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.
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 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 U.S. markets where we 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 (see also Part II Item 1A for additional risks relating to
COVID-19);
• the effect on lodging demand of (i) changes in national and local economic
and business conditions, including concerns about the duration and
strength of U.S. economic growth or the potential for an economic
recession as a result of COVID-19 pandemic, 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, 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 United States , such as
the pace of economic growth in Europe , the effects of the United Kingdom's
withdrawal from the European Union , escalating trade tensions between the
United States and its trading partners such as China , or conflicts in the
Middle East , all of which could affect the relative volatility of global
credit markets generally, global travel and lodging demand within the
United States ;
• risks that U.S. immigration policies and travel ban will suppress
international travel to the United States generally;
• volatility in global financial and credit markets, in particular because
of the COVID-19 pandemic, and the impact of budget deficits and potential
U.S. governmental action to address such deficits through reductions in
spending and similar austerity measures, 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 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 Host L.P. to Host Inc. , 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 (see also Part
II Item 1A for additional information relating to this default risk);
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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 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 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
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Operating Results and Outlook COVID-19 Response
Since first reported in
• Suspended operations at 35 of our hotels as of May 6, 2020 , while
continuing to operate the remaining 45 hotels at reduced capacity so
long as they generate revenue greater than the incremental costs
associated with staying open; we may suspend operations at additional
hotels if appropriate in order to further reduce operating costs;
• 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 temporary suspension of brand
standards, resulting in an expected reduction in hotel operating costs
across the portfolio by approximately 70-75% in April, compared to
initial forecasts;
• Accrued approximately $35 million in the first quarter for benefits that
will be provided to hotel employees furloughed by our hotel managers
through June 1, 2020 ;
• Average occupancy of 29% in March and approximately 12% in April, 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;
• Suspended contributions to 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;
• Increased liquidity by accessing $1.5 billion of capacity under the
revolver portion of our credit facility in March 2020 as a precautionary
measure in order to increase our cash position and preserve financial
flexibility. We have also engaged in discussions with our credit
facility lenders for flexibility in financial covenant requirements;
• Anticipate temporarily suspending or paying a nominal dividend until
further notice. The first quarter dividend paid in April 2020 totaled
approximately $141 million . All future dividends are subject to approval
by the Board of Directors; and
• Anticipate reducing 2020 corporate expenses 10-15% through reduced
travel, compensation and other overhead.
In addition, we are in the process of evaluating the benefit of obtaining
stimulus relief available under the Coronavirus Aid, Relief, and Economic
Security Act (CARES Act) and the
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.
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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 March 31,
2020 2019 Change
Total revenues $ 1,052 $ 1,390 (24.3 )%
Net income (loss) (3 ) 189 N/M
Operating profit (loss) (11 ) 216 N/M
Operating profit (loss) margin under
GAAP (1.0 )% 15.5 % (1,650 bps)
EBITDAre and Adjusted EBITDAre (1) $ 164 $ 406 (59.6 )%
Diluted earnings per common share - 0.25 (100.0 )%
NAREIT FFO and Adjusted FFO per
diluted share (1) 0.23 0.48 (52.1 )%
All Owned Hotel Data (2):
Quarter ended March 31,
2020 2019 Change
All owned hotel revenues (pro forma)
(1) $ 1,052 $ 1,314 (19.9 )%
All owned hotel EBITDA (pro forma) (1) 178 400 (55.5 )%
All owned hotel EBITDA margin (pro
forma) (1) 16.9 % 30.4 % (1,350 bps)
Change in all owned hotel Total RevPAR
- Constant US$ (21.0 )%
Change in all owned hotel RevPAR -
Constant US$ (23.3 )%
Change in all owned hotel RevPAR -
Nominal US$ (23.4 )%
Change in domestic RevPAR (23.4 )%
Change in international RevPAR -
Constant US$ (19.1 )%
___________
(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 (U.S. Generally Accepted
Accounting Principles) financial measures within the meaning of the rules of
the SEC . See "Non-GAAP 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.
