The following presents the monthly 2020 hotel operating results for the full portfolio and for the hotels without suspended operations during the periods presented: Total Portfolio Open Hotels (1) April May June April May June Number of hotels 80 80 80 45 45 47 Number of rooms 46,669 46,670 46,670 26,379 26,379 27,280 Average Occupancy Percentage 6.9 % 8.8 % 10.7% 12.1 % 15.3 % 16.3% Average Room Rate$ 128.54 $ 150.16 $ 193.67 $ 134.01 $ 146.09 $ 182.26 RevPAR$ 8.92 $ 13.29 $ 20.77 $ 16.16 $ 22.37 $ 29.71 ___________
(1) Excludes the 35, 35, and 33 hotels with partial or fully suspended operations
in the months of April, May, and June, respectively.
Total revenues declined$1,380 million , or 93.1%, for the second quarter and$1,718 million , or 59.8%, year-to-date due to the suspended operations, as travel restrictions in most states began in mid-March of 2020 and we experienced a sharp decline in group, business and leisure travel resulting from these restrictions, and the postponement or cancellation of conventions and conferences, music and arts festivals, sporting events and other large public gatherings, which typically are drivers of demand at our hotels. All owned hotel RevPAR and Total RevPAR on a constant US$ basis for the quarter declined 93.0% and 92.9%, respectively, as occupancy and food and beverage revenues experienced significant declines. Year-to-date, all owned hotel RevPAR and Total RevPAR declined 59.2% and 57.9%, respectively, as positive results in January and February were offset by significant declines during the subsequent months. All owned hotel Total RevPAR in ourJacksonville andFlorida Gulf Coast markets declined the least during the quarter, with decreases of 70.9% and 81.5%, respectively, due to short-term leisure demand and limited group business. Our hotels inSan Francisco /San Jose andNew York , our two largest markets by room count, experienced declines in all owned hotel Total RevPAR of 95.4% and 88.6%, respectively, as three of our sevenSan Francisco /San Jose hotels and one of our threeNew York hotels suspended operations. The largest all owned hotel Total RevPAR declines occurred in ourBoston ,New Orleans andMaui /Oahu markets, as the Hyatt Place Waikiki was our only hotel in these markets that remained open during the quarter.
As a result of the travel restrictions beginning
• net income (loss) decreased
• diluted earnings (loss) per share for the quarter decreased
the second quarter and
• Adjusted EBITDAre decreased
million year-to-date; and
• Adjusted FFO per diluted share decreased
and$1.04 year-to-date. Outlook The impact of the COVID-19 pandemic has resulted in significant downward revisions to macroeconomic and industry expectations for 2020. Government-imposed stay-at-home orders across theU.S. resulted in unprecedented job losses and a severe decline in economic activity. While an employment recovery began in May as many states moved into the initial phases of reopening, a resurgence in positive cases in recent weeks has caused several markets to roll back plans, which likely will slow the pace of recovery in the near term. Based on Blue Chip Economic Indicators, the consensus currently anticipates a 5.5% decline in realU.S. GDP this year, which would result in the sharpest contraction since World War II. Business investment is anticipated to fall by 9.5%. While analysts believe the unemployment rate may have peaked in April, it is anticipated to remain elevated throughout the year, with an expected average of 9.4%. The range of potential outcomes on the economy and the lodging industry specifically is exceptionally wide, reflecting both the unprecedented nature of the crisis and varying analyst assumptions surrounding the trajectory of infection rates, and the timing and efficacy of medical solutions, including the development of a vaccine. The Blue Chip Economic Indicators consensus also estimates that the second quarter saw a sharp contraction in real GDP, falling 33.6% on a quarter-over-quarter, seasonally adjusted basis, and that the second half of the year is expected to see the beginning of an economic recovery. Hotel supply growth is anticipated to be muted in the coming months as construction shutdowns halted progress in six states for several weeks, while social distancing measures and supply chain challenges have resulted in significant project delays across the rest of theU.S. In addition, a large percentage ofU.S. hotels have closed temporarily, and we anticipate that 26 -------------------------------------------------------------------------------- the number of permanent hotel closures will be higher than historical averages. However, significant declines in industry demand resulting from reduced economic activity will more than offset the effect of lower supply growth, resulting in unprecedented occupancy and RevPAR declines. We anticipate that luxury and upper upscale hotels in top markets, which are the markets where a majority of our hotels are located, will be most heavily affected by the current crisis, due in part to the sharp decline in air travel, particularly from international arrivals, and the slower anticipated recovery of corporate and group demand. At the same time, we believe that as the crisis wanes, our resort hotels will perform better than urban locations, although still at levels far below those before the COVID-19 pandemic. As a result of the significant uncertainties for broader macroeconomic trends in the second half of the year, and more widespread implementation of social distancing measures, we anticipate that the industry outlook will continue to be weighed down by the slow return of corporate and group travel, as businesses likely will remain cautious. In addition, consumer confidence and leisure demand will continue to be affected by a weakened labor market, the recent resurgence in positive cases in multiple markets, including the sunbelt states, and reduced wealth and spending power. Given the unprecedented and unpredictable nature of the pandemic and its effect on our industry, we are not able to provide a full-year forecast for RevPAR, net income or EBITDA at this time. We believe that recovery within the lodging industry is highly dependent on the development of a vaccine or strong therapeutic.
Strategic Initiatives
Balance Sheet. InJune 2020 , we amended the credit agreement governing our$1.5 billion revolving credit facility and two$500 million term loans. Under the amendment, the quarterly-tested financial covenants were waived beginningJuly 1, 2020 until the required financial statement reporting date for the third quarter of 2021, while maintaining the ability to make acquisitions and raise capital, subject to certain restrictions. InJune 2020 , we repaid$750 million under the revolver portion of our credit facility. As ofJune 30, 2020 , we had$1.6 billion of cash and cash equivalents and$750 million of available capacity under the revolver portion of our credit facility. We may in the future re-draw amounts under the revolver portion of our credit facility to bolster our liquidity position.
Dispositions. During the quarter, we sold a parcel of land adjacent to The
Phoenician hotel for approximately
Capital Projects. We have prioritized major capital projects for those assets and markets which are expected to recover faster, such as leisure and drive-to destinations, as well as previously announced major return on investment projects. We are utilizing the low occupancy environment to accelerate certain projects and minimize future disruption. During the first half of 2020, we spent approximately$206 million on ROI capital projects and$94 million on renewal and replacement projects, representing almost 60% of the total capital expenditure projects planned for the year. We expect total spend in the second half of the year to be approximately$100 million lower than the first half. For full year 2020, we expect total capital expenditures of$475 million to$520 million . This total amount consists of ROI projects of approximately$325 million to$345 million and renewal and replacement expenditures of$150 million to$175 million . ROI projects include approximately$195 million to$200 million for the Marriott transformational capital program discussed below. We have made substantial progress on the four-year Marriott transformational capital program, which includes 17 of our properties and began in 2018. We believe this program will position these hotels to be more competitive in their respective markets and will enhance long-term performance through increases in RevPAR and market yield index. We agreed to invest amounts in excess of the FF&E reserves required under our management agreements and in exchange, Marriott has provided additional priority returns on the agreed upon investments and operating profit guarantees of up to$84 million , before reductions for incentive management fees, to offset expected business disruption. On average, we expect to spend approximately$175 million per year. Nearly 60% of the total estimated costs of the transformational capital program have been spent as ofJune 30, 2020 . Of the 17 properties included in the program, we have completed projects at theCoronado Island Marriott Resort & Spa ,New York Marriott Downtown ,San Francisco Marriott Marquis ,Santa Clara Marriott ,Minneapolis Marriott City Center andSan Antonio Marriott Rivercenter as ofJune 30, 2020 . We also expect to complete theJW Marriott Atlanta Buckhead renovation by the end of 2020. 27
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Results of Operations
The following table reflects certain line items from our statements of operations (in millions, except percentages):
Quarter endedJune 30 ,
Year-to-date ended
2020 2019 Change 2020 2019 Change Total revenues$ 103 $ 1,483 (93.1 )%$ 1,155 $ 2,873 (59.8 )% Operating costs and expenses: Property-level costs (1) 431 1,178 (63.4 ) 1,469 2,323 (36.8 ) Corporate and other expenses 25 25 - 50 54 (7.4 ) Operating profit (loss) (353 ) 280 N/M (364 ) 496 N/M Interest expense 40 43 (7.0 ) 77 86 (10.5 ) Other gains/(losses) 13 57 (77.2 ) 12 62 (80.6 ) Benefit (provision) for income taxes 46 (16 ) N/M 83 (18 ) N/M Host Inc.: Net income (loss) attributable to non-controlling interests (4 ) 4 N/M (4 ) 7 N/M Net income (loss) attributable to Host Inc. (352 ) 286 N/M (355 ) 472 N/M Host L.P.: Net income (loss) attributable to non- controlling interests (1 ) 1 N/M (1 ) 2 N/M Net income (loss) attributable to Host L.P. (355 ) 289 N/M (358 ) 477 N/M ___________
(1) Amount represents total operating costs and expenses from our unaudited
condensed consolidated statements of operations, less corporate and other
expenses. N/M=Not meaningful.
