Host Hotels & Resorts, Inc. and Host Hotels & Resorts, L.P. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. The combined filing covers the REIT and its operating partnership, whose financial statements are substantially similar.
Business context and reporting period
Host owned 80 primarily luxury and upper-upscale hotels, with 46,674 rooms, across the United States, Brazil and Canada. COVID-19 restrictions and the collapse in travel demand materially affected hotel operations. Nine of the 35 hotels that initially suspended operations remained suspended at September 30; by November 4, 31 of those hotels had reopened.
Financial and operating performance
| Metric | Q3 2020 | Q3 2019 | YTD 2020 | YTD 2019 |
|---|---|---|---|---|
| Revenue | $198 | $1,262 | $1,353 | $4,135 |
| Operating income (loss) | $(318) | $137 | $(682) | $633 |
| Operating margin | (160.6)% | 10.9% | (50.4)% | 15.3% |
| Net income (loss) | $(316) | $372 | $(675) | $851 |
| Host Inc. diluted EPS | $(0.44) | $0.51 | $(0.95) | $1.14 |
| Adjusted EBITDAre | $(111) | $312 | $(136) | $1,179 |
| Adjusted FFO per diluted share | $(0.11) | $0.35 | $(0.14) | $1.37 |
Q3 revenue fell 84.3% year over year; YTD revenue fell 67.3%. Q3 room revenue declined 84.8% and food-and-beverage revenue declined 90.9%. All-owned-hotel RevPAR fell 84.1% in Q3 and 67.2% YTD on a constant-dollar basis. Portfolio occupancy rose from 12.9% in July to 19.7% in September, but September RevPAR remained 81.8% below the prior year.
YTD net cash used in operating activities was $164, versus $914 of cash provided in 2019. Q3 cash burn, a company-defined non-GAAP measure, was $267, improving from $399 in Q2. YTD capital expenditures were $384: $262 for return-on-investment projects and $122 for renewals and replacements.
At September 30, cash and cash equivalents were $2,430, with another $138 in the FF&E replacement fund. Total debt was $5,638, compared with $3,794 at year-end 2019; weighted-average interest rate was 3.0%, weighted-average maturity was 5.2 years, and 56% of debt was fixed-rate. The company reported no debt maturities until 2023.
Material changes versus the prior comparable period
- COVID-19 drove steep declines in occupancy, room rates and food-and-beverage demand. Q3 all-owned-hotel EBITDA margin was (46.0)%, compared with 25.6% a year earlier.
- Hotel operating costs fell 54.9% in Q3, but did not offset the revenue decline; fixed costs, including depreciation, property expenses and interest, continued to weigh on results.
- Interest expense increased to $66 in Q3 from $46, including $26 of cash debt-extinguishment costs associated with refinancing.
- The 2019 comparison included substantial hotel-sale gains: other gains were $274 in Q3 2019 and $336 YTD 2019. These make year-over-year net income comparisons particularly uneven.
- YTD financing cash flow was $1,337 provided, versus $380 used in 2019, reflecting new debt and revolver borrowing, partly offset by debt repayments, dividends and share repurchases.
Outlook, management commentary and risks
- Management said it could not provide a full-year forecast for RevPAR, net income or EBITDA because of the pandemic’s unprecedented and unpredictable effects. It expected recovery to be gradual and stated that it would likely not begin until 2021.
- Management cited a slow return of corporate and group travel, weak consumer confidence, elevated unemployment, renewed infection risks and uncertainty around public-health outcomes and government stimulus. Month-to-month operating improvement was not assured.
- Cost actions included portfolio-wide staffing and service reductions; hotel operating costs were down more than 65% in Q3 excluding severance. The company recorded $43 of hotel severance in Q3 and accrued $26 for similar payments expected in Q4. Some managers’ Employee Retention Credits benefited the company; approximately $23 was recorded in Q3.
- Regular common dividends and share repurchases were suspended. Contributions to hotel FF&E escrow accounts and certain capital projects were suspended or deferred. Management forecast full-year 2020 capital expenditures of $475–$510, including $325–$340 for return-on-investment projects.
- The $1.5 billion revolver was fully utilized. The company drew approximately $746 in Q3 as a precaution. Credit-facility maintenance covenants were waived through the required reporting date for Q3 2021, but the senior-notes EBITDA-to-interest coverage ratio was 1.1x against a 1.5x threshold; while below that threshold, the company cannot incur additional debt. This was not reported as an event of default.
- In Q3, Host issued $750 of 3.5% senior notes due 2030 and used proceeds in part to repurchase $364 principal amount of 4.75% notes due 2023 for $390, including a $26 premium.
- After quarter-end, Host sold the Newport Beach Marriott Hotel & Spa for $216, including $14 of FF&E funds, and adjacent Phoenician land for $66. Management expected a combined gain of approximately $200 in Q4; asset-sale proceeds may be subject to debt-repayment provisions.
- The company identified pandemic duration and travel demand, operating costs, debt covenants and financing access, hotel-manager concentration, and the ability to maintain liquidity and resume dividends as material risks. It reported minimal legal accruals and no known reasonably possible material legal loss contingency requiring disclosure.
Important facts for investors to verify
- Whether occupancy, RevPAR and group and corporate bookings continue to recover, and how many hotels remain closed or operate below breakeven.
- Cash burn, liquidity and the use of post-quarter asset-sale proceeds, including any required revolver or term-loan repayments.
- Progress toward restoring the senior-notes interest-coverage ratio and the implications of the restriction on additional debt.
- Actual 2020 capital spending versus the $475–$510 forecast, and whether deferred maintenance or projects affect future competitiveness.
- Timing and conditions for any dividend or share-repurchase resumption; future dividends remain subject to board approval.
- The effect of excluded severance costs on non-GAAP measures: including severance, Q3 Adjusted EBITDAre would have been $(154), and YTD Adjusted EBITDAre $(180).