HOST HOTELS & RESORTS, INC. 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 quarterly 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 facilitates social distancing, implement enhanced cleaning protocols and other COVID-19 pandemic 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 as the COVID-19 pandemic subsides; general economic uncertainty inU.S. markets where we own hotels and the potential for low levels of economic growth in these markets; and the effects on hotel operations of steps that 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 pace ofU.S. economic growth, global economic prospects, consumer confidence and the value of theU.S. dollar, and (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 outsidethe United States , such as the pace of economic growth inEurope , the effects of theUnited Kingdom's withdrawal from theEuropean Union , escalating trade tensions betweenthe United States and its trading partners such asChina , or conflicts in theMiddle East , all of which could affect the relative volatility of global credit markets generally, global travel and lodging demand withinthe United States ; ? risks thatU.S. immigration policies, border closings related to the COVID-19 pandemic and travel bans will suppress international travel tothe United States ; ? volatility in global financial and credit markets, in particular because of the COVID-19 pandemic, and the impact of budget deficits and potentialU.S. governmental action to address such deficits through reductions in spending and similar austerity measures, which could materially adversely affectU.S. and global economic conditions, business activity, credit 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 severance and furloughed hotel employees as a result of measures taken by our hotel managers in response to the COVID-19 pandemic and risks associated with our managers' ability to successfully increase staffing levels to meet expected increases in lodging demand due to the challenging labor environment; ? 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, including the waivers we obtained under our credit facility as a result of not meeting the original covenant thresholds that otherwise would have been required and other risks associated with 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 -------------------------------------------------------------------------------- ? 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 ofHost Inc. and each of the REITs acquired, established or to be established byHost Inc. to continue to satisfy complex rules in order to qualify as REITs for federal income tax purposes andHost Inc.'s andHost L.P.'s ability and the ability of our subsidiaries, and similar 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, 2020 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.
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 beginning in the first quarter of 2020. While many of the restrictive measures put in place in jurisdictions where we own hotels have been lifted, the pandemic continues to have a material adverse effect on operations and future bookings and is expected to continue to have a material negative impact on our financial results and cash flows. We have not filed for any relief under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") or the American Rescue Plan Act; however, several of our operators, including Hyatt and Marriott, have filed for the Employee Retention Credit ("ERC") to partially offset the costs of their furloughed hotel employees under Title II of the CARES Act, as discussed below. Benefits received by our operators from the ERC related to their employees working at our hotels ultimately benefit us as we bear the expense for the wages and benefits of all persons working at our hotels. Benefit costs for furloughed employees did not have a significant impact on the third quarter 2021 results, as they were eligible to be reimbursed through the American Rescue Plan Act, the 22 --------------------------------------------------------------------------------
reimbursement for which our managers have applied. We also expect that these benefit costs will not have a significant impact on our fourth quarter results.
In response to the pandemic, we and our managers, as applicable, have accomplished the following:
? Implemented portfolio-wide cost reductions, resulting in a reduction of pro forma hotel operating costs across the portfolio by approximately 30% in the third quarter of 2021, compared to 2019. While we expect that certain initiatives, including modernized brand standards, streamlined operating departments and accelerated adoption of cost-saving technologies, may lead to long-term expense reductions, we also expect hotel operating costs to increase more in line with total revenues over time as hotels continue to transition from their contingency level operational plans to increased staffing levels and controllable spending; ? Suspended contributions to certain of our hotels' FF&E escrow accounts; ? Accessed the full$1.5 billion under the revolver portion of the credit facility in 2020 as a precautionary measure in order to increase our cash position and preserve financial flexibility, while further amending the credit agreement governing our$1.5 billion revolving credit facility and two$500 million term loans in 2021. Under the amendments, the quarterly-tested financial covenants were waived beginningJuly 1, 2020 until the required financial statement reporting date for the second quarter of 2022. Subsequent to quarter end, we exited the waiver period prior to the first scheduled covenant test, and will be required to meet the modified financial covenants, under the terms of the amendment, for the subsequent five quarters; and ? Suspended regular quarterly common cash dividends and stock repurchases until further notice. All future dividends are subject to approval by the Board of Directors. 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. While vaccination rates have increased during the first three quarters of the year, 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.
