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HOST HOTELS & RESORTS, INC.

(HST)
  Report
Delayed Nasdaq  -  04:00 2022-10-06 pm EDT
16.56 USD   -1.02%
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HOST HOTELS & RESORTS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/05/2022 | 11:27am EDT
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 of Host 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 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; and general economic uncertainty in U.S. markets where we own hotels
and the potential for low levels of economic growth in these markets;

the effect on lodging demand of (i) changes in national and local economic and
business conditions, including concerns about U.S. economic growth, an economic
recession in the United States or globally, the current high level of inflation,
global economic prospects, consumer confidence and the value of the U.S. dollar,
and (ii) factors that may shape public perception of travel to a particular
location, such as natural disasters, weather events, pandemics and outbreaks of
contagious diseases, such as the COVID-19 pandemic, 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;

risks that U.S. immigration policies related to the COVID-19 pandemic will suppress international travel to the United States generally or decrease the labor pool;

the impact of geopolitical developments outside the United States, such as the
pace of economic growth in Europe, the effects of the United Kingdom's
withdrawal from the European Union, trade tensions and tariffs between the
United States and its trading partners such as China, or conflicts in Eastern
Europe and the Middle East, all of which could affect global travel and lodging
demand within the United States;

volatility in global financial and credit markets, and the impact of budget
deficits and pending and future U.S. governmental action to address such
deficits through reductions in spending and similar austerity measures, as well
as the impact of potential U.S. government shutdowns, which could materially
adversely affect U.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 by our hotel managers, such as increased hotel costs for
cleaning protocols and severance and furlough payments to hotel employees;

the effect of rating agency downgrades of our debt securities or 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 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 a decline in
operations due to the COVID-19 pandemic;

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;

                                       21
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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 on, or 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;

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 percentage 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 Host Inc. and each of the REITs acquired, established or to be
established by Host Inc. to continue to satisfy complex rules in order to
qualify as REITs for U.S. federal income tax purposes and Host Inc.'s and Host
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 ended December 31, 2021 and in other filings with the
Securities 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
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Operating Results and Outlook

Operating Results

The following table reflects certain line items from our unaudited condensed
consolidated 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,

                               2022              2021           Change          2022                2021            Change
Total revenues              $     1,381       $       649         112.8 %   $       2,455       $       1,048         134.3 %
Net income (loss)                   260               (61 )         N/M               378                (214 )         N/M
Operating profit (loss)             327               (68 )         N/M               449                (234 )         N/M
Operating profit (loss)
margin under GAAP                  23.7 %           (10.5 )%        N/M              18.3 %             (22.3 )%        N/M
EBITDAre?¹?                 $       506       $       111         355.9 %   $         812       $         116         600.0 %
Adjusted EBITDAre?¹?                500               110         354.5 %             806                 113         613.3 %
Basic and diluted
earnings (loss) per
common share                       0.36             (0.09 )         N/M              0.52               (0.30 )         N/M
NAREIT FFO per diluted
share?¹?                           0.58              0.12         383.3 %            0.97                0.13         646.2 %
Adjusted FFO per diluted
share?¹?                           0.58              0.12         383.3 %            0.97                0.13         646.2 %



All Owned Hotel Data:
                               Quarter ended June 30,                      

Year-to-date ended June 30,

                                2022              2021          Change            2022                2021            Change
All Owned Hotel revenues
?¹?                         $      1,373       $      657           109.0 %   $       2,426       $       1,088           123.0 %
All Owned Hotel EBITDA
?¹?                                  510              151           237.7 %             839                 200           319.5 %
All Owned Hotel EBITDA
margin ?¹?                          37.1 %           23.0 %     1,410 bps              34.6 %              18.4 %     1,620 bps
Change in All Owned Hotel
Total RevPAR ?¹?                   107.8 %                                            121.6 %
Change in All Owned Hotel
RevPAR ?¹?                          98.2 %                                            111.0 %


___________
(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 SEC. All Owned Hotel results exclude the operations of
hotels sold or held-for-sale as of June 30, 2022. See "Non-GAAP Financial
Measures" and "All Owned Hotel Operating Statistics and Results" 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.
Additionally, All Owned Hotel results and statistics include adjustments for
dispositions and acquisitions. See Hotel RevPAR Overview for results of the
portfolio based on our ownership period, without these adjustments.
N/M = Not meaningful.

Operations


Total revenues increased $732 million, or 112.8%,and $1,407 million, or 134.3%,
as compared to the second quarter of 2021 and year-to-date 2021, respectively,
due to strong leisure demand at our resort hotels and continued acceleration in
the recovery of business and group travel. All Owned Hotel RevPAR and Total
RevPAR for the second quarter increased 98.2% and 107.8%, respectively, compared
to the second quarter of 2021 due to both rate and occupancy growth.
Year-to-date, All Owned Hotel RevPAR and Total RevPAR has increased 111.0% and
121.6%, respectively, compared to 2021.

While leisure demand, bolstered by spring break during the quarter, continues to
drive strong results at resort properties, the pace of recovery at our urban
properties significantly accelerated in the second quarter. As a result, Total
RevPAR in the quarter for all markets exceeded 2021 levels and the portfolio as
a whole exceeded the second quarter 2019 pre-pandemic levels. All Owned Hotel
Total RevPAR in our Miami, Orlando and Jacksonville markets increased 54.7%,
41.1% and 29.2%, respectively, compared to 2019, due to continued strength at
our leisure properties. While our hotels in San Francisco/San Jose and
Washington, D.C., two of our larger markets by room count, experienced All Owned
Hotel Total RevPAR declines of 26.5% and 15%, respectively, compared to second
quarter 2019, this is an improvement from declines of 59.3% and 49.1% in the
first quarter compared to 2019. All Owned Hotel Total RevPAR in our San Diego
market, which primarily consists of convention type hotels, nearly reached 2019
levels for the first time, with a decline of only 0.8% compared to the second
quarter of 2019. All Owned Hotel Total RevPAR performance was lowest for our
Boston market, with a decline of 34.7% compared to 2019.
                                       23
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Operating trends overall continued to improve in the second quarter of 2022. At
the same time, hotel-level operating costs are increasing at lower rates. While
hiring pace improved during the quarter, it continues to lag the improvement in
operations. The lag in hiring is due to the challenging labor environment across
the industry, which has hindered our managers' ability to adjust staffing levels
commensurate with the increase in demand.

As a result of continued operational improvements at our hotels since the onset
of the COVID-19 pandemic, second quarter 2022 results improved when compared to
2021 as follows:

net income increased $321 million for the quarter and $592 million year-to-date;

diluted earnings per share increased $0.45 for the quarter and $0.82 year-to-date;

Adjusted EBITDAre increased $390 million for the quarter and $693 million year-to-date; and

Adjusted FFO per diluted share increased $0.46 for the quarter and $0.84 year-to-date.


For the second quarter of 2022, operating profit margin under GAAP was 23.7% and
All Owned Hotel EBITDA margin was 37.1%, both exceeding the second quarter 2019
pre-pandemic levels. Along with the strong improvements in rates, our hotel
margins also have benefited from the implementation of portfolio-wide cost
reductions as well as the lag in hiring noted above, resulting in a reduction of
All Owned Hotel operating costs across the portfolio by approximately 10% in the
first half of 2022, compared to the first half of 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-level operating costs to
increase over time at a higher rate, more in line with total revenues, as hotels
continue to transition to more normalized levels of operations.

Outlook


We have experienced a significant improvement in revenues and earnings during
the first half of the year. However, current macroeconomic headwinds and
concerns surrounding the potential for an economic slowdown are now competing
with an accelerating lodging recovery. Further improvement in operations will be
dependent on our ability to maintain high-rated business in our resort markets,
the continued acceleration of group and business transient demand and the return
of international inbound travel. Blue Chip Economic Indicators consensus
currently estimates an increase in real U.S. GDP of 2.0% for 2022, while
business investment is anticipated to increase 5.0%. However, accelerating
inflation, high energy prices and geopolitical uncertainty have led to increased
risks in recent months and elevated concerns surrounding the Federal Reserve's
ability to execute a soft landing for inflation and economic growth. The range
of potential outcomes on the economy and the lodging industry specifically
remains exceptionally wide, reflecting varying analyst assumptions surrounding
the impact of inflation, supply chain disruptions, labor shortages in key
industries, geopolitical conflicts, interest rate expectations and the
unpredictability of new COVID-19 variants.

Hotel supply growth is anticipated to remain below the long-term historical
average in 2022, as supply chain challenges have resulted in project delays
across the U.S. We anticipate that many of these projects will continue to be
delayed or cancelled, while the new project pipeline will remain suppressed
until supply chain issues and other macroeconomic concerns abate. While the
pandemic has had an outsized impact on our industry, particularly in luxury and
upper upscale hotels in top U.S. markets, where a majority of our hotels are
located, leisure travel continues to outperform expectations due to pent-up
demand, high personal savings and waning virus fears. We have also seen a
significant acceleration in group and business transient demand in the first
half of the year, leading to improving trends in our urban markets.

