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Nov. 6, 2020, 11:16 a.m. EST

10-Q: HOST HOTELS & RESORTS, INC.

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 report on Form 10-Q, we make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by their use of terms and phrases such as "anticipate," "believe," "could," "expect," "may," "intend," "predict," "project," "plan," "will," "estimate" and other similar terms and phrases, including references to assumptions and forecasts of future results. Forward-looking statements are based on management's current expectations and assumptions and are not guarantees of future performance. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results to differ materially from those anticipated at the time the forward-looking statements are made.

The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

the duration and scope of the COVID-19 pandemic and its short and longer-term impact on the demand for travel, transient and group business, and levels of consumer confidence; actions governments, businesses and individuals take in response to the pandemic, including limiting or banning travel; the ability of our hotel managers to operate hotels in a way that facilitate social distancing, implement enhanced cleaning protocols and other COVID-19 mitigation practices; the impact of the pandemic and actions taken in response to the pandemic on global and regional economies, travel, and economic activity, including the duration and magnitude of its impact on unemployment rates, business investment and consumer discretionary spending; the pace of recovery when the COVID-19 pandemic subsides; general economic uncertainty in 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;

the effect on lodging demand of (i) changes in national and local economic and business conditions, including concerns about the duration of the U.S. economic recession as a result of the COVID-19 pandemic, global economic prospects, consumer confidence and the value of the U.S. dollar, and

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, border closings related to the COVID-19 pandemic and travel bans 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 severance and 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;

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 December 31, 2019 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.

Operating Results and Outlook

COVID-19 Response

The COVID-19 pandemic has significantly adversely impacted U.S. and global economic activity and has contributed to significant volatility in financial markets beginning in the first quarter of 2020. The adverse economic impact continues as various restrictive measures remain in place in many jurisdictions where we own hotels, including quarantines, restrictions on travel, school closings, limitations on the size of gatherings and/or restrictions on types of business that may continue to operate. As a result, the pandemic continues to negatively impact almost every industry directly or indirectly, including having a severe impact on the U.S. lodging industry generally and our company specifically. The ongoing effects of the pandemic on our operations and future bookings have had, and will continue to have, a material negative impact on our financial results and cash flows, and such negative impact may continue well after restrictive measures imposed by federal, state, local and other government authorities to contain the outbreak have been lifted.

We have not filed for any relief under the Coronavirus Aid, Relief, and Economic Security Act (CARES 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 employees at our properties ultimately will benefit us as we bear the expense for the wages and benefits of all persons working at our hotels.

In response to the pandemic, we and our managers, as applicable, have taken the following actions:

As of November 4, 2020, reopened 31 of the 35 hotels that had suspended operations at the start of the COVID-19 pandemic. We will maintain operations or reopen a property when it is anticipated to generate revenue greater than the incremental costs associated with staying open;

Average monthly occupancy (which includes the results of hotels with suspended operations) has increased during the quarter from 12.9% in July to 19.7% in September, due in part to increased demand in drive-to leisure markets, short-term group business and limited business travel;

Working with our hotel managers, we implemented portfolio-wide cost reductions, including significantly reducing staffing levels by furloughing or severing a substantial portion of the hotel workforce, reducing shared services fees, suspending food and beverage outlet operations, closing guestroom floors and meeting space, and temporarily suspending brand standards. These initiatives have resulted in a reduction of hotel operating costs across the portfolio by over 65%, excluding severance, in the third quarter, compared to 2019. 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;

Paid health benefits of approximately $31 million in the third quarter and $85 million year-to-date for hotel employees furloughed by our managers and special pay, including $32 million that was accrued in the second quarter. We also accrued $26 million in the third quarter for similar payments to be made in the fourth quarter and recorded $43 million in the third quarter for hotel-level severance costs. A portion of the furlough costs has been offset in the third quarter by ERC of approximately $23 million;

Suspended contributions to our hotels' FF&E escrow accounts and suspended or deferred non-essential capital projects, which we expect will reduce full year capital expenditures spending by approximately $100 million to $125 million compared to the forecast range as reported in our Annual Report on Form 10-K;

Successfully amended the credit agreement governing our $1.5 billion revolving credit facility and two $500 million term loans. Under the amendment, the quarterly-tested financial covenants were waived beginning July 1, 2020 until the required financial statement reporting date for the third quarter of 2021;

Accessed the full $1.5 billion under the revolver portion of the credit facility as a precautionary measure in order to increase our cash position and preserve financial flexibility in light of continued uncertainty in the global markets;

Suspended regular quarterly common cash dividends and stock repurchases until further notice. All future dividends are subject to approval by the Board of Directors; and

Reduced corporate expenses by 15% year-to-date and expect to reduce by 10-15% for the full year compared to 2019, through reduced travel, compensation and other overhead.

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.