(2) Due to the COVID-19 pandemic and its effects on operations, we are presenting
hotel operating results on an All Hotel pro forma basis. Thus, operating
results are presented for all consolidated properties owned as of March 31,
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.
Operations
Total revenues declined
All owned hotel Total RevPAR in our
As a result of the travel restrictions beginning
• operating profit (loss) margin (calculated based on GAAP operating
profit as a percentage of GAAP revenues) declined 1,650 basis points, to
(1.0)%, for the first quarter due to the decline in revenues, partially
offset by cost savings
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measures, including significant reductions in staffing levels, reduced
shared services fees and closure of food and beverage outlets;
• all owned hotel EBITDA margin, which excludes dispositions, depreciation
expense and corporate expenses declined 1,350 basis points for the
quarter;
• net income (loss) for the quarter decreased $192 million ;
• diluted earnings (loss) per share for the quarter decreased $0.25 , or 100.0%;
• Adjusted EBITDAre decreased $242 million , or 59.6%, for the quarter; and
• Adjusted FFO per diluted share decreased $0.25 , or 52.1%, for the quarter.
Because the COVID-19 related restrictions on travel were primarily implemented in mid-March, our first quarter operating results above do not reflect the full impact of the COVID-19 pandemic and we expect a further steep decline in operating results for the second quarter of 2020 as compared to these first quarter results.
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 the
The Blue Chip Economic Indicators consensus also anticipates that the second
quarter will see the sharpest contraction in real GDP, with a decline of 6.7% on
a same-quarter-over-prior-year basis, followed by meaningful improvement in the
second half of the year. Hotel supply growth is anticipated to be muted in the
coming months as construction shutdowns have halted progress in six states,
while social distancing measures and supply chain challenges have resulted in
significant project delays across the rest of the
Despite the potential for improving macroeconomic trends in the second half of the year, assuming a gradual lifting 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 are likely to remain cautious. In addition, consumer confidence and leisure demand will continue to be affected by a weakened labor market 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 forecast for RevPAR, net income or EBITDA at this time.
Strategic Initiatives
Balance Sheet. During the quarter, we drew the entire
Capital Projects. We have cancelled or deferred certain projects, mainly
composed of maintenance capital expenditures and elective renovations that will
not impact hotel operations, which we expect will reduce capital expenditures
spend by approximately
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projects. We are utilizing the low occupancy environment to accelerate certain
projects and minimize future disruption. For full year 2020, we expect total
capital expenditures of
During the first quarter of 2020, we spent approximately
We have made substantial progress on the four-year Marriott transformational
capital program for 17 of our properties, which began in 2018. We believe this
program will make these hotels 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, or approximately an average of
Results of Operations
The following table reflects certain line items from our statements of operations (in millions, except percentages):
Quarter ended March 31,
2020 2019 Change
Total revenues $ 1,052 $ 1,390 (24.3 )%
Operating costs and expenses:
Property-level costs (1) 1,038 1,145 (9.3 )
Corporate and other expenses 25 29 (13.8 )
Operating profit (loss) (11 ) 216 N/M
Interest expense 37 43 (14.0 )
Other gains/(losses) (1 ) 5 N/M
Benefit (provision) for income taxes 37 (2 ) N/M
Host Inc.:
Net income attributable to
non-controlling interests - 3 (100.0 )
Net income (loss) attributable to
Host Inc. (3 ) 186 N/M
Host L.P.:
Net income attributable to
non-controlling interests - 1 (100.0 )
Net income (loss) attributable to
Host L.P. (3 ) 188 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.
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Statement of Operations Results and Trends
For the first quarter of 2020, along with the significant declines in revenues
and operating profit due to the COVID-19 pandemic, the results of hotels
acquired or sold during the comparable periods impacted our year-over-year
comparisons. Comparisons of our operations were affected by the acquisition of
the 1
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