Statement of Operations Results and Trends
The COVID-19 pandemic has resulted in a significant decline in operations in the first half of 2020. RevPAR has increased slightly each month during the second quarter, from a low of$8.92 in April to$20.77 in June. By comparison, RevPAR was$204.15 for the second quarter of 2019. There can be no assurances that increases in RevPAR will continue, particularly because of the possibility that summer leisure travel will not be replaced by an increase in business travel in the fall.Hotel Sales Overview
The following table presents total revenues in accordance with GAAP and includes all consolidated hotels (in millions, except percentages):
Quarter endedJune 30 ,
Year-to-date ended
2020 2019 Change 2020 2019 Change Revenues: Rooms$ 61 $ 931 (93.4 )% $ 687$ 1,788 (61.6 )%
Food and beverage 11 449 (97.6 ) 341 882 (61.3 ) Other 31 103 (69.9 ) 127 203 (37.4 ) Total revenues$ 103 $ 1,483 (93.1 ) $
1,155
The significant decline in revenues was due predominately to the impact of the COVID-19 pandemic, as follows:
Rooms. Total rooms revenues decreased
Food and beverage. Total food and beverage ("F&B") revenues decreased
28 -------------------------------------------------------------------------------- Other revenues. Total other revenues decreased$72 million , or 69.9%, for the quarter and$76 million , or 37.4%, year-to-date, Attrition and cancellation revenues decreased$2 million for the quarter and increased$7 million year-to-date, as a significant portion of cancellations occurred during the first quarter. We do not expect to recognize any further significant attrition and cancellation revenues related to the pandemic for the remainder of the year, as we continue to prioritize the rebooking of group business.
Property-level Operating Expenses
The following table presents property-level operating expenses in accordance with GAAP and includes all consolidated hotels (in millions, except percentages):
Quarter ended June 30, Year-to-date ended June 30, 2020 2019 Change 2020 2019 Change Expenses: Rooms$ 43 $ 226 (81.0 )%
$ 230 $ 443 (48.1 )% Food and beverage
39 290 (86.6 ) 284 575 (50.6 )
Other departmental and
support expenses 113 334 (66.2 ) 432 661 (34.6 ) Management fees (2 ) 71 NM 28 125 (77.6 )
Other property-level
expenses 70 91 (23.1 ) 163 183 (10.9 ) Depreciation and amortization 168 166 1.2 332 336 (1.2 )
Total property-level
operating expenses
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 and expenses will differ. Our wages and benefits expenses account for approximately 61% of the operating expenses at our hotels (excluding depreciation). Due to a significant decline in operations and implementation of portfolio-wide cost reductions in response to the COVID-19 pandemic, we reduced wages and benefits expense by over 70% during the second quarter compared to the prior year. 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. The decline in expenses for rooms, food and beverage, other departmental and support, and management fees predominately are due to the impact of the COVID-19 pandemic, as follows:
Rooms. Rooms expenses declined
Food and beverage. F&B expenses decreased
Other departmental and support expenses. Other departmental and support expenses decreased$221 million , or 66.2%, for the second quarter and$229 million , or 34.6%, year-to-date. Management fees. Base management fees, which generally are calculated as a percentage of total revenues, decreased$42 million , or 93.4%, for the second quarter and$53 million , or 61.7%, year-to-date. Incentive management fees, which generally are based on the amount of operating profit at each hotel after we receive a priority return on our investment, decreased$31 million , or 116.1%, for the quarter and$52 million , or 107.8%, year-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 decreased$21 million , or 23.1%, for the quarter and$20 million , or 10.9%, year-to-date. The expenses were partially offset by operating profit guarantees received from Marriott under the transformational capital program. 29 --------------------------------------------------------------------------------
Other Income and Expense
Corporate and other expenses. The following table details our corporate and other expenses for the quarter and year-to-date (in millions):
Quarter endedJune 30 ,
Year-to-date ended
2020 2019 2020 2019 General and administrative costs$ 21 $ 22 $ 43 $ 47 Non-cash stock-based compensation expense 4 3 7 7 Total$ 25 $ 25 $ 50 $ 54 Interest expense. Interest expense decreased for the quarter and year-to-date due to the refinancing of senior notes in 2019. The following table details our interest expense for the quarter and year-to-date (in millions): Quarter ended June 30, Year-to-date ended June 30, 2020 2019 2020 2019 Cash interest expense(1) $ 38 $ 42 $ 73 $ 83 Non-cash interest expense 1 1 3 3 Cash debt extinguishment costs(1) 1 - 1 - Total interest expense $ 40 $ 43 $ 77 $ 86 ___________
(1) Including the change in accrued interest, total cash interest paid was
Other gains/(losses). During the second quarter of 2020, we recognized a gain of approximately$12 million related to the sale of a parcel of land adjacent to The Phoenician hotel. In the second quarter of 2019 we recognized a gain of$57 million related to the sale of three hotels, while the year-to-date 2019 gain of$62 million also included the sale of one hotel in the first quarter. Equity in earnings (losses) of affiliates. During the second quarter of 2020, ourMaui timeshare joint venture recorded a$21 million impairment expense, of which our share was$14 million , on its inventory of timeshare units. Benefit (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 expense paid or accrued toHost L.P. by the TRS represents its taxable income or loss, with regard to which we record an income tax provision or benefit. For the quarter and year-to-date, we recorded an income tax benefit of$46 million and$83 million , respectively, due to the net operating loss incurred by our TRS. As a result of legislation enacted by the CARES Act, such net operating loss may be carried back up to five years in order to procure a refund of federal corporate income taxes previously paid. Any net operating loss incurred by our TRS not carried back may be carried forward indefinitely.
