Host Hotels & Resorts, Inc.

Good day and welcome to the host hotels and resorts third quarter, 2020 earnings conference call. Today's conference is being recorded at this time. I would like to turn the call over to Tejal Eggman, senior vice president of investor relations. 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 could 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 FFO, adjusted EBITDA RE, cash burn, and hotel level of results. You can find this information together with the reconciliations to the most directly comparable GAAP 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 Resilio, President and Chief Executive Officer, and Saurabh Ghosh, Executive Vice President, Chief Financial Officer and Treasurer. And now I'd like to turn the call over to Jim.

Thank you, Tejal, and thanks everyone for joining us this morning. I hope all of you and your families remain safe and healthy. Over the last several months, we've transitioned from responding to the challenges posed by this pandemic to rebuilding our business within its confines. To that end, I would like to highlight three key achievements since our last earnings call. First, we've achieved gradual but steady revenue growth with our portfolio delivering sequentially higher rep part each month from a historic low of approximately $9 in April to a preliminary estimate of $37 in October. Although third quarter in October REVPAR remained more than 80% lower year over year, third quarter revenues grew over 90% quarter over quarter as our operators maximized their efforts to access all potential sources of hotel demand, which continues to gradually increase. Second, we have reduced our third quarter hotel level operating loss by approximately 40% from second quarter levels, including the benefit of a $23 million employee retention credit. Based on third quarter results and excluding the employee retention credit benefit, we have reduced our monthly ongoing hotel level operating loss by approximately 25% on average. compared to the second quarter. Our sequential revenue growth has flowed through to our bottom line as our operators have continued to do an outstanding job of minimizing expenses. Finally, we have further strengthened our robust liquidity by raising over $600 million of capital through opportunistic asset sales and debt refinancing and repayments. As a result, If fourth quarter operations are commensurate with the third quarter, we expect to end the year with approximately $2.4 to $2.5 billion of total available liquidity, including cash and FF&E reserves, with no debt maturity until 2023. As we enter the ninth month of the pandemic with daily COVID-19 case counts in the United States near all-time highs, We continue to believe that the demand recovery will remain gradual and choppy before the widespread availability of effective COVID-19 vaccines and therapeutics. Therefore, our key near-term priorities remain. Number one, working with our operators to continue to access all potential sources of demand. Number two, minimizing expenses and reducing hotel cash burn. And number three, maximizing liquidity. We are equally focused on our longer-term objectives of structurally redefining our operating model, positioning our portfolio to gain red part index share, and capitalizing on opportunistic investments to create long-term value for our stockholders. Let me walk you through our progress on these near and long-term objectives before handing the call over to Saurabh to explain our third quarter operating performance. Beginning with demand, although occupancy continues to be driven by leisure travelers, our hotels are also capturing short-term group airline crew and small but steady business transient volumes. We booked 127,000 group nights in the third quarter, and delivered 88,000 more room nights than the second quarter, if you exclude New York, which accounted for the majority of group room nights in the second quarter due to medical and first responder business. Excluding New York, group rooms increased progressively throughout the quarter, from 19,000 in July to 40,000 in August and 49,000 in September, primarily driven by corporate and SMURF events. Nine of our hotels booked sports-related group locks, from Major League Baseball and NFL teams to ESPN and other sports media, with a notable 800 rooms booked at Hyatt Regency San Francisco Burlingame for the PGA Championship in August. In addition, the Andaz Maui was personally bought out by a film production unit, which generated over 8,000 total room nights across September and October. two months when regular hotel operations were temporarily suspended. With robust safety protocols in place, including testing attendees upon arrival and employees on a daily basis, the ANDAS generated a little over $1.7 million of incremental hotel-level EBITDA from this business. While our operators are striving to access all potential sources of hotel demand, They remain focused on working with meeting planners to restore confidence in traditional group meetings and events. In October, the Orlando World Center Marriott hosted this year's Connect 2020 conference with more than 1,000 in-person attendees at our hotel and 175 virtual attendees at home. Every detail was meticulously designed for safety. as the trade show was spread across our 39,000 square foot crystal ballroom with widely spaced booths and aisles so that large groups of attendees were able to socially distance safely. Attendees complied with the hotel's mask mandate and plenty of masks were available on site. The property was able to complement the in-person event with virtual suppliers and a digital trade show that occurred simultaneously. We believe this hybrid meeting format will augment in-person demand and Marriott plans to host four global hybrid meeting events starting on November 9th at our Ritz-Carlton Tyson's Corner. While such events help publicize the fact that meetings can take place safely despite the complexities posed by the pandemic, restrictions on large group gatherings remain in place for most states and local jurisdictions. And nearly all conventions and city-wise have been canceled through the first quