Host Hotels & Resorts, Inc.

Good day, and welcome to the Host Hotels and Resorts First Quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Tejal Engman, Vice President of Investor Relations. Tejal, please go ahead.

Thank you, and good morning, everyone. Before we begin, please note that many of the comments made today are considered to be forward-looking statements under federal securities laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that would cause future results to differ from those expressed, and we are not obligated to publicly update or revise these forward-looking statements. In addition, on today's call, we will discuss certain non-GAAP financial information, such as SSO, adjusted EBITDA RE, and comparable hotel results. You can find this information together with reconciliations to the most directly comparable gap information in today's earnings press release in our 8K files with the SEC and in the supplemental financial information on our website at hosthotels.com. Participating in today's call with me will be Jim Rizzolio, President and Chief Executive Officer, Brian McNamara, Principal Financial Officer and Controller, and Saurav Ghosh, Executive Vice President, Strategy and Analytics. And now I'd like to turn the call over to Jim.

Thank you, Tejal, and thanks for joining us this morning. We hope that you and your families are safe and healthy, and we extend our deepest thanks for those affected by COVID-19. As you are aware, the lodging sector is navigating an unprecedented downturn that is expected to be at least twice as severe as the Great Recession. After a strong January and February, U.S. REBPAR posted its steepest decline on record and is expected to further deteriorate in April, according to STR data. Although we couldn't have anticipated the outbreak of a global pandemic, POST is well positioned to withstand the magnitude of its impact due to years of prudent capital allocation that emphasized maximizing balance sheet capacity and liquidity towards the end of the cycle. Today, we not only expect to persevere through this crisis, we fully expect to emerge with a stronger operating model, the highest quality portfolio in the company's history, and the ability to capitalize on future opportunities to create value for all our stakeholders. This morning, I will address our liquidity and cash flow position, key business segment trends, and our revised capital plan. Brian will discuss our first quarter performance in depth and provide our forecast for April. We began this year with the lowest leverage in the company's history at 1.6 times net debt to adjusted EBITDA, no near-term debt maturities, $1.6 billion of cash on hand, a fully unencumbered consolidated portfolio, and an investment grade balance sheet. We drew down our $1.5 billion credit facility revolver in mid-March and ended April with approximately $2.7 billion of cash, including FF&E reserves, after paying approximately $140 million in first quarter dividends, which were declared in February. At quarter end, our leverage ratio as defined in our credit facility was at two times. Our interest coverage ratio was at 6.8 times and our fixed charge coverage ratio was at 4.6 times, all of which are well within the limits specified in our credit facility covenants. We expect to remain in compliance with all our credit facility covenants through the second quarter. and are currently in discussions with our supportive bank lending group to secure greater flexibility on our covenant requirements. Moving on to expenses. We and our operators responded to the precipitous decline in revenues in March and April by implementing portfolio-wide cost reductions that are unprecedented in their magnitude. These include reducing the fixed portion of above property allocated costs by as much as two-thirds, suspending contributions to hotels' FF&E escrow accounts, suspending most brand standards, and unfortunately, furloughing up to 80% of the hotel workforce. As of yesterday, operations at 35 of our 80 consolidated hotels representing 43% of our total room count, are suspended. We work with our operators to determine whether to suspend operations at a hotel based on the property's ability to generate revenues that are greater than the incremental cost associated with remaining open. If the hotel is expected to achieve this incremental threshold, it remains open. Our preference is to leave hotels open as long as it is financially justifiable to do so. because we believe an operational property is better positioned to capture demand when it begins to recover. Our scale within several markets, such as New York, Washington, DC, San Diego, Los Angeles, Orange County, and Chicago, has helped us generate operational efficiencies and to further benefit from consolidating low levels of demand at multiple properties into the hotels that remain operational in that market. For example, we have gained operational efficiencies in Washington, D.C., with the leadership of the JW Marriott overseeing the Washington Marriott and Metro Center and the Westin Georgetown. The same has been achieved in New York and other markets. Demand consolidation is benefiting our hotels in Los Angeles, San Antonio, and San Diego. where we are able to consolidate demand into one property in each of those markets. For the hotels that remain open, our managers have significantly scaled down operations by closing guest room floors and meeting spaces and suspending food and beverage outlet operations. Due to timing, we expect to see the full benefit of these operating expense reductions in April. when total hotel operating expenses are expected to be 70% to 75% lower than our initial forecast from February. At the corporate level, we expect to further conserve cash by reducing our capital expenditures by $100 to $125 million and our corporate expenses by 10% to 15%. Finally, we expect to either suspend our second quarter dividend or cut it to a penny a