To facilitate a quarter-to-quarter comparison of our operations, we typically present certain operating statistics for the periods included in this presentation on a comparable hotel basis. However, due to the COVID-19 pandemic and its effects on operations, there is little comparability between periods. For this reason, we are revising our presentation to instead present pro forma hotel operating results for all hotels. See "Hotel Operating Statistics " for a complete description of our methodology. We also discuss ourHotel RevPAR results by geographic location and mix of business (i.e., transient, group, or contract). 30
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The following tables set forth performance information for our hotels by
geographic location as of
All Owned Hotels (pro forma) by Location in Constant US$ As of June 30, 2020 Quarter ended June 30, 2020 Quarter ended June 30, 2019 Average Average Percent Percent No. of No. of Average Occupancy Average Occupancy Change in Change in Location Properties Rooms Room Rate Percentage RevPAR Total RevPAR Room Rate Percentage
RevPAR Total RevPAR RevPAR
5 1,842$ 278.24 17.7 %$ 49.11 $ 87.12 $ 313.53 73.9 %$ 231.56 $ 471.22 (78.8 )% (81.5 )%Maui /Oahu 4 1,983 75.47 3.7 2.77 5.82 384.31 92.3 354.62 563.56 (99.2 ) (99.0 )Jacksonville 1 446 469.00 28.1 131.95 219.50 414.11 84.1 348.40 753.61 (62.1 ) (70.9 )Miami 3 1,276 276.13 8.3 22.86 39.35 299.54 80.6 241.56 390.25 (90.5 ) (89.9 )Phoenix 3 1,654 185.02 6.8 12.58 53.48 277.88 74.6 207.40 488.38 (93.9 ) (89.0 )San Francisco /San Jose 7 4,528 175.74 4.2 7.43 14.51 267.87 82.7 221.55 313.95 (96.6 ) (95.4 )Los Angeles 4 1,726 207.67 9.9 20.48 28.05 228.49 89.1 203.54 300.39 (89.9 ) (90.7 )New York 3 4,261 134.19 30.2 40.47 43.18 292.59 84.9 248.42 378.93 (83.7 ) (88.6 )San Diego 3 3,288 181.47 2.5 4.57 17.07 257.34 83.0 213.66 394.65 (97.9 ) (95.7 )Atlanta 4 1,682 138.09 9.6 13.23 18.55 188.81 76.7 144.87 232.21 (90.9 ) (92.0 )Washington, D.C. (CBD) 5 3,238 221.94 4.6 10.14 10.76 278.76 91.5 255.04 367.23 (96.0 ) (97.1 )New Orleans 1 1,333 N/M 0.0 0.29 1.94 196.98 81.0 159.65 233.90 (99.8 ) (99.2 )Orange County 2 925 163.08 7.4 12.01 18.18 189.11 79.5 150.28 251.79 (92.0 ) (92.8 )Orlando 1 2,004 N/M 0.1 0.05 17.24 177.39 70.7 125.33 295.11 (100.0 ) (94.2 )Houston 4 1,716 112.05 13.9 15.63 20.43 181.69 74.6 135.49 193.31 (88.5 ) (89.4 )Philadelphia 2 810 120.32 10.6 12.75 15.74 247.35 89.7 221.94 366.74 (94.3 ) (95.7 )Northern Virginia 3 1,252 129.21 7.9 10.20 15.45 214.09 77.9 166.82 280.83 (93.9 ) (94.5 )Seattle 2 1,315 196.68 1.1 2.26 5.68 234.35 85.1 199.47 271.52 (98.9 ) (97.9 )Boston 3 2,715 N/M 0.2 0.28 2.05 272.01 87.8 238.87 324.76 (99.9 ) (99.4 )Denver 3 1,340 112.47 7.9 8.87 10.96 176.07 79.4 139.88 210.69 (93.7 ) (94.8 )San Antonio 2 1,512 123.02 5.4 6.59 9.36 186.37 75.1 139.94 200.21 (95.3 ) (95.3 )Chicago 4 1,816 110.04 9.8 10.82 13.03 237.05 82.5 195.46 278.10 (94.5 ) (95.3 ) Other 6 2,509 109.28 13.5 14.77 18.40 175.50 83.0 145.69 207.76 (89.9 ) (91.1 ) Domestic 75 45,171 165.18 8.9 14.62 23.52 252.03 82.4 207.60 332.73 (93.0 ) (92.9 ) International 5 1,499 59.79 8.4 5.02 12.44 143.72 69.7 100.16 154.14 (95.0 ) (91.9 ) All Locations - Constant US$ 80 46,670 161.97 8.8 14.31 23.16 249.07 82.0 204.15 327.00 (93.0 ) (92.9 ) All Owned Hotels (pro forma) in Nominal US$ As of June 30, 2020 Quarter ended June 30, 2020 Quarter ended June 30, 2019 Average Average Percent Percent No. of No. of Average Occupancy Average Occupancy Change in Change in Properties Rooms Room Rate Percentage RevPAR Total RevPAR Room Rate Percentage
RevPAR Total RevPAR RevPAR
5 1,499$ 59.79 8.4 %$ 5.02 $ 12.44 $ 158.97 69.7 %$ 110.79 $ 169.04 (95.5 )% (92.6 )% Domestic 75 45,171 165.18 8.9 14.62 23.52 252.03 82.4 207.60 332.73 (93.0 ) (92.9 ) All Locations 80 46,670 161.97 8.8 14.31 23.16 249.49 82.0 204.49 327.47 (93.0 ) (92.9 ) 31
-------------------------------------------------------------------------------- AllOwned Hotels (pro forma) by Location in Constant US$ As ofJune 30, 2020 Year-to-date endedJune 30, 2020
Year-to-date ended
Average Average Percent Percent No. of No. of Average Occupancy Average Occupancy Change in Change in Location Properties Rooms Room Rate Percentage RevPAR Total RevPAR Room Rate Percentage
RevPAR Total RevPAR RevPAR
5 1,842$ 400.35 44.2 %$ 177.03 $ 353.01 $ 379.76 78.4 %$ 297.90 $ 586.44 (40.6 )% (39.8 )%Maui /Oahu 4 1,983 451.32 39.1 176.41 259.64 410.35 90.6 371.89 573.91 (52.6 ) (54.8 )Jacksonville 1 446 398.29 42.6 169.62 342.83 391.86 81.4 318.88 722.04 (46.8 ) (52.5 )Miami 3 1,276 425.83 39.6 168.56 268.97 355.53 83.2 295.96 455.82 (43.0 ) (41.0 )Phoenix 3 1,654 352.56 37.0 130.34 303.21 327.86 78.6 257.82 566.03 (49.4 ) (46.4 )San Francisco /San Jose 7 4,528 287.40 31.8 91.26 134.44 286.10 80.0 228.99 322.35 (60.1 ) (58.3 )Los Angeles 4 1,726 215.97 39.3 84.80 124.95 226.22 87.8 198.59 294.83 (57.3 ) (57.6 )New York 3 4,261 190.39 43.1 82.11 120.16 266.94 78.5 209.56 323.62 (60.8 ) (62.9 )San Diego 3 3,288 241.83 31.8 77.01 154.12 255.23 80.0 204.18 372.23 (62.3 ) (58.6 )Atlanta 4 1,682 185.37 36.3 67.36 107.33 208.09 76.7 159.65 252.43 (57.8 ) (57.5 )Washington, D.C. (CBD) 5 3,238 229.66 29.3 67.21 97.24 265.11 82.5 218.62 312.73 (69.3 ) (68.9 )New Orleans 1 1,333 202.76 32.6 66.19 99.87 203.37 81.3 165.38 241.84 (60.0 ) (58.7 )Orange County 2 925 193.61 32.9 63.66 110.25 195.04 79.2 154.54 260.36 (58.8 ) (57.7 )Orlando 1 2,004 215.19 28.6 61.54 152.85 193.57 74.8 144.76 339.92 (57.5 ) (55.0 )Houston 4 1,716 163.52 37.6 61.51 91.53 182.15 75.2 136.92 197.16 (55.1 ) (53.6 )Philadelphia 2 810 165.99 36.7 60.90 98.18 220.90 83.9 185.41 304.83 (67.2 ) (67.8 )Northern Virginia 3 1,252 196.57 30.3 59.55 98.07 212.31 71.8 152.53 260.36 (61.0 ) (62.3 )Seattle 2 1,315 193.49 27.6 53.38 77.51 215.31 81.3 174.95 237.90 (69.5 ) (67.4 )Boston 3 2,715 176.94 26.6 47.06 71.97 236.19 78.6 185.74 260.95 (74.7 ) (72.4 )Denver 3 1,340 154.85 29.0 44.89 68.03 169.71 72.1 122.41 184.62 (63.3 ) (63.2 )San Antonio 2 1,512 179.31 24.2 43.38 65.75 191.24 76.2 145.81 215.02 (70.3 ) (69.4 )Chicago 4 1,816 136.92 28.7 39.26 54.32 199.76 71.5 142.77 203.93 (72.5 ) (73.4 ) Other 6 2,509 155.53 35.4 55.07 76.39 172.13 78.1 134.38 191.51 (59.0 ) (60.1 ) Domestic 75 45,171 242.02 34.0 82.19 136.94 254.20 79.3 201.52 324.88 (59.2 ) (57.8 ) International 5 1,499 127.54 30.9 39.36 59.43 139.27 68.7 95.64 143.57 (58.8 ) (58.6 ) All Locations - Constant US$ 80 46,670 238.67 33.9 80.81 134.46 250.99 78.9 198.12 319.06 (59.2 ) (57.9 ) All Owned Hotels (pro forma) in Nominal US$ As of June 30, 2020 Year-to-date ended June 30, 2020
Year-to-date ended
Average Average Percent Percent No. of No. of Average Occupancy Average Occupancy Change in Change in Properties Rooms Room Rate Percentage RevPAR Total RevPAR Room Rate Percentage RevPAR Total RevPAR RevPAR Total RevPAR International 5 1,499$ 127.54 30.9 %$ 39.36 $ 59.43 $ 151.58 68.7 %$ 104.09 $ 155.00 (62.2 )% (61.7 )% Domestic 75 45,171 242.02 34.0 82.19 136.94 254.20 79.3 201.52 324.88 (59.2 ) (57.8 ) All Locations 80 46,670 238.67 33.9 80.81 134.46 251.33 78.9 198.39 319.43 (59.3 ) (57.9 ) ______ N/M = Not Meaningful 32 --------------------------------------------------------------------------------
The majority of our customers fall into three broad categories: transient, group, and contract business, which accounted for approximately 61%, 35%, and 4%, respectively, of our full year 2019 room sales. The information below is derived from business mix data for the 80 hotels owned as ofJune 30, 2020 . 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.