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:
Year-to-date ended September
Quarter ended September 30, 30,
2021 2020 Change 2021 2020 Change
Total revenues $ 844 $ 198 326.3 % $ 1,892 $ 1,353 39.8 %
Net loss (120 ) (316 ) 62.0 % (334 ) (675 ) 50.5 %
Operating loss (95 ) (318 ) 70.1 % (329 ) (682 ) 51.8 %
Operating loss margin
under GAAP (11.3 )% (160.6 )% 14,930 bps (17.4 )% (50.4 )% 3,300 bps
EBITDAre?¹? $ 179 $ (154 ) N/M $ 295 $ (180 ) N/M
Adjusted EBITDAre?¹? 177 (111 ) N/M 290 (136 ) N/M
Diluted loss per
common share (0.17 ) (0.44 ) 61.4 % (0.47 ) (0.95 ) 50.5 %
NAREIT FFO per diluted
share?¹? 0.20 (0.21 ) N/M 0.33 (0.25 ) N/M
Adjusted FFO per
diluted share?¹? 0.20 (0.11 ) N/M 0.33 (0.14 ) N/M
23
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AllOwned Hotel Data (2): Year-to-date ended September Quarter ended September 30, 30, 2021 2020 Change 2021 2020 Change All owned hotel revenues (pro forma)?¹? $ 853 $ 220 287.7 %$ 1,978 $ 1,429 38.4 % All owned hotel EBITDA (pro forma)?¹? 196 (98 ) N/M 364 (80 ) N/M All owned hotel EBITDA margin (pro forma)?¹? 23.0 % (44.5 )% N/M 18.4 % (5.6 )% N/M Change in all owned hotel Total RevPAR - Constant US$ 288.5 % 38.7 % Change in all owned hotel RevPAR - Constant US$ 307.3 % 51.5 % Change in all owned hotel RevPAR - Nominal US$ 307.5 % 51.4 % Change in domestic RevPAR 306.8 % 52.4 % Change in international RevPAR - Constant US$ 342.8 % (17.6 )% ___________ (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 theSEC . See "Non-GAAP Financial Measures" for 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 temporarily presenting hotel operating results on anAll Owned Hotel pro forma basis. Thus, operating results are presented for all consolidated hotels owned as ofSeptember 30, 2021 and do not include the results of operations for hotels sold through the reporting date. Additionally, operating results for acquisitions as ofSeptember 30, 2021 are reflected for full calendar years, which include results for periods prior to our ownership.
N/M = Not meaningful.
Operations
While still well below pre-pandemic levels, total revenues increased$646 million , or 326.3%, for the third quarter as compared to the third quarter of 2020 due to strong leisure demand at our resort hotels and limited return of group business. For the year-to-date, total revenues increased$539 million , or 39.8%, with quarter over quarter improvement in the first three quarters of 2021. All owned hotel RevPAR and Total RevPAR on a constant US$ basis for the quarter increased 307.3% and 288.5%, respectively, due to increases in occupancy and food and beverage revenues. For the year-to-date, all owned hotel RevPAR and Total RevPAR on a constant US$ basis increased 51.5% and 38.7%, respectively. During the quarter, all owned hotel Total RevPAR in ourJacksonville ,Maui , andMiami markets totaled$683 ,$635 and$334 , respectively, representing increases of 32.2%, 14.6% and 13.5%, compared to 2019, due to strong leisure demand. Our hotels inNew York andSan Francisco /San Jose , our two largest markets by room count, experienced all owned hotel Total RevPAR of$131 and$104 , respectively, representing declines of 61.7% and 65.5%, compared to 2019, as operations at these hotels begin to ramp up following the lifting of many of the COVID-19 restrictions previously in place in these markets. All owned hotel Total RevPAR was lowest for ourNew Orleans property, at$92 , a decline of 47.6% compared to 2019, due to the impact of Hurricane Ida. Operating trends continue to be positive in the third quarter of 2021, as vaccine distribution has continued and many jurisdictions have lifted COVID-19 restrictions. In particular, hotels inFlorida ,Arizona andHawaii continue to drive the portfolio, with RevPAR levels that are approaching or exceeding 2019 levels. At the same time, hotel-level operating costs are increasing at lower rates, as hiring did not keep pace with the improvement in operations at these resort destinations. The lag in hiring is due to the challenging labor environment across the industry, coupled with improving occupancy, which has hindered our managers' ability to adjust staffing levels commensurate with the increase in demand. We anticipate that hotel-level operating costs over time will increase at a higher rate, as our hotel managers adjust back to more normalized levels of operations.
Although operations remain below pre-pandemic levels, as a result of continued
operational improvements at our hotels since the COVID-19 pandemic began in
? net loss decreased$196 million for the quarter and$341 million year-to-date; ? diluted loss per share for the quarter decreased$0.27 for the quarter and$0.48 year-to-date; 24
-------------------------------------------------------------------------------- ? Adjusted EBITDAre increased$288 million for the quarter and$426 million year-to-date; and ? Adjusted FFO per diluted share increased$0.31 for the quarter and$0.47 year-to-date.
Outlook
While the COVID-19 pandemic has severely impacted macroeconomic and industry expectations for 2021, year-over-year growth in real GDP and business investment have seen a strong rebound from 2020, supported by recent stimulus, low interest rates, vaccine distribution, and the lifting of many government-imposed restrictions across theU.S. Blue Chip Economic Indicators consensus currently estimates an increase in real GDP of 5.7% for 2021, while business investment is anticipated to increase 7.9%. Though analysts believe the unemployment rate peaked in 2020, it is anticipated to remain elevated in 2021, with an expected average of 5.6% for the year. The range of potential outcomes on the economy and the lodging industry specifically remains exceptionally wide, reflecting the unprecedented nature of the pandemic and varying analyst assumptions surrounding the impact of supply chain disruptions, labor shortages in key industries and inflation expectations. Hotel supply growth is anticipated to remain below the long-term historical average in 2021, as social distancing measures and supply chain challenges have resulted in project delays across theU.S. However, the pandemic has had an outsized impact on our industry demand. As a result, RevPAR recovery to pre-pandemic levels is lagging that of the broaderU.S. economy, despite lower supply growth. Luxury and upper upscale hotels in topU.S. markets, where a majority of our hotels are located, have been most heavily affected by the pandemic, due in part to the sharp decline in air travel, particularly from international arrivals, and the slower recovery of corporate and group demand. While we have seen improving trends across all location types, we anticipate that these factors will persist through the remainder of 2021. As a result of the significant uncertainties related to the impact of new virus variants, the pace of vaccination, particularly for school-aged children, and broader macroeconomic trends in 2021, we anticipate that the industry outlook will continue to be weighed down by the slower return of corporate and group travel, as many businesses and employees remain cautious. While strong leisure demand has supported growing investor optimism throughout 2021, the delayed return to office is likely to continue to constrain business transient and group travel in the near term. Therefore, the timing and trajectory of the recovery is difficult to forecast due to a wide range of customer responses to vaccines and the virus, seasonal shifts in the mix of business and leisure demand, as well as a condensed booking window for hotel rooms. While we currently anticipate RevPAR growth for the remainder of the year, we cannot provide a full year forecast for RevPAR at this time. We believe that the continued recovery within the lodging industry is highly dependent on the strength of the economy, consumer confidence and the return of corporate and group travel. Accordingly, we believe that the impact of the recovery on specific markets and industries will be uneven.
As noted above, the current outlook for the lodging industry remains highly uncertain. There can be no assurances as to the extent and timing for a recovery in lodging demand for any number of reasons, including, but not limited to, slower than anticipated return of group and business travel.