Despite strong results for the first half of the year, significant uncertainties
remain related to broader macroeconomic trends, recession concerns and the
impact of new virus variants. We believe that the continued strength within the
lodging industry is highly dependent on the broader overall economy, consumer
confidence and the continued acceleration of corporate and group travel now that
leisure demand is exceeding pre-pandemic levels in many markets. Accordingly, we
believe that operations in specific markets and asset types will continue to be
uneven.

Based on these trends, we expect full year RevPAR of between $191 and $195, representing an increase from 2021 of 62.5% to 65.9%, respectively, and a decrease from 2019 of 4.5% to 2.5%, respectively. Seasonality and changing market and business mix are expected to lead to lower RevPAR in the second half of the year compared to the second quarter.


As noted above, the current outlook for the lodging industry remains highly
uncertain. There can be no assurances as to the continued recovery in lodging
demand for any number of reasons, including, but not limited to, slower than
anticipated return of group and business travel or deteriorating macroeconomic
conditions.

Strategic Initiatives
                                       24
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Dispositions. During the second quarter, we sold the Sheraton New York Times
Square Hotel for $373 million, including a $250 million bridge loan we provided
to the buyer, and the YVE Hotel Miami for $50 million, including $1 million of
FF&E funds retained by us.

Capital Projects. During the first half of 2022, we spent approximately $162
million on ROI capital projects and $78 million on renewal and replacement
projects. For full year 2022, we expect total capital expenditures of $500
million to $575 million. This total amount consists of ROI projects of
approximately $320 million to $355 million and renewal and replacement
expenditures of $180 million to $220 million. ROI projects include approximately
$90 million to $115 million for the Marriott transformational capital program
discussed below.

In 2022, we expect to complete renovations to 4,400 guestrooms, approximately
49,000 square feet of meeting space and approximately 123,000 square feet of
public space.

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 91% of the total estimated costs of the program have been spent as
of June 30, 2022. Of the 16 hotels included in the program, we have completed
projects at the Coronado Island Marriott Resort & Spa, New York Marriott
Downtown, San Francisco Marriott Marquis and Santa Clara Marriott in 2019;
projects at the Minneapolis Marriott City Center, San Antonio Marriott
Rivercenter and JW Marriott Atlanta Buckhead in 2020; and projects at The
Ritz-Carlton Amelia Island, New York Marriott Marquis and Orlando World Center
Marriott in 2021. In 2022, we completed projects at the Houston Marriott Medical
Center and Marina del Rey Marriott. We also expect to substantially complete
projects at Boston Marriott Copley Place, JW Marriott Houston by the Galleria,
Marriott Marquis San Diego Marina and Washington Marriott at Metro Center during
2022.

Results of Operations

The following table reflects certain line items from our unaudited condensed consolidated statements of operations (in millions, except percentages):


                               Quarter ended June 30,                         Year-to-date ended June 30,
                                2022              2021         Change          2022                2021           Change
Total revenues              $       1,381       $     649        112.8 %   $       2,455       $       1,048        134.3 %
Operating costs and
expenses:
Property-level costs ?¹?            1,036             692         49.7             1,965               1,233         59.4
Corporate and other
expenses                               25              25            -                48                  49         (2.0 )
Gain on insurance and
business interruption
settlements                            (7 )             -          N/M                (7 )                 -          N/M
Operating profit (loss)               327             (68 )        N/M               449                (234 )        N/M
Interest expense                       37              43        (14.0 )              73                  85        (14.1 )
Other gains                             1               3        (66.7 )              14                   2        600.0
Benefit (provision) for
income taxes                          (39 )            22          N/M               (23 )                68          N/M

Host Inc.:
Net income (loss)
attributable to
non-controlling interests               4              (1 )        N/M                 6                  (2 )        N/M
Net income (loss)
attributable to Host Inc.             256             (60 )        N/M               372                (212 )        N/M

Host L.P.:
Net loss attributable to
non-controlling interests              (1 )             -          N/M                 -                   -            -
Net income (loss)
attributable to Host L.P.             261             (61 )        N/M               378                (214 )        N/M



                                       25
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___________

(1) Amount represents total operating costs and expenses from our unaudited condensed consolidated statements of operations, less corporate and other expenses and gain on insurance and business interruption settlements.

N/M=Not meaningful.

Statement of Operations Results and Trends

Hotel Sales Overview

The following table presents total revenues in accordance with GAAP and includes all consolidated hotels (in millions, except percentages):

© Edgar Online, source Glimpses

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