The following are the results of our consolidated portfolio transient, group and contract business:
Percent change vs. Quarter ended
Quarter ended June 30, 2020 2019 Room nights Room revenues (in thousands) (in thousands) Room nights Room revenues Transient business 198 $ 37 (90.0 )% (92.8 )% Group business 134 18 (90.0 ) (94.3 ) Contract business 43 6 (74.1 ) (83.3 ) As ofJuly 30, 2020 , 2.7 million group room nights for the year have been cancelled. This equates to an estimated$1.0 billion in total cancelled group revenue, of which approximately 62% is rooms revenue. Approximately 63% of the group room revenue lost was for the first half of the year. We believe that the pace of group and transient business remains uncertain for the second half of the year due to the uncertainty surrounding the pandemic, government restrictions on travel, and companies' restrictions on business travel. The Company expects further cancellations of group business in the second half of the year.
Liquidity and Capital Resources
Liquidity and Capital Resources ofHost Inc. andHost L.P. The liquidity and capital resources ofHost Inc. andHost L.P. are derived primarily from the activities ofHost 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 hotels.Host Inc. is a REIT and its only significant asset is the ownership of partnership interests ofHost L.P. ; therefore, its financing and investing activities are conducted throughHost L.P. , except for the issuance of its common and preferred stock. Proceeds from stock issuances byHost Inc. are contributed toHost L.P. in exchange for OP units. Additionally, funds used byHost Inc. to pay dividends or to repurchase its stock are provided byHost L.P. Therefore, while we have noted those areas in which it is important to distinguish betweenHost Inc. andHost L.P. , we have not included a separate discussion of liquidity and capital resources as the discussion below applies to bothHost Inc. andHost 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. This strategy has resulted in a lower overall cost of capital for us, allowing us to complete opportunistic investments and acquisitions and positions us to manage potential declines in operations throughout the lodging cycle. Over the past several years leading up to the COVID-19 pandemic, we had 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. As the magnitude of the financial impact of the COVID-19 pandemic is uncertain, we believe these actions will provide us with financial flexibility until economic restrictions related to the pandemic are lifted and lodging demand begins to recover. Under the current challenging operating environment posed by the COVID-19 pandemic and the slowdown inU.S. economic activity and lodging demand, we have taken steps to preserve liquidity by reducing expected capital expenditures, suspending dividends and stock repurchases and have worked with our hotel operators to reduce hotel operating expenses. We intend to use available cash in the near term predominantly to fund negative operations at our hotels and corporate expenses. Despite the challenges caused by the current COVID-19 pandemic and economic crisis, we believe we have sufficient liquidity and access to capital markets to withstand the current decline in operating cash flow and to fund our capital expenditures programs. We may continue to access capital markets if favorable conditions exist in order to enhance our liquidity, to refinance senior notes and to fund cash needs. We also may execute acquisitions or other investment opportunities generated by the COVID-19 crises. 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. OnApril 15, 2020 , we paid a dividend of$0.20 per share onHost Inc.'s common stock, which dividend totaled approximately$141 million . This was the last dividend paid prior to the suspension of future dividends as part of our COVID-19 response. Capital Resources. As ofJune 30, 2020 , we had$1,578 million of cash and cash equivalents,$154 million in our FF&E escrow reserve and$750 million of available capacity under the revolver portion of our credit facility. We have no material debt maturities 33
-------------------------------------------------------------------------------- until 2023. 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, to make distributions and to 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. Following the amendment of our credit facility agreement, the quarterly-tested financial covenants were waived beginningJuly 1, 2020 until the required financial statement reporting date for the third quarter of 2021. If, at any time, we determine that market conditions are favorable, after considering our liquidity requirements, we may causeHost L.P. to issue senior notes or debentures exchangeable for shares ofHost Inc. common stock. Given the total amount of our debt and our maturity schedule, we will continue to redeem or refinance senior notes from time to time, taking advantage of favorable market conditions. InJuly 2019 ,Host Inc.'s Board of Directors authorized repurchases of up to$1.0 billion of senior notes other than in accordance with their respective 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 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 accelerated expensing of previously deferred and capitalized 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 that 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 and the restrictions under the credit facility amendment. Accordingly, considering 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. While we currently have$371 million available under our share repurchase program, additional repurchases are currently restricted under the credit facility amendment. There were no share repurchases during the second quarter of 2020 and we do not anticipate additional repurchases in 2020 or 2021 through the Covenant Relief Period (as defined below). Sources and Uses of Cash. Our sources of cash generally include cash from operations, proceeds from debt and equity issuances, and proceeds from hotel sales. Uses of cash include acquisitions, capital expenditures, operating costs, debt repayments, and repurchases of shares and distributions to equity holders.
Cash Provided by Operations. In the first half of 2020, net cash used in
operations was
Cash Used in Investing Activities. Net cash used in investing activities was$264 million during the first half of 2020 compared to$460 million for the first half of 2019. Cash used in investing activities during the first half of 2020 primarily was due to$300 million of capital expenditures for the first half of 2020 compared to$240 million in the first half of 2019, while 2019 also included the acquisition of one hotel. Cash provided by investing activities in the first half of 2020 included the sale of land adjacent to The Phoenician and$28 million of proceeds from the repayment of a loan receivable associated with the sale of a property in 2019, while the first half of 2019 consisted of proceeds from the disposition of four hotels. Cash Provided by/Used in Financing Activities. In the first half of 2020, net cash provided by financing activities was$268 million compared to cash used of$611 million for the first half of 2019. Cash provided by financing activities in the first half of 2020 consisted of a net$750 million draw on the credit facility. Cash used in the first half of 2020 and 2019 primarily consisted of stock repurchases, dividend payments and distributions.