        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 September 30,                           Year-to-date ended September 30,
                                         2020                  2019          Change            2020                      2019           Change
        Total revenues              $          198         $      1,262        (84.3 )%   $         1,353           $         4,135       (67.3 )%
        Net income (loss)                     (316 )                372          N/M                 (675 )                     851         N/M
        Operating profit (loss)               (318 )                137          N/M                 (682 )                     633         N/M
        Operating profit (loss)
        margin under GAAP                   (160.6 )%              10.9 %        N/M                (50.4 )%                   15.3 %       N/M
        EBITDAre (1)                $         (154 )       $        316          N/M      $          (180 )         $         1,183         N/M
        Adjusted EBITDAre (1)                 (111 )                312          N/M                 (136 )                   1,179         N/M
        Diluted earnings (loss)
        per common share                     (0.44 )               0.51          N/M                (0.95 )                    1.14         N/M
        NAREIT FFO per diluted
        share (1)                            (0.21 )               0.35          N/M                (0.25 )                    1.36         N/M
        Adjusted FFO per diluted
        share (1)                            (0.11 )               0.35          N/M                (0.14 )                    1.37         N/M
        All Owned Hotel Data (2):
                                        Quarter ended September 30,                           Year-to-date ended September 30,
                                         2020                  2019          Change            2020                      2019           Change
        All owned hotel revenues
        (pro forma) (1)             $          198         $      1,212        (83.7 )%   $         1,353           $         3,924       (65.5 )%
        All owned hotel EBITDA
        (pro forma) (1)                        (91 )                310          N/M                  (72 )                   1,156         N/M
        All owned hotel EBITDA
        margin (pro forma) (1)               (46.0 )%              25.6 %        N/M                 (5.3 )%                   29.5 %       N/M
        Change in all owned hotel
        Total RevPAR - Constant
        US$                                  (83.9 )%                                               (65.9 )%
        Change in all owned hotel
        RevPAR - Constant US$                (84.1 )%                                               (67.2 )%
        Change in all owned hotel
        RevPAR - Nominal US$                 (84.2 )%                                               (67.2 )%
        Change in domestic RevPAR            (84.0 )%                                               (67.1 )%
        Change in international
        RevPAR - Constant US$                (91.0 )%                                               (70.8 )%
        ___________
        


(1) EBITDAre, Adjusted EBITDAre, NAREIT FFO per diluted share and Adjusted FFO per diluted share and all owned hotel operating results (including hotel revenues and hotel EBITDA and margins) are non-GAAP financial measures within the meaning of the rules of the SEC. Beginning in the third quarter of 2020, we changed our definition of Adjusted EBITDAre and Adjusted NAREIT FFO to exclude non-ordinary course severance costs, and remove these severance costs from property level operating results, which we believe provides useful supplemental information that is beneficial to an investor's understanding of our ongoing operating performance. Furlough costs, which are viewed as a replacement to wages, will continue to be included in these metrics. Including these severance costs, our Adjusted EBITDAre and Adjusted NAREIT FFO would have been $(154) and $(123) for the quarter, respectively, and $(180) and $(146) year-to-date, respectively. Including severance costs, our All Hotel Pro Forma EBITDA would have been $(134) million for the third quarter 2020 and $(116) million year-to-date 2020. 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 presenting hotel operating results on an All Hotel pro forma basis. Thus, operating results are presented for all consolidated properties owned as of September 30, 2020 and do not include the results of operations for properties sold in 2019 or through the reporting date. Additionally, operating results for acquisitions in the current and prior year are reflected for full calendar years, to include results for periods prior to our ownership.

N/M=Not meaningful

Operations

Total revenues declined $1,064 million, or 84.3%, for the third quarter and $2,782 million, or 67.3%, year-to-date due to the COVID-19 pandemic, as we experienced a sharp decline in group, business and leisure travel beginning in mid-March 2020. An overall decline in travel as well as the postponement or cancellation of conventions and conferences, music and arts festivals, sporting

events and other large public gatherings and on-going travel restrictions have significantly reduced demand at our hotels. All owned hotel RevPAR and Total RevPAR on a constant US$ basis for the quarter declined 84.1% and 83.9%, respectively, as occupancy and food and beverage revenues experienced significant declines. Year-to-date, all owned hotel RevPAR and Total RevPAR declined 67.2% and 65.9%, respectively, as positive results in January and February were offset by significant declines during the subsequent months.

All owned hotel Total RevPAR in our Jacksonville, Florida Gulf Coast and Phoenix markets declined the least during the quarter, with decreases of 25.9%, 37.4% and 61.5%, respectively, due to short-term leisure demand and limited group business. Our hotels in San Francisco/San Jose and New York, our two largest markets by room count, experienced declines in all owned hotel Total RevPAR of 91.0% and 93.2%, respectively, as operations at the Grand Hyatt San Francisco remained suspended through the end of the third quarter and operations at the New York Marriott Downtown remained suspended through mid-August. The largest all owned hotel Total RevPAR declines occurred in our Boston and Maui/Oahu markets due to continued suspension of operations at the Sheraton Boston Hotel and at our three hotels in Maui.

As a result of the COVID-19 pandemic beginning mid-March 2020:

net income (loss) decreased $688 million for the third quarter and $1,526 million year-to-date;

diluted earnings (loss) per share for the quarter decreased $0.95 for the third quarter and $2.09 year-to-date;

Adjusted EBITDAre decreased $423 million for the quarter and $1,315 million year-to-date; and

Adjusted FFO per diluted share decreased $0.46 for the third quarter and $1.51 year-to-date.

Outlook

The COVID-19 pandemic has severely impacted macroeconomic and industry expectations for 2020. Government-imposed stay-at-home orders across the U.S. resulted in unprecedented job losses and a severe decline in economic activity beginning in March. While the economy staged a strong rebound in the third quarter, with Blue Chip Economic Indicators consensus estimating an increase in real GDP of 29.1% on a quarter-over-quarter, seasonally adjusted basis, momentum has slowed moving into the fall as stay-at-home-schooling constrains economic activity for some households, further stimulus has stalled in Congress, and parts of the U.S. grapple with a recent surge in outbreaks. The Blue Chip Economic Indicators consensus also currently anticipates a 4.0% decline in real U.S. GDP this year, while business investment is anticipated to fall by 5.9%. While analysts believe the unemployment rate may have peaked in April, it is anticipated to remain elevated throughout the year, with an expected average of 8.4%. The range of potential outcomes on the economy and the lodging industry specifically is exceptionally wide, reflecting both the unprecedented nature of the pandemic and varying analyst assumptions surrounding the trajectory of infection rates, and the timing and efficacy of medical solutions, including the development of a vaccine.

Following the sharp rebound in real GDP for the third quarter, Blue Chip Economic Indicators anticipates fourth quarter growth to slow to 3.8%. Hotel supply growth is anticipated to remain muted in the coming months as construction shutdowns halted progress in six states for several weeks over the spring, while social distancing measures and supply chain challenges have resulted in significant project delays across the rest of the U.S. A large percentage of U.S. hotels closed temporarily in the spring, and while many have begun to reopen, we anticipate that the number of permanent hotel closures will be higher than historical averages. However, significant declines in industry demand resulting from reduced economic activity have more than offset the effect of reduced supply, resulting in unprecedented occupancy and RevPAR declines. Luxury and upper upscale hotels in top 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 slightly improving month-over-month trends, we anticipate that these factors will persist into the fourth quarter and that slowing economic momentum will weigh on growth potential.

As a result of the significant uncertainties related to election outcomes, health outcomes, further government stimulus and related policy, and resulting broader macroeconomic trends in the fourth quarter, we anticipate that the industry outlook will continue to be weighed down by the slow return of corporate and group travel, as businesses likely will remain cautious. In addition, consumer confidence and leisure demand will continue to be affected by a weakened labor market, the recent resurgence in positive cases in some regions, and reduced wealth and spending power. Given the unprecedented and unpredictable nature of the pandemic and its effect on our industry, we are not able to provide a full year forecast for RevPAR, net income or EBITDA at this time. We believe that recovery within the lodging industry is highly dependent on the strength of the economy, consumer confidence and, especially with respect to corporate and group travel, the development of a vaccine or strong therapeutic. Accordingly, we believe the eventual

recovery will not likely occur until 2021, at which point it will likely be gradual and the impact on specific markets and industries will be uneven.

Strategic Initiatives

Balance Sheet. During the third quarter, we issued $750 million of 3.5% Series I senior notes due September 2030 for proceeds of approximately $733 million, net of discounts, underwriting fees and expenses. The proceeds of such issuance were used to repurchase through a tender offer $364 million (approximately 81%) of the $450 million 4.75% Series C senior notes due 2023 for $390 million, including a prepayment premium of $26 million.

We also drew $746 million under the revolver portion of our credit facility, which fully utilized its available capacity. Our quarterly-tested financial covenants were waived beginning July 1, 2020 until the required financial statement reporting date for the third quarter of 2021. As of September 30, 2020, we had $2.4 billion of cash and cash equivalents.

Dispositions. Subsequent to quarter end, we sold the Newport Beach Marriott Hotel & Spa for $216 million, including $14 million for the FF&E replacement funds, and sold excess land adjacent to The Phoenician hotel for $66 million. The credit facility requires that we use the net proceeds from debt issuances and asset sales in excess of $350 million to first repay borrowings under the revolver and, in excess of $700 million in proceeds, to repay the revolver and term loans on a pro rata basis, subject to certain exceptions. As a result of restrictions under the waiver, a portion of the proceeds from the issuance of the Series I senior notes, the Newport Beach Marriott Hotel & Spa sale and the land sale at the Phoenician may be required to repay the revolving credit facility or to repay other debt.

Capital Projects. We reduced our capital plan for renewal and replacement capital projects while prioritizing major capital projects for those assets and markets which are expected to recover faster, such as leisure and drive-to destinations, as well as previously announced major return on investment projects. We are utilizing the low occupancy environment to accelerate certain projects and minimize future disruption.

During the first three quarters of 2020, we spent approximately $262 million on ROI capital projects and $122 million on renewal and replacement projects, representing approximately 78% of the total capital expenditures projects planned for the year. For full year 2020, we expect total capital expenditures of $475 million to $510 million. This total amount consists of ROI projects of approximately $325 million to $340 million and renewal and replacement expenditures of $150 million to $170 million. ROI projects include approximately . . .

Nov 06, 2020

COMTEX_374051544/2041/2020-11-06T11:16:28

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