Aug. 5, 2021, 3:26 p.m. EDT

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

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

the duration and scope of the COVID-19 pandemic and its short and longer-term impact on the demand for travel, transient and group business, and levels of consumer confidence; actions governments, businesses and individuals take in response to the pandemic, including limiting or banning travel; the ability of our hotel managers to operate hotels in a way that facilitate social distancing, implement enhanced cleaning protocols and other COVID-19 pandemic mitigation practices; the impact of the pandemic and actions taken in response to the pandemic on global and regional economies, travel, and economic activity, including the duration and magnitude of its impact on unemployment rates, business investment and consumer discretionary spending; the pace of recovery as the COVID-19 pandemic subsides; general economic uncertainty in U.S. markets where we own hotels and the potential for low levels of economic growth in these markets; and the effects on hotel operations of steps that our hotel managers take to reduce operating costs in response to the COVID-19 pandemic;

the effect on lodging demand of (i) changes in national and local economic and business conditions, including concerns about the pace of U.S. economic growth, 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, 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 and risks associated with our managers' ability to successfully increase staffing levels to meet expected increases in lodging demand due to the challenging labor environment;

the effect of rating agency downgrades of our debt securities on the cost and availability of new debt financings;

the reduction in our operating flexibility and the limitation on our ability to incur debt, pay dividends and make distributions resulting from restrictive covenants in our debt agreements, including the waivers we obtained under our credit facility as a result of not meeting the original covenant thresholds that otherwise would have been required and other risks associated with the amount of our indebtedness or related to restrictive covenants in our debt agreements, including the risk that a default could occur as a result of the decline in operations due to the COVID-19 pandemic;

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, 2020 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. While many of the restrictive measures put in place in jurisdictions where we own hotels have been lifted, certain restrictions remain, including limitations on the size of gatherings and/or on the types of business that may continue to operate. As a result, the pandemic continues to negatively impact 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 remaining restrictive measures imposed by federal, state, local and other governmental authorities have been lifted.

We have not filed for any relief under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") or the American Rescue Plan Act; however, several of our operators, including Hyatt and Marriott, have filed for the Employee Retention Credit ("ERC") to partially offset the costs of their furloughed hotel employees under Title II of the CARES Act, as discussed below. Benefits received by our operators from the ERC related to their employees working at our hotels ultimately benefit us as we bear the

expense for the wages and benefits of all persons working at our hotels. Benefit costs for furloughed employees did not have a significant impact on the second quarter results, as they were eligible to be reimbursed through the American Rescue Plan Act, the reimbursement of which our managers have applied. We expect that these benefit costs will also not have a significant impact on our third quarter results.

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

As of August 2, 2021, reopened all of the 35 hotels that had suspended operations at the start of the COVID-19 pandemic;

Average monthly occupancy (which includes the results of hotels with suspended operations) has increased during the quarter from 38.6% in April to 48.5% in June, as the increased vaccination rate in the U.S. has continued to lead to improving leisure demand;

Working with our hotel managers, we implemented portfolio-wide cost reductions. These initiatives have resulted in a reduction of pro forma hotel operating costs across the portfolio by approximately 46% in the second quarter of 2021, 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. However, we expect hotel operating costs to increase more in line with total revenues over time as hotels continue to transition from their contingency level operational plans to increased staffing levels and controllable spending. The transition to increased staffing levels has lagged revenue increases due to the challenging labor environment across the industry. Additionally, reintroduction of marketing, maintenance and other support costs are expected to increase other departmental and support expenses as the recovery is expected to continue to gain momentum;

Suspended contributions to certain of our hotels' FF&E escrow accounts;

Further amended the credit agreement governing our $1.5 billion revolving credit facility and two $500 million term loans. Under the amendments, the quarterly-tested financial covenants were waived beginning July 1, 2020 until the required financial statement reporting date for the second quarter of 2022, with certain financial covenants modified through the third quarter of 2023;

Accessed the full $1.5 billion under the revolver portion of the credit facility in 2020 as a precautionary measure in order to increase our cash position and preserve financial flexibility 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 in 2020 by approximately 17%, 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. While vaccination rates have increased during the first half of the year, there remains a great deal of uncertainty surrounding the trends and duration of the COVID-19 pandemic, and we are monitoring developments on an ongoing basis. We, and our hotel managers, may take additional actions in response to future developments.







