Host Hotels & Resorts, Inc. — Q2 2020 Form 10-Q
Business context and period: The filing covers the quarter and six months ended June 30, 2020. Host is a hotel-owning REIT with 80 primarily luxury and upper-upscale hotels. Its results were severely affected by COVID-19 restrictions and the collapse in travel demand.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $103 million | $1.483 billion | $1.155 billion | $2.873 billion |
| Operating income (loss) | $(353) million | $280 million | $(364) million | $496 million |
| Net income (loss) | $(356) million | $290 million | $(359) million | $479 million |
| Net income (loss) attributable to Host Inc. | $(352) million | $286 million | $(355) million | $472 million |
| Diluted earnings (loss) per share | $(0.50) | $0.39 | $(0.50) | $0.64 |
| GAAP operating margin | (342.7)% | 18.9% | (31.5)% | 17.3% |
- Q2 revenue fell 93.1% year over year; first-half revenue fell 59.8%. Q2 RevPAR declined 93.0% and Total RevPAR declined 92.9% on a constant-dollar basis. June portfolio occupancy was 10.7%, up from 6.9% in April.
- Operating cash flow was negative $15 million for the first half, versus positive $624 million a year earlier. Q2 GAAP cash used in operating activities was $172 million; management-defined Q2 cash burn, including capital expenditures and other adjustments, was $399 million.
- At June 30, cash and cash equivalents were $1.578 billion, with $154 million in the FF&E replacement fund and $750 million of available revolver capacity. Total debt was $4.543 billion, up from $3.794 billion at year-end 2019; weighted-average interest rate was 3.0%, and weighted-average maturity was 4.7 years. No material debt maturities were due before 2023.
- First-half capital spending was approximately $300 million. Management expected full-year 2020 capital expenditures of $475 million to $520 million, including $325 million to $345 million for return-on-investment projects.
Material changes, outlook and risks
- COVID-19 caused widespread hotel closures and sharp declines in group, business and leisure travel. Of 35 hotels that had suspended operations, 19 had reopened by July 30; 16 remained suspended. Hotel operating costs were reduced approximately 70% in Q2 versus the prior year, alongside substantial furloughs and other cost actions.
- As of July 30, 2.7 million group room nights for 2020 had been cancelled, representing an estimated $1.0 billion in total cancelled group revenue. Management expected further cancellations in the second half.
- Management did not provide a full-year forecast for RevPAR, net income or EBITDA, citing exceptional uncertainty. It said industry recovery depended substantially on a vaccine or effective therapeutic, and anticipated a slow return of corporate and group travel.
- The credit agreement amendment waived financial maintenance covenants from July 1, 2020 through the required reporting date for Q3 2021, followed by a phase-in. It also imposed a $300 million minimum monthly liquidity covenant, higher borrowing costs during the relief period, and restrictions on distributions, repurchases, debt and capital spending. The company was compliant with covenants at June 30.
- Management reported a June 30 leverage ratio of 4.6x and fixed-charge coverage of 2.7x. Senior-note EBITDA-to-interest coverage was 4.1x, down from 9.9x at year-end 2019; management expected it to fall below the 1.5x threshold for certain notes in Q3 or Q4 2020, restricting additional debt issuance. The filing states no substantial doubt remained about the company’s ability to continue as a going concern following the credit amendment.
- The regular dividend was suspended beginning with the Q2 dividend otherwise payable in July; stock repurchases were also suspended. The last dividend, $0.20 per share, was paid April 15. Future dividends are subject to board approval.
- Unusual items included a $12 million gain from selling land adjacent to The Phoenician and a $14 million share of an impairment loss on timeshare inventory at a Maui joint venture. The company recorded an $83 million first-half income-tax benefit, primarily related to taxable REIT subsidiary net operating losses. Management reported minimal legal accruals and no known legal matters requiring loss-contingency disclosure.
Most important facts for investors to verify
- Current hotel reopening status, occupancy and RevPAR trends, and whether the low June occupancy improved or deteriorated thereafter.
- Actual cash burn, available liquidity, capital spending and any further borrowing, asset sales or covenant amendments.
- Whether senior-note interest-coverage thresholds are breached and the resulting effect on debt capacity or ratings.
- Group booking cancellations, future demand recovery, and the timing or conditions for resuming dividends and repurchases.
- Performance and remaining cost of the Marriott transformational capital program, including the related operating-profit guarantees.