The following table summarizes significant debt issuances, net of deferred
financing costs, that were completed as of
Transaction Date Description of Transaction Net Proceeds Debt Issuances March - June 2020 Net draw on the revolver portion of the credit facility $ 750 Total issuances $ 750 34
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The following table summarizes significant debt repayments, including prepayment
premiums, that were completed as of
Transaction Transaction Date Description of Transaction Amount Debt Repayments July 2020 Redemption of preferred equity units of Host LP $ (22 ) Total cash repayments $ (22 )
The following table summarizes significant equity transactions that have been
completed through
Transaction Transaction Date Description of Transaction Amount Equity of Host Inc. January - 2020 April Dividend payments (1)(2)$ (320 ) January - 2020 Repurchase of 8.9 million shares of Host Inc. March common stock (147 ) Cash payments on equity transactions$ (467 ) ___________
(1) In connection with the dividend payments,
(2) Includes the fourth quarter 2019 dividend that was paid in
Debt
As of
OnJune 26, 2020 , we entered into an amendment (the "Amendment") to the existing senior unsecured bank credit facility withBank of America, N.A ., as administrative agent. The Amendment suspends requirements to comply with all existing financial maintenance covenants under the credit facility for the period beginningJuly 1, 2020 until the required financial statement reporting date for the third quarter of 2021 (such period, the "Covenant Relief Period"). The existing financial maintenance covenants are reinstated for the quarter endingSeptember 30, 2021 , except that after the reinstatement instead of using the prior four calendar quarter's results in the calculations, only results for the second quarter of 2021 and thereafter are used during a phase in period and the maximum permitted ratio of consolidated total debt to consolidated EBITDA (the "Leverage Ratio") for the initial three quarters after reinstatement is increased from 7.25:1.00 to 8.25:1.00 for the first quarter, 8.00:1.00 for the second quarter and 7.75:1.00 for the third quarter. The Amendment permits us to terminate the Covenant Relief Period at any time, subject to demonstrating satisfaction of the financial maintenance covenants that otherwise would apply for the quarter endingSeptember 30, 2021 . The Amendment also provides for, among other things:
• an increase in the interest rate applicable to outstanding borrowings during
the Covenant Relief Period, with the rate being increased by 40 basis points
to the applicable rate across the credit rating-based pricing grid
determined according to our unsecured long-term debt rating; the interest
rate based on the current unsecured long-term debt rating increases to LIBOR
plus 130 basis points and LIBOR plus 140 basis points for the revolver and
term facilities, respectively;
• the addition of a permanent LIBOR floor of 15 basis points applicable to
borrowings under the revolver and the term facilities;
• the addition of a minimum liquidity covenant, which requires a minimum
liquidity level of
end of the Covenant Relief Period (subject to potential increase in the case
of any future acquisitions of hotels with negative cash flow);
• during the Covenant Relief Period, additional limitations on acquisitions
which provide that we may make acquisitions including (i) property exchange
transactions governed by Section 1031 of the Internal Revenue Code, (ii)
acquisitions of up to
acquisitions of up to
we maintain minimum total liquidity of up to
amount of the acquisition; we also may 35
--------------------------------------------------------------------------------
assume debt in acquisitions, provided that the debt to undepreciated real
estate assets ratio shall not exceed 0.35:1.00 calculated on a pro forma
basis;
• during the Covenant Relief Period, additional limitations on the ability to
make distributions and repurchases or redemptions, with certain exceptions,
including the ability to make distributions sufficient to allow for the
payment of a quarterly cash dividend by
higher distribution amounts to the extent necessary to allow
maintain REIT status or to avoid corporate income or excise taxes;
• during the Covenant Relief Period, additional limitations on debt incurrence
such that we can incur indebtedness only if the incurrence is permitted
under our senior notes indenture; • limitations on the ability to make stock repurchases or redemptions following the Covenant Relief Period if the Leverage Ratio exceeds 7.25:1.00, subject to certain exceptions;
• limitations on the ability to make capital expenditures from the period
beginning on the effective date and ending on
date on which the Covenant Relief Period is terminated); during this period
we can fund all emergency, life safety and ordinary course maintenance
capital expenditures plus
return on investment capital expenditures; and
• a requirement during the Covenant Relief Period to apply the net cash proceeds in excess of$350,000,000 in the aggregate from asset sales and debt issuances (but not equity issuances) as a mandatory prepayment of
amounts outstanding under the credit facility; the mandatory prepayment
requirements for asset sales and debt issuances are subject to various
exceptions, including, among other things, (1) the net cash proceeds of
asset sales in an amount of up to
exchange transaction governed by Section 1031 of the Internal Revenue Code,
(2) the net cash proceeds of debt issuances constituting refinancing
indebtedness, (3) certain indebtedness assumed in acquisitions and (4) other
indebtedness up to
In connection with the Amendment, we paid a consent fee of 7.5 basis points on the amount of each consenting lender's commitments under the revolver and term facilities. Financial Covenants Credit Facility Covenants. Our credit facility contains certain important financial covenants concerning allowable leverage, unsecured interest coverage, and required fixed charge coverage. 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 million are 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 4.6 x Maximum ratio of 7.25x Fixed charge coverage ratio 2.7 x Minimum ratio of 1.25x Unsecured interest coverage ratio (1) 4.4 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. 36
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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, Series G and Series H 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, Series G and Series H senior notes and our actual credit ratios as ofJune 30, 2020 : Actual Ratio Covenant Requirement Unencumbered assets tests 447 % Minimum ratio of 150% Total indebtedness to total assets 22 % Maximum ratio of
65%
Secured indebtedness to total assets 0 % Maximum ratio of
40%
EBITDA-to-interest coverage ratio 4.1 x Minimum ratio of
1.5x
We are in compliance with all of the financial ratios applicable to our Series D, Series E, Series F, Series G and Series H senior notes as ofJune 30, 2020 in order for us to be able to incur additional indebtedness. The above EBITDA-to-interest coverage ratio as ofJune 30, 2020 is based on results for the third and fourth quarters of 2019 and first and second quarters of 2020. This ratio was 9.9x as of year-end 2019, 6.6x as ofMarch 31, 2020 and, as noted above, was 4.1x as ofJune 30, 2020 . We expect this ratio to continue to decline in 2020 as more quarters of historically poor operations caused by the COVID-19 pandemic are reflected in the calculation. We expect the ratio to fall below the 1.5x requirement as of the end of either the third or fourth quarter of 2020 and we will not be able to incur additional debt while the ratio is below this requirement,.
Covenants for Senior Notes Issued Before We Attained an Investment Grade Rating
The terms of our senior notes that were issued before we attained our investment grade rating provided that many of the restrictive covenants in the senior notes indenture would not apply shouldHost L.P. attain an investment grade rating. Accordingly, because our senior notes currently are rated investment grade by both Moody's andStandard & Poor's , the covenants in our senior notes indenture (for our Series C senior notes, our only remaining senior notes issued before we attained an investment grade rating) 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, 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 Series C senior notes as ofJune 30, 2020 and 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 orStandard & Poor's : Actual Ratio* Covenant Requirement Unencumbered assets tests 447 % Minimum ratio of 125% Total indebtedness to total assets 22 % Maximum ratio of
65%
Secured indebtedness to total assets 0 % Maximum ratio of
45%
EBITDA-to-interest coverage ratio 4.1 x Minimum ratio of 2.0x ___________
* Because of differences in the calculation methodology between our Series D,
Series E, Series F, Series G and Series H senior notes and our Series C senior
notes, our actual ratios as reported can be slightly different.