        Operating Results
        The following table reflects certain line items from our statements of
        operations and significant operating statistics (in millions, except per share
        and hotel statistics):
        Historical Income
        Statement Data:
                                      Quarter ended June 30,                           Year-to-date ended June 30,
                                       2021             2020          Change            2021                 2020          Change
        Total revenues              $      649        $     103         530.1 %     $      1,048         $      1,155         (9.3 )%
        Net loss                           (61 )           (356 )        82.9 %             (214 )               (359 )       40.4 %
        Operating loss                     (68 )           (353 )        80.7 %             (234 )               (364 )       35.7 %
        Operating loss margin
        under GAAP                       (10.5 )%        (342.7 )%     33,220 bps          (22.3 )%             (31.5 )%       920 bps
        EBITDAre (1)                $      111        $    (190 )         N/M       $        116         $        (26 )        N/M
        Adjusted EBITDAre (1)              110             (189 )         N/M                113                  (25 )        N/M
        Diluted loss per common
        share                            (0.09 )          (0.50 )        82.0 %            (0.30 )              (0.50 )       40.0 %
        NAREIT FFO per diluted
        share (1)                         0.12            (0.26 )         N/M               0.13                (0.03 )        N/M
        Adjusted FFO per diluted
        share (1)                         0.12            (0.26 )         N/M               0.13                (0.03 )        N/M
        All Owned Hotel Data (2):
                                      Quarter ended June 30,                           Year-to-date ended June 30,
                                       2021             2020          Change            2021                 2020          Change
        All owned hotel revenues
        (pro forma) (1)             $      659        $     104         533.7 %     $      1,088         $      1,196         (9.0 )%
        All owned hotel EBITDA
        (pro forma) (1)                    126             (172 )         N/M                151                   18        738.9 %
        All owned hotel EBITDA
        margin (pro forma) (1)            19.1 %         (165.4 )%        N/M               13.9 %                1.5 %      1,240 bps
        Change in all owned hotel
        Total RevPAR - Constant
        US$                              540.7 %                                            (8.8 )%
        Change in all owned hotel
        RevPAR - Constant US$            607.0 %                                            (0.3 )%
        Change in all owned hotel
        RevPAR - Nominal US$             607.5 %                                            (0.4 )%
        Change in domestic RevPAR        612.6 %                                             0.7 %
        Change in international
        RevPAR - Constant US$            141.2 %                                           (68.1 )%
        ___________
        


(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 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 these supplemental measures are useful, reconciliations to the most directly comparable GAAP measure, and the limitations on the use of these supplemental measures.

(2) Due to the COVID-19 pandemic and its effects on operations, we are temporarily presenting hotel operating results on an All Owned Hotel pro forma basis. Thus, operating results are presented for all consolidated hotels owned as of June 30, 2021 and do not include the results of operations for hotels sold through the reporting date. Additionally, operating results for acquisitions as of June 30, 2021 are reflected for full calendar years, which include results for periods prior to our ownership.

N/M = Not meaningful.

Operations

While still below pre-pandemic levels, total revenues increased $546 million, or 530.1%, for the second quarter as compared to the second quarter of 2020 due to strong leisure demand at our resort hotels. For the year-to-date, total revenues decreased $107 million, or 9.3%, as positive results in January and February of 2020 offset the improvement in revenues during the second quarter of 2021. All owned hotel RevPAR and Total RevPAR on a constant US$ basis for the quarter increased 607.0% and 540.7%, respectively, due to increases in occupancy and food and beverage revenues. For the year-to-date, all owned hotel RevPAR and Total RevPAR on a constant US$ basis decreased 0.3% and 8.8%, respectively.

During the quarter, all owned hotel Total RevPAR in our Jacksonville, Maui, and Florida Gulf Coast markets totaled $730, $544 and $506, respectively, due to strong leisure demand. Our hotels in New York and San Francisco/San Jose, our two largest markets by room count, experienced all owned hotel Total RevPAR of just $64 and $59, respectively, as operations at these hotels begin to ramp

up following the lifting of many of the restrictions previously in place in these markets. All owned hotel Total RevPAR was lowest for our Boston properties, at $39, as operations at the Sheraton Boston remained suspended through the end of the second quarter.

Operating trends continue to be positive in the second quarter of 2021, as vaccine distribution has continued and many jurisdictions have lifted COVID-19 restrictions, with RevPAR increasing from $93.49 in April to $111.25 in June. In particular, properties in Florida, Arizona and Hawaii continue to drive the portfolio, with RevPAR levels that are approaching or exceeding 2019 levels. At the same time, hotel-level operating costs are increasing at lower rates, as hiring did not keep pace with the improvement in operations at these resort destinations. The lag in hiring is due to the challenging labor environment across the industry, coupled with the strong pace of sequential growth in occupancy, which has not provided our managers sufficient time to adjust staffing levels commensurate with the increase in demand. We anticipate that hotel-level operating costs over time will increase at a higher rate, as our hotel managers adjust back to more normalized levels of operations.

Although operations remain below pre-pandemic levels, as a result of continued operational improvements at our hotels since the COVID-19 pandemic began in mid-March 2020, second quarter and year-to-date 2021 results improved when compared to 2020 as follows:

net loss decreased $295 million for the quarter and $145 million year-to-date;

diluted loss per share for the quarter decreased $0.41 for the quarter and $0.20 year-to-date;

Adjusted EBITDAre increased $299 million for the quarter and $138 million year-to-date; and

Adjusted FFO per diluted share increased $0.38 for the quarter and $0.16 year-to-date.