share. which is a reduction of approximately $140 million compared to our prior 20 cent per share quarterly dividend. As a result of these anticipated cash savings initiatives and a worst case scenario where all of our hotels are effectively closed through the end of 2020 and the dividend remains suspended or reduced, our monthly cash outflow would average $120 to $140 million per month. reflecting average hotel-level expenses of $70 to $80 million a month, as well as estimated capital expenditures, interest payments, and general corporate overhead. Importantly, in this worst-case scenario, we would end 2020 with approximately $1.65 billion of cash, including the FF&E Reserve, leaving us with ample liquidity to support operations as the economy recovers. Moving on to group and transient business trends. Through May 4th, we have lost an estimated $1.3 billion of expected 2020 revenues. This represents approximately $630 million of total group revenues known to date and $660 million of total transient revenues forecasted for the first half of the year. Approximately 90% of our total group revenue cancellations have been for the first half of the year. with over 60% in the second quarter alone. Of the approximately 10% of total group revenue cancellations in the second half, less than 3% are for the fourth quarter. While the low levels of cancellations for the fourth quarter are encouraging, we believe that the near-term pace of group and transient business remains uncertain until the consumer feels comfortable traveling again. Our operators have rebooked approximately 12% of our total 2020 lost group revenues, with the majority rebooked for the second half of 2020. Although we expect a significant portion of our total group revenues to be lost due to timing, as they were driven by a favorable 2020 citywide convention calendar, a majority of our group customers have expressed a desire to rebook at our properties. Finally, we have collected $32 million cancellation fees to date with $10 million recognized in the first quarter. Shifting to 2021 total group revenue pace. We began this year with 2.3 million definite rooms on the books for 2021 and pace was nearly 3% ahead of the same time last year. Although 2021 group booking activity is half of what it was last year, and our total group revenue pace is now flat, we believe group demand will return over time. With decision makers on the sidelines in wait-and-see mode, we believe the pace of recovery in both group and business transient will depend upon customers feeling safe to travel. Markets with stronger group for 2021 are San Antonio, San Diego, Seattle, Los Angeles, and Chicago, whereas New York, Orlando, San Francisco, San Jose, Denver, and Boston currently have PACE opportunities. Given the current uncertainty, PACE by market could change considerably in the weeks and months to come. We continue to believe in the long-term viability of the group business. While the association business model relies upon generating income from large group meetings, a more intangible reality is that most group meetings allow members within an industry to connect with and learn from each other, while building relationships and trust in a manner that we don't think is possible to replicate digitally. In the long run, we believe using group volumes to compress supply and generate productive yield management will remain a cornerstone of the lodging business. That said, we are positioning ourselves for the recovery to be led by drive-to leisure destinations, As observed in China and other parts of Asia that are several weeks ahead of the United States, the recovery thus far has been led by domestic leisure stays and drive-to destinations. With renovations recently completed and construction or planned within the next 12 months, over 70% of our portfolio and our strongest drive-to leisure markets will be fully refreshed. Specifically, our hotels in Phoenix, San Diego, Orange County, San Antonio and Florida, which represent over 13,000 keys, or nearly 30% of our total portfolio, are very well positioned to capture a recovery and drive to leisure demand. We continue to prioritize the health and safety of our employees and guests. Most of our hotels are managed by large brands who are known for reliably delivering consistent service and standards. These brands are now raising their cleanliness standards to even higher levels with new protocols to address the current circumstances. We believe branded hotels' communication around and execution of rigorous cleaning standards will resonate well with customers. Moreover, we expect the strength of their loyalty programs to be a strong driver of demand to our properties. Turning to our supply outlook, while it will take several quarters before we have a complete understanding of the change in hotel supply growth. We've cut our internal net supply expectations for 2020 in half, based on broad assumptions surrounding project delays or announcements and existing hotel closures. We now expect supply growth of roughly 1% in 2020, with average growth over the next three years remaining below the long-term historical trend. Moreover, we believe there is a high probability that several projects that have not yet begun construction will be canceled or significantly delayed. Although no one knows the timing or shape of the recovery, we are hopeful that occupancy declines may have stabilized and found a bottom in April. We are frequently asked what level of occupancy will allow us to break even at the hotel evil line. As you may imagine, it's difficult to provide a number. as it varies greatly by property, requires ADR assumptions, and is likely to change on a monthly basis. We have done the analysis based on a single month of operations in the current environment with significant expense reductions remaining in place. In that scenario, assuming ADRs decline 15 to 30 percent on a year-over-year basis, we would expect to see