The above EBITDA-to-interest coverage ratio as ofJune 30, 2020 is based on results for the third and fourth quarters of 2019 and first and second quarters of 2020. This ratio was 9.9x as of year-end 2019, 6.6x as ofMarch 31, 2020 and, as noted above, was 4.1x as ofJune 30, 2020 . We expect this ratio to continue to decline in 2020 as more quarters of historically poor operations caused by the COVID-19 pandemic are reflected in the calculation. We expect the ratio to fall below the 2.0x requirement as of the end of third quarter of 2020 and, in the event we lose our investment grade rating, we will not be able to incur additional debt while the ratio is below this requirement.
For additional details on our credit facility and senior notes, see our Annual
Report on Form 10-K for the year ended
Dividend Policy
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. Funds used byHost Inc. to pay dividends on its common stock are provided by distributions fromHost L.P. As ofJune 30, 2020 ,Host Inc. is the owner of approximately 99% of theHost L.P. common OP units. 37 -------------------------------------------------------------------------------- The remaining common OP units are owned by unaffiliated limited partners.Each Host L.P. OP unit may be redeemed for cash or, at the election ofHost Inc. ,Host Inc. common stock based on the conversion ratio. The conversion ratio is 1.021494 shares ofHost Inc. common stock for eachHost L.P. OP unit. During the Covenant Relief Period, all redemptions must be made withHost Inc. common stock. Investors should consider the non-controlling interests in theHost L.P. common OP units when analyzing dividend payments byHost Inc. to its stockholders, as these common OP unitholders share, on a pro rata basis, in cash distributed byHost L.P. to all of its common OP unitholders. For example, ifHost Inc. paid a$1 per share dividend on its common stock, it would be based on the payment of a$1.021494 per common OP unit distribution byHost L.P. toHost Inc. , as well as to the other unaffiliatedHost L.P. common OP unitholders.Host Inc.'s policy on common dividends generally is to distribute, over time, 100% of its taxable income, which primarily is dependent onHost Inc.'s results of operations, as well as tax gains and losses on property sales.Host Inc. paid a regular quarterly cash dividend of$0.20 per share on its common stock onApril 15, 2020 to stockholders of record onMarch 31, 2020 . As part of our response to COVID-19 and in order to preserve cash and future financial flexibility, we have suspended our regular quarterly dividends. All future dividends are subject to Board approval.
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 are 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 endedDecember 31, 2019 . For a detailed discussion of the new accounting standards, see "Note 2. Summary of Significant Accounting Policies" in this quarterly report.
All
To facilitate a quarter-to-quarter comparison of our operations, we typically present certain operating statistics and operating results for the periods included in this presentation on a comparable hotel basis (discussed inComparable Hotel Operating Statistics below). However, due to the COVID-19 pandemic and its effects on operations there is little comparability between periods. For this reason we are temporarily suspending our comparable hotel presentation and instead present hotel operating results for all consolidated hotels and, to facilitate comparisons between periods, we are presenting results on a pro forma basis, including the following adjustments: (1) operating results are presented for all consolidated hotels owned as ofJune 30, 2020 , but do not include the results of operations for properties sold in 2019; and (2) operating results for acquisitions in the current and prior year are reflected for full calendar years, to include results for periods prior to our ownership. For these hotels, since the year-over-year comparison includes periods prior to our ownership, the changes will not necessarily correspond to changes in our actual results.
The following discusses our typical presentation of comparable hotels; however, this method is not being used in the current presentation as prior year presentation of comparable hotel performance is no longer relevant given the impact of COVID-19 on operations. To facilitate a quarter-to-quarter comparison of our operations, we typically present certain operating statistics (i.e., Total RevPAR, 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.
We define our comparable hotels as those:
(i) that are owned or leased by us at the end 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 further defined 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 38 -------------------------------------------------------------------------------- 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. Historically, we have not included 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 1Hotel South Beach inFebruary 2019 and therefore it was not included in our comparable hotels for 2019. We are, however, making a change to this policy going forward, which is explained below under "2020Comparable Hotel Definition Change ." 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.
2020
EffectiveJanuary 1, 2020 , the Company adjusted its definition of comparable hotels to include recent acquisitions on a pro forma basis assuming they have comparable operating environments. Operating results for acquisitions in the current and prior year will be reflected for full calendar years, to include results for periods prior to our ownership. Management believes this will provide investors a better understanding of underlying growth trends for our current portfolio. As a result, the 1Hotel South Beach would be included in the comparable hotel set for 2020.
CONSTANT US$ AND NOMINAL US$
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, Adjusted EBITDAre, 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.
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"), Earnings Before Interest Expense, Income Taxes, Depreciation and Amortization for real estate
("EBITDAre") and
Adjusted EBITDAre, as a measure of performance forHost Inc. andHost L.P. , • Funds From Operations ("FFO") and FFO per diluted share, both calculated in accordance withNational Association of Real Estate Investment Trusts ("NAREIT") guidelines and with certain
adjustments
from those guidelines, as a measure of performance forHost Inc. , •All Owned Hotel pro forma operating results, as a measure of performance forHost Inc. andHost L.P. , and
• COVID-19 Non-GAAP Financial Measures, including Hotel-level operating
loss and cash burn.
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 endedDecember 31, 2019 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 39 --------------------------------------------------------------------------------
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, EBITDAre and Adjusted EBITDAre
EBITDA
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 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.
EBITDAre and Adjusted EBITDAre
We present EBITDAre in accordance with NAREIT guidelines, as defined in itsSeptember 2017 white paper "Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate," to provide an additional performance measure to facilitate the evaluation and comparison of our results with other REITs. NAREIT defines EBITDAre as net income (calculated in accordance with GAAP) excluding interest expense, income tax, depreciation and amortization, gains or losses on disposition of depreciated property (including gains or losses on change of control), impairment write-downs of depreciated property and of investments in unconsolidated affiliates caused by a decrease in value of depreciated property in the affiliate, and adjustments to reflect the entity's pro rata share of EBITDAre of unconsolidated affiliates. We make additional adjustments to EBITDAre 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. We believe that the presentation of Adjusted EBITDAre, when combined with the primary GAAP presentation of net income, is beneficial to an investor's understanding of our operating performance. Adjusted EBITDAre also is similar to what is used in calculating certain credit ratios for our credit facility and senior notes. We adjust EBITDAre for the following items, which may occur in any period, and refer to this measure as Adjusted EBITDAre:
• Property Insurance Gains - We exclude the effect of property insurance gains
reflected in our consolidated statements of operations because we believe
that including them in Adjusted EBITDAre is not consistent with reflecting
the ongoing performance of our assets. In addition, property insurance gains
could be less important to investors given that the depreciated asset book
value written off in connection with the calculation of the property
insurance gain often does not reflect the market value of real estate assets.
• Acquisition Costs - Under GAAP, costs associated with completed property
acquisitions that are considered business combinations are expensed in the
year incurred. We exclude the effect of these costs because we believe they
are not reflective 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 performance. In unusual circumstances, we also may adjust EBITDAre for gains or losses that management believes are not representative of the company's current operating performance. The last such adjustment was a 2013 exclusion of a gain from an eminent domain claim. 40
-------------------------------------------------------------------------------- The following table provides a reconciliation of EBITDA, EBITDAre, and Adjusted EBITDAre to net income (loss), the financial measure calculated and presented in accordance with GAAP that we consider the most directly comparable: Reconciliation of Net Income (Loss) to EBITDA, EBITDAre and Adjusted EBITDAre for Host Inc. and Host L.P. (in millions) Quarter ended June 30, Year-to-date ended June 30, 2020 2019 2020 2019 Net income (loss) (1)$ (356 ) $ 290 $ (359 )$ 479 Interest expense 40 43 77 86 Depreciation and amortization 168 166 332 336 Income taxes (46 ) 16 (83 ) 18 EBITDA (1) (194 ) 515 (33 ) 919 Gain on dispositions (2) (1 ) (57 ) - (59 ) Equity investment adjustments: Equity in (earnings) losses of affiliates 25 (4 ) 21 (9 ) Pro rata EBITDAre of equity investments (20 ) 6 (14 ) 16
EBITDAre and Adjusted EBITDAre (1)
(26 )$ 867 ___________
(1) Net income, EBITDA, EBITDAre, Adjusted EBITDAre, NAREIT FFO and Adjusted FFO
for the quarter ended
sale of land adjacent to The Phoenician and a loss of
inventory impairment expense recorded by our
reflected through equity in (earnings) losses of affiliates.