Outlook

While the COVID-19 pandemic has severely impacted macroeconomic and industry expectations for 2021, year-over-year growth in real GDP and business investment has seen a strong rebound from 2020, supported by recent stimulus, low interest rates, vaccine distribution, and the lifting of many government-imposed restrictions across the U.S. While forecasts for 2021 remain uncertain, Blue Chip Economic Indicators consensus currently estimates an increase in real GDP of 6.6% for the year, while business investment is anticipated to increase 8.4%. Though analysts believe the unemployment rate peaked in 2020, it is anticipated to remain elevated in 2021, with an expected average of 5.6% for the year. The range of potential outcomes on the economy and the lodging industry specifically remain exceptionally wide, reflecting the unprecedented nature of the pandemic, varying analyst assumptions surrounding new virus variants and the continued impact of vaccine deployments.

While there have been some permanent closures of existing hotel rooms, hotel supply growth is anticipated to remain below the long-term historical average in 2021, as social distancing measures and supply chain challenges have resulted in project delays across the U.S. However, the pandemic has had an outsized impact on our industry demand. As a result, RevPAR recovery to pre-pandemic levels is anticipated to lag that of the broader U.S. economy, despite lower supply growth. Luxury and upper upscale hotels in top U.S. markets, where a majority of our hotels are located, have been most heavily affected by the pandemic, due in part to the sharp decline in air travel, particularly from international arrivals, and the slower recovery of corporate and group demand. While we have seen improving trends, especially in sunbelt markets, we anticipate that these factors will persist through the remainder 2021.

As a result of the significant uncertainties related to the impact of new virus variants, the pace of vaccination and broader macroeconomic trends in 2021, we anticipate that the industry outlook will continue to be weighed down by the slow return of corporate and group travel, as businesses are expected to remain cautious. While investor optimism has grown in the first half of 2021, as analysts focus on strong leisure demand, existing corporate policies are likely to continue to constrain nonessential business transient and group travel in the near term. Therefore, the timing and trajectory of the recovery is difficult to forecast due to a wide range of customer responses to vaccines and the virus, seasonal shifts in the mix of business and leisure demand, as well as a condensed booking window for hotel rooms. Therefore, while we currently anticipate sequential RevPAR growth through the remainder of the year, we cannot provide a full year forecast for RevPAR at this time. We believe that the continued recovery within the lodging industry is highly dependent on the strength of the economy, consumer confidence and the return of corporate and group travel. Accordingly, we believe that the impact of the recovery on specific markets and industries will be uneven.

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

Strategic Initiatives

Balance Sheet and Financing Transactions. As of June 30, 2021, we had $1.5 billion of cash and cash equivalents. During the second quarter, we issued approximately 7.8 million shares of Host Inc. common stock under our "at-the-market" offering program at an average price of $17.99 per share, for net proceeds of approximately $138 million.

Acquisitions. During the second quarter, we purchased the 444-room Four Seasons Resort Orlando at Walt Disney World(R) Resort for a total purchase price of $610 million and the Royal Ka'anapali and Ka'anapali Kai golf courses, adjacent to our Hyatt Regency Maui hotel, for $28 million.

Subsequent to quarter end, we purchased the 200-room Baker's Cay Resort Key Largo, Curio Collection for a total purchase price of $200 million and a 223-room luxury downtown hotel in Houston, formerly operated as the Hotel Alessandra, for $65 million. We have engaged HEI to manage the luxury downtown Houston hotel and expect to re-open the property later this year under a new name and brand.

Capital Projects. We are utilizing the low occupancy environment to accelerate certain projects and minimize future disruption.

During the first half of 2021, we spent approximately $117 million on ROI capital projects and $63 million on renewal and replacement projects. For full year 2021, we expect total capital expenditures of $400 million to $475 million. This total amount consists of ROI projects of approximately $275 million to $325 million and renewal and replacement expenditures of $125 million to $150 million. ROI projects include approximately $110 million to $140 million for the Marriott transformational capital program discussed below.

During the second quarter, we completed the development of a new waterpark at The Ritz-Carlton Golf Resort, Naples and 19 two-bedroom luxury villas at the Andaz Maui at Wailea Resort. The 19 two-bedroom luxury villas achieved occupancy of 73% in June 2021, its first full month of operations, at an average rate of $1,626.

We have made substantial progress on the Marriott transformational capital program, which began in 2018 and is expected to be substantially complete by 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 75% of the total estimated costs of the program have been spent as of June 30, 2021, and we expect to complete approximately 85% of the program by the end of the year. 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 and projects at the Minneapolis Marriott City Center, San Antonio Marriott Rivercenter and JW Marriott Atlanta Buckhead in 2020. In 2021, we completed the project at The Ritz-Carlton Amelia . . .

Aug 05, 2021

COMTEX_391029402/2041/2021-08-05T15:25:44

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