hotel EBITDA break-even at 35% to 45% portfolio occupancy. Our enterprise analytics and asset management teams are working closely with our operators to strengthen a long-term hotel operating model with nearer-term goals of achieving break-even and generating higher profitability at lower levels of occupancy. In the 2009 recession, several operating expense line items were significantly reduced and continue to improve through the cycle. While we expect our hotels to incur new expenses, especially ones related to new cleaning standards, downturns compel owners and operators to reevaluate brand standards, programs, and above-property expenses, an exercise that can result in long-term savings and a healthier hotel operating model that better serves customers' changing needs. Turning to CapEx, we have reduced our 2020 capital expenditures by $100 to $125 million, which represents an approximately 50% reduction to the portion of the CapEx budget that was already spent, underweighed, or committed. Approximately 85% of our CapEx savings are derived from eliminating non-essential renewal and replacement CapEx spend, with the remainder coming from suspended ROI projects. We continue to plan on spending $180 to $200 million on the Marriott Transformational Capital Program and now expect to receive $20 million in operating profit guarantees this year. It makes sense for us to complete these renovations for these reasons. First, we benefit from $20 million of operating profit guarantees without experiencing commensurate revenue disruption given the current unprecedented low red par environment. Second, we expect the renovations to position us to achieve meaningful red part gains through the cycle, particularly as most hotel owners are compelled to cut back on renovations due to liquidity constraints. And third, construction bids are coming in below budget and market pricing is expected to decline by at least 6% to 10%, which provides us the opportunity to buy out construction at lower prices. In addition to all this, As the performance of these properties return, we will receive enhanced owner's priority on this investment, which will reduce the incentive management fees we pay Marriott. As part of this year's Marriott Transformational Capital Program, we have completed renovations at the San Antonio River Center Marriott, and we will finish the Minneapolis City Center Marriott in just a few weeks. Later this year, we plan to complete the JW Marriott Buckhead, In addition, we expect to start the Ritz-Carlton Amelia Island, which is scheduled to complete in the first quarter of 2021. Finally, we will complete the second phases at both New York Marriott Marquis and the Orlando World Center Marriott, which are scheduled to complete in the third and fourth quarter of 2021, respectively. Combined with the properties completed as part of last year's capital program, including the Coronado Island Marriott Resort and Spa, New York Marriott Downtown, San Francisco Marriott Marquis, and Santa Clara Marriott, the Marriott Transformational Capital Program will be nearly 70% complete by the end of 2020. While the program consists of a mix of group and leisure-dominant hotels and markets, these transformational renovations are expected to have a useful life of 7 to 10 years and will help our properties gain market share and outperform through the next cycle. While our revised CapEx plan assumes projects will be completed substantially as scheduled, COVID-19 has impacted our ability to implement renovations. As supply chains have been disrupted and certain state and local orders have deemed construction not essential, we will continue to provide quarterly updates on our capital plan for the year. As I reflect on leading hosts over the last few years and now through this crisis, It is gratifying to know that our prudent and disciplined capital allocation strategy toward the end of the cycle has served all our stakeholders well. In 2018 and 2019, we sold $3.3 billion of our relatively lower quality and lower total rent per asset at the top of the market. Additionally, we capitalized on the favorable debt capital markets last year to execute over $3 billion of refinancing, which extended our debt maturities and reduced our borrowing costs at an opportune time. While we also acquired $1.6 billion of high-quality assets, bought back $629 million of stock, and invested in developing and redeveloping parts of our portfolio, we deployed each of these value creation tools in a measured and disciplined manner. not knowing when the cycle would end, but discerning that balance sheet strength and capacity would be of paramount importance when it did. Today, as we enter a new logic cycle, we feel hopeful about a future where the threat of this pandemic has passed. In the meantime, we are taking the opportunity this crisis provides to further strengthen our operating model and to learn how to generate higher levels of profitability at lower levels of occupancy. We are excited to be entering a new cycle with the highest quality portfolio of iconic and irreplaceable assets in the company's history and likely in the lodging industry. When demand recovers, we believe that the quality of our assets, many of which will be newly renovated, will be a true differentiator that will help us gain Redpar Index share and outperform the industry. We continue to believe in the strength of both geographic and demand diversity through the cycle. Geographic diversity will serve us through an uneven recovery as various states and markets enter lockdowns at different times. Demand diversity will help us drive optimal revenue management and pricing through the cycle. Finally, we expect our relative balance sheet strength to continue to be a differentiator that will provide us with greater flexibility to capitalize on future long-term value creation opportunities that meet our strategic objectives. With that, I will turn the call over to Brian.