Strategic Initiatives Balance Sheet and Financing Transactions. As ofSeptember 30, 2021 , we had$1.0 billion of cash and cash equivalents. As ofSeptember 30, 2021 , we have met the minimum financial covenant levels under our senior notes indentures, which reinstates our ability to incur additional debt so long as we maintain these covenant levels and subject to the provisions of our credit facility and senior notes indentures. We also exited our credit facility Covenant Relief Period as discussed in more detail in subsequent sections. Acquisitions. During the third quarter, we acquired the 200-room Baker's Cay ResortKey Largo , Curio Collection by Hilton, for$200 million , a 223-room luxury downtownHouston hotel for$65 million and the 59-roomAlila Ventana Big Sur for$150 million . The downtownHouston hotel has been renamedThe Laura Hotel , part of the Autograph Collection by Marriott, and will be managed byHEI Hotels & Resorts . It is expected to open in the fourth quarter of 2021. Dispositions. Subsequent to quarter end, we sold theWestfields Marriott Washington Dulles ,San Ramon Marriott , TheWestin Buckhead Atlanta ,The Westin Los Angeles Airport and The Whitley for$551 million , including approximately$11 million for the FF&E replacement funds. Capital Projects. We are utilizing the low occupancy environment to accelerate certain projects and minimize future disruption. During the first three quarters of 2021, we spent approximately$201 million on ROI capital projects and$92 million on renewal and replacement projects. For full year 2021, we expect total capital expenditures of$410 million to$465 million . This total amount consists of ROI projects of approximately$285 million to$320 million and renewal and replacement expenditures of$125 million to$145 million . ROI projects include approximately$115 million to$140 million for the Marriott transformational capital program discussed below. 25 -------------------------------------------------------------------------------- During the third quarter, we completed the development of the multi-year renovation at theNew York Marriott Marquis , including all 1,966 guestrooms, over 140,000 square feet of meeting space, the addition of a skybridge and a renovated lobby with new bars and upgraded restaurants. Additionally, we completed the multi-year renovation at theOrlando World Center Marriott , including all 2,010 guestrooms, a redesigned 18th hole at the golf course and an updated lobby. The projects at both properties were part of the Marriott transformational capital program, discussed below. We have made substantial progress on the Marriott transformational capital program, which began in 2018 and is expected to be substantially complete by the end of 2022, and includes 16 of our hotels. 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$83 million , before reductions for incentive management fees, to offset expected business disruption. Approximately 79% of the total estimated costs of the program have been spent as ofSeptember 30, 2021 , and we expect to complete approximately 85% of the program by the end of 2021. Of the 16 hotels included in the program, we have completed projects at theCoronado Island Marriott Resort & Spa ,New York Marriott Downtown ,San Francisco Marriott Marquis , andSanta Clara Marriott in 2019 and projects at theMinneapolis Marriott City Center ,San Antonio Marriott Rivercenter andJW Marriott Atlanta Buckhead in 2020. So far during 2021, we have completed the projects atThe Ritz-Carlton Amelia Island ,New York Marriott Marquis andOrlando World Center Marriott and we expect to substantially complete the projects atHouston Marriott Medical Center . Results of Operations
The following table reflects certain line items from our statements of operations (in millions, except percentages):
Quarter ended September 30 ,
Year-to-date ended
2021 2020 Change 2021 2020 Change
Total revenues $ 844 $ 198 326.3 % $ 1,892 $ 1,353 39.8 %
Operating costs and
expenses:
Property-level costs
?¹? 920 498 84.7 2,153 1,967 9.5
Corporate and other
expenses 24 18 33.3 73 68 7.4
Operating loss (95 ) (318 ) 70.1 (329 ) (682 ) 51.8
Interest expense 43 66 (34.8 ) 128 143 (10.5 )
Other gains 2 - N/M 4 13 (69.2 )
Benefit for income
taxes 13 73 (82.2 ) 81 156 (48.1 )
Host Inc.:
Net loss attributable
to non-controlling
interests (1 ) (3 ) 66.7 (3 ) (7 ) 57.1
Net loss attributable
to Host Inc. (119 ) (313 ) 62.0 (331 ) (668 ) 50.4
Host L.P.:
Net income attributable
to non-controlling
interests 1 1 - 1 - N/M
Net loss attributable
to Host L.P. (121 ) (317 ) 61.8 (335 ) (675 ) 50.4
___________
(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.
26
--------------------------------------------------------------------------------Statement of Operations Results and Trends
The COVID-19 pandemic began to significantly impact hotel operations beginning in mid-March of 2020. However, RevPAR has increased during 2021, from$44.29 in January to$126.23 in September. There can be no assurances that the increases in RevPAR will continue.
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