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:
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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 inU.S. markets where we own hotels and the potential for low levels of economic growth in these markets;
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the effect on lodging demand of (i) changes in national and local economic and business conditions, including concerns aboutU.S. economic growth, an economic recession inthe United States or globally, the current high level of inflation, 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 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;
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risks that
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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 , trade tensions and tariffs betweenthe United States and its trading partners such asChina , or conflicts inEastern Europe and theMiddle East , all of which could affect global travel and lodging demand withinthe United States ;
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volatility in global financial and credit markets, and the impact of budget deficits and pending and futureU.S. governmental action to address such deficits through reductions in spending and similar austerity measures, as well as the impact of potentialU.S. government shutdowns, which could materially adversely affectU.S. and global economic conditions, business activity, credit availability, borrowing costs, and lodging demand;
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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;
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the effect of rating agency downgrades of our debt securities or on the cost and availability of new debt financings;
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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;
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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;
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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;
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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;
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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;
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relationships with property managers and joint venture partners and our ability to realize the expected benefits of our joint ventures and other strategic relationships;
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risks associated with a single manager, Marriott International, managing a significant percentage of our hotels;
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changes in the desirability of the geographic regions of the hotels in our portfolio or in the travel patterns of hotel customers;
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the ability of third-party internet and other travel intermediaries to attract and retain customers;
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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;
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the effect of a data breach or significant disruption of hotel operator information technology networks as a result of cyber attacks;
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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;
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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 forU.S. 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
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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, 2021 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 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 endedJune 30 ,
Year-to-date ended
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
2022 2021 Change 2022 2021 ChangeAll 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 inAll Owned Hotel Total RevPAR ?¹? 107.8 % 121.6 % Change inAll Owned Hotel RevPAR ?¹? 98.2 % 111.0 % ___________ (1) EBITDAre, Adjusted EBITDAre, NAREIT FFO per diluted share and Adjusted FFO per diluted share andAll 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 . AllOwned Hotel results exclude the operations of hotels sold or held-for-sale as ofJune 30, 2022 . See "Non-GAAP Financial Measures" and "AllOwned 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. AllOwned 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. AllOwned Hotel Total RevPAR in ourMiami ,Orlando andJacksonville markets increased 54.7%, 41.1% and 29.2%, respectively, compared to 2019, due to continued strength at our leisure properties. While our hotels inSan Francisco /San Jose andWashington, D.C. , two of our larger markets by room count, experiencedAll 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. AllOwned Hotel Total RevPAR in ourSan 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. AllOwned Hotel Total RevPAR performance was lowest for ourBoston market, with a decline of 34.7% compared to 2019. 23 -------------------------------------------------------------------------------- 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:
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net income increased
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diluted earnings per share increased
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Adjusted EBITDAre increased
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Adjusted FFO per diluted share increased
For the second quarter of 2022, operating profit margin under GAAP was 23.7% andAll 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 ofAll 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 realU.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 theFederal 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 theU.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 topU.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
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
-------------------------------------------------------------------------------- Dispositions. During the second quarter, we sold theSheraton New York Times Square Hotel for$373 million , including a$250 million bridge loan we provided to the buyer, and theYVE 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$83 million , before reductions for incentive management fees, to offset expected business disruption. Approximately 91% of the total estimated costs of the program have been spent as ofJune 30, 2022 . Of the 16 hotels included in the program, we have completed projects at theCoronado Island Marriott Resort & Spa ,New York Marriott Downtown ,San Francisco Marriott Marquis andSanta Clara Marriott in 2019; projects at theMinneapolis Marriott City Center ,San Antonio Marriott Rivercenter andJW Marriott Atlanta Buckhead in 2020; and projects atThe Ritz-Carlton Amelia Island ,New York Marriott Marquis andOrlando World Center Marriott in 2021. In 2022, we completed projects at theHouston Marriott Medical Center andMarina del Rey Marriott . We also expect to substantially complete projects atBoston Marriott Copley Place ,JW Marriott Houston by the Galleria,Marriott Marquis San Diego Marina andWashington Marriott at Metro Center during 2022. Results of Operations
The following table reflects certain line items from our unaudited condensed consolidated statements of operations (in millions, except percentages):
Quarter ended June 30, Year-to-date ended June 30, 2022 2021 Change 2022 2021 Change Total revenues$ 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
The following table presents total revenues in accordance with GAAP and includes all consolidated hotels (in millions, except percentages):
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