(2) Reflects the sale of four hotels in 2019.
FFO Measures
We present NAREIT FFO and NAREIT FFO per diluted share as non-GAAP measures of our performance in addition to our earnings 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. EffectiveJanuary 1, 2019 , we adopted NAREIT's definition of FFO included in NAREIT's Funds From Operations White Paper - 2018 Restatement. The adoption did not result in a change in the way we calculate NAREIT FFO. NAREIT defines FFO as net income (calculated in accordance with GAAP), excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control, impairment write-downs of certain real estate assets and investments and adjustments for consolidated partially-owned entities and unconsolidated affiliates. Adjustments for consolidated partially-owned entities and unconsolidated affiliates are calculated to reflect our pro rata share of the FFO of those entities on the same basis. 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 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
extinguishment of
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
repurchases and
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 that are considered business combinations are expensed in the year incurred. We exclude the effect of these costs because we believe they are not reflective 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
performance. 41
-------------------------------------------------------------------------------- In unusual circumstances, we also may adjust NAREIT FFO for gains or losses that management believes are not representative of our current operating performance. For example, in 2017, as a result of the reduction of theU.S. federal corporate income tax rate from 35% to 21% by the Tax Cuts and Jobs Act, we remeasured our domestic deferred tax assets as ofDecember 31, 2017 and recorded a one-time adjustment to reduce the deferred tax assets and to increase the provision for income taxes by approximately$11 million . We do not consider this adjustment to be reflective of our ongoing operating performance and, therefore, excluded this item from Adjusted FFO. The following table provides a reconciliation of the differences between our non-GAAP financial measures, NAREIT FFO and Adjusted FFO (separately and on a per diluted share basis), and net income (loss), the financial measure calculated and presented in accordance with GAAP that we consider most directly comparable:Host Inc. Reconciliation of Diluted Earnings (Loss) per Common Share to NAREIT and Adjusted Funds From Operations per Diluted Share (in millions, except per share amount) Quarter ended June 30, Year-to-date ended June 30, 2020 2019 2020 2019 Net income (loss) (1)$ (356 ) $ 290 $ (359 ) $ 479 Less: Net (income) loss attributable to non-controlling interests 4 (4 ) 4 (7 ) Net income (loss) attributable to Host Inc. (352 ) 286 (355 ) 472 Adjustments: Gain on dispositions (2) (1 ) (57 ) - (59 ) Depreciation and amortization 166 165 331 334 Equity investment adjustments: Equity in (earnings) losses of affiliates 25 (4 ) 21 (9 ) Pro rata FFO of equity investments (20 ) 4 (17 ) 13 Consolidated partnership adjustments: FFO adjustment for non-controlling partnerships - - (1 ) 1 FFO adjustments for non-controlling interests of Host L.P. (2 ) (1 ) (3 ) (3 ) NAREIT FFO (1) (184 ) 393 (24 ) 749 Adjustments to NAREIT FFO: Loss on debt extinguishment 1 - 1 - Adjusted FFO (1)$ (183 ) $ 393 $ (23 ) $ 749 For calculation on a per share basis (3): Diluted weighted average shares outstanding - EPS, NAREIT FFO and Adjusted FFO 705.1 739.4 706.7 740.2 Diluted earnings (loss) per common share$ (.50 ) $ .39 $ (.50 ) $ .64 NAREIT FFO and Adjusted FFO per diluted share$ (.26 ) $ .53 $ (.03 ) $ 1.01 ___________
(1-2) Refer to the corresponding footnote on the Reconciliation of Net Income
(Loss) to EBITDA, EBITDAre and Adjusted EBITDAre forHost Inc. andHost L.P.
(3) Diluted earnings (loss) per common share, NAREIT FFO per diluted share 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 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. 42
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We present certain operating results for our hotels, such as hotel revenues, expenses, food and beverage profit, and EBITDA (and the related margins), on a hotel-level pro forma basis as supplemental information for our investors. Our hotel results reflect the operating results of our hotels as discussed inAll Owned Hotel Operating Statistics above. We present all owned hotel EBITDA to help 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 expense). Corporate-level costs and expenses also are removed to arrive at property-level results. We believe these property-level results provide investors with supplemental information about the ongoing operating performance of our hotels. All owned hotel results are presented both by location and for our properties in the aggregate. We eliminate depreciation and amortization expense because, even though depreciation and amortization expense are property-level expenses, these non-cash expenses, which are based on historical cost accounting for real estate assets, implicitly assume that the value of real estate assets diminishes predictably over time. As noted earlier, because real estate values have historically risen or fallen with market conditions, many real estate industry investors have considered presentation of historical cost accounting for operating results to be insufficient. Because of the elimination of corporate-level costs and expenses, gains or losses on disposition and depreciation and amortization expense, the hotel operating results we present do not represent our total revenues, expenses, operating profit or net income and should not be used to evaluate our performance as a whole. Management compensates for these limitations by separately considering the impact of these excluded items to the extent they are material to operating decisions or assessments of our operating performance. Our consolidated statements of operations include such amounts, all of which should be considered by investors when evaluating our performance. While management believes that presentation of all owned hotel results is a measure that provides useful information in evaluating our ongoing performance, this measure is not used to allocate resources or to assess the operating performance of each of these hotels, as these decisions are based on data for individual hotels and are not based on all owned hotel results in the aggregate. For these reasons, we believe all owned hotel operating results, when combined with the presentation of GAAP operating profit, revenues and expenses, provide useful information to investors and management. 43 -------------------------------------------------------------------------------- The following tables present certain operating results and statistics for our hotels for the periods presented herein and a reconciliation of the differences between all owned hotel pro forma EBITDA, a non-GAAP financial measure, and net income (loss), the financial measure calculated and presented in accordance with GAAP that we consider most directly comparable. Similar reconciliations of the differences between (i) 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) hotel expenses and (iv) operating costs and expenses as calculated and presented in accordance with GAAP, also are included in the reconciliation: AllOwned Hotel Pro Forma Results forHost Inc. andHost L.P. (in millions, except hotel statistics) Year-to-date ended Quarter ended June 30, June 30, 2020 2019 2020 2019 Number of hotels 80 80 80 80 Number of rooms 46,670 46,670 46,670 46,670 Change in hotel Total RevPAR - Constant US$ (92.9 )% - (57.9 )% - Nominal US$ (92.9 )% - (57.9 )% - Change in hotel RevPAR - Constant US$ (93.0 )% - (59.2 )% - Nominal US$ (93.0 )% - (59.3 )% - Operating profit (loss) margin (1) (342.7 )% 18.9 % (31.5 )% 17.3 %All Owned Hotel Pro Forma EBITDA margin (2) (155.3 )% 31.9 % 1.6 % 31.2 % Food and beverage profit margin (1) (254.5 )% 35.4 % 16.7 % 34.8 %All Owned Hotel Pro Forma food and beverage profit margin (2) (254.5 )% 35.6 %
16.7 % 34.9 %
Net income (loss)$ (356 ) $ 290 $ (359 ) $ 479 Depreciation and amortization 168 166 332 336 Interest expense 40 43 77 86 Provision (benefit) for income taxes (46 ) 16 (83 ) 18 Gain on sale of property and corporate level income/expense 34 (44 ) 51 (33 ) Pro forma adjustments (2) - (25 ) - (40 )
All
18$ 846 Quarter ended June 30, 2020 Quarter ended June 30, 2019 Adjustments Adjustments All Owned Hotel Pro All Owned Depreciation Forma Depreciation and Hotel Pro and corporate Results Pro forma corporate level Forma Results GAAP Results level items (3) GAAP Results adjustments(3) items (3) Revenues Room $ 61 $ -$ 61 $ 931 $ (62 ) $ - $ 869 Food and beverage 11 - 11 449 (19 ) - 430 Other 31 - 31 103 (4 ) - 99 Total revenues 103 - 103 1,483 (85 ) - 1,398 Expenses Room 43 - 43 226 (14 ) - 212 Food and beverage 39 - 39 290 (13 ) - 277 Other 181 - 181 496 (33 ) - 463 Depreciation and amortization 168 (168 ) - 166 - (166 ) - Corporate and other expenses 25 (25 ) - 25 - (25 ) - Total expenses 456 (193 ) 263 1,203 (60 ) (191 ) 952 Operating Profit (Loss) - AllOwned Hotel Pro Forma EBITDA$ (353 ) $ 193$ (160 ) $ 280 $ (25 ) $ 191 $ 446 44
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Year-to-date ended June 30, 2020 Year-to-date ended June 30, 2019 Adjustments Adjustments All Owned Depreciation All Owned Hotel Depreciation and Hotel Pro and corporate Pro Forma Pro forma corporate level Forma Results GAAP Results level items Results (3) GAAP Results adjustments(3) items (3) Revenues Room $ 687 $ - $ 687$ 1,788 $ (111 ) $ -$ 1,677 Food and beverage 341 - 341 882 (39 ) - 843 Other 127 - 127 203 (11 ) - 192 Total revenues 1,155 - 1,155 2,873 (161 ) - 2,712 Expenses Room 230 - 230 443 (28 ) - 415 Food and beverage 284 - 284 575 (26 ) - 549 Other 623 - 623 969 (67 ) - 902 Depreciation and amortization 332 (332 ) - 336 - (336 ) - Corporate and other expenses 50 (50 ) - 54 - (54 ) - Total expenses 1,519 (382 ) 1,137 2,377 (121 ) (390 ) 1,866 Operating Profit (Loss) - AllOwned Hotel Pro Forma EBITDA $ (364 ) $ 382 $ 18 $ 496 $ (40 ) $ 390 $ 846 ___________
(1) Profit margins are calculated by dividing the applicable operating profit by
the related revenue amount. GAAP profit margins are calculated using amounts
presented in the condensed consolidated statements of operations. Hotel
margins are calculated using amounts presented in the above tables.
(2) Pro forma adjustments represent the following items: (i) the elimination of
results of operations of our sold hotels, which operations are included in
our condensed consolidated statements of operations as continuing operations
and (ii) the addition of results for periods prior to our ownership for
hotels acquired during the presented periods. For this presentation, we no
longer adjust for certain items such as gains on insurance settlements, the
results of our leased office buildings and other non-hotel revenue and expense items, and they are included in theAll Owned Hotel Pro Forma results. 45
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COVID-19 Non-GAAP Financial Measures
Hotel-level Operating Loss
We present hotel-level operating loss because management believes this metric is helpful to investors to evaluate the monthly operating performance of our properties during the COVID-19 pandemic. We further adjustAll Owned Hotel Pro Forma EBITDA to reflect benefits for furloughed employees in the month that they are provided to the employees of our properties, replacing the related GAAP expense accrual. While furlough costs may arise in various situations, the furlough costs incurred during the COVID-19 pandemic are unusually large and not reflective of how wages and benefits are generally accrued and paid, therefore management adjustsAll Owned Hotel Pro Forma EBITDA to include the furlough costs based on the timing that they are provided to the employees to better reflect monthly costs and evaluate the hotel performance. We accrue for the anticipated furlough costs when our hotel managers have committed to the continuation of these benefits regardless of the timing of the benefits. For example, inMarch 2020 we accrued$35 million for April and May benefits for furloughed employees at our Marriott- and Hyatt-managed hotels. InJune 2020 , we accrued$32 million for the July, August and September benefits for our Marriott-managed hotels. As a result, our GAAP operating results reflect the timing of the commitment rather than the actual month of the benefits. While the net impact of the accrual is not significant in the evaluation of our hotel operations on a quarterly basis, we adjust for the timing of the accrual on a monthly basis to include the expense in the month that the furlough benefits are provided in order to evaluate the month-to-month changes in operating results at our properties exclusive of the timing of the accrual. Hotel-level operating loss is not intended to be, and should not be used as, a substitute for GAAP net income (loss). Because of the elimination of corporate-level costs and expenses, gains or losses on disposition and depreciation and amortization expense, the hotel-level monthly operating results we present do not represent our total operating results and should not be used to evaluate our performance as a whole. Management compensates for these limitations by separately considering the impact of these excluded items to the extent they are material to operating decisions or assessments of our operating performance. Our consolidated statements of operations include such amounts, all of which should be considered by investors when evaluating our performance.
The following table provides a reconciliation of the differences between our non-GAAP financial measure, hotel-level operating loss, and net loss, the financial measure calculated and presented in accordance with GAAP that we consider most directly comparable.
Reconciliation of Net Loss to Hotel-level Operating Loss forHost Inc. and Host L.P. (in millions) Quarter ended April May June June 30, 2020 Net loss$ (120 ) $ (114 ) $ (122 ) $ (356 ) Depreciation and amortization 54 56 58 168 Interest expense 14 13 13 40 Benefit for income taxes (8 ) (16 ) (22 ) (46 ) Gain on sale of property and 7 11 16 34 corporate level income/expense All Owned Hotel Pro Forma EBITDA (53 ) (50 ) (57 ) (160 )
Benefits for furloughed employees (20 ) (3 ) 20
(3 ) adjustment Hotel-level operating loss$ (73 ) $ (53 ) $ (37 ) $ (163 ) Cash Burn We present cash burn because management believes this metric is helpful to investors to evaluate the our ability to continue to fund operations during periods where hotels have suspended operations or are operating at very low levels of occupancy due to the COVID-19 pandemic We define cash burn as net cash from operating activities adjusted for (i) capital expenditures; (ii) changes in short term assets and liabilities; and (iii) contributions to equity investments, as further described below. Cash burn is not intended to be, and should not be used as, a substitute for GAAP cash flow as it does not reflect the issuance or repurchase of equity, dividends, issuance or repayment of debt, or other investing activities such as the purchase or sale of properties. Adjustments include: • Capital Expenditures - Capital expenditures are included in the overall cash burn as they represent a significant on-going cash outflow for us. While we continually evaluate our capital expenditure program to appropriately balance improving and renewing our hotel portfolio with
our overall cash needs; we continue to anticipate capital expenditures
to be a significant cash outflow. 46
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• Changes in short term assets and liabilities - We eliminate changes in
short-term assets and liabilities, including due from managers, other assets and other liabilities, that primarily represent timing of cash inflows and outflows. As a result, cash burn includes income and expenses in better alignment with how these items are reflected on the statement of operations. These generally represent receipts and payments that will be settled within the year and do not reflect our cash savings or liquidity needs on an on-going basis.
• Contributions to equity investments - We include contributions to equity
investments that have been necessary due to the depressed operations for
these investments during the COVID-19 pandemic. These are included as
investing activities on the consolidated statements of cash flows.
The following table provides a reconciliation of our second quarter cash used in operating activities per our statements of cash flows to cash burn.
Reconciliation of GAAPNet Cash Used in Operating Activities to Cash Burn for Host Inc. and Host L.P. (in millions) Quarter ended June 30, 2020 GAAP net cash used in operating activities $ (172 ) Capital expenditures (169 ) Contributions to equity investments (1 ) Timing adjustments Change in due from managers (31 ) Change in other assets (17 ) Change in other liabilities (9 ) Cash burn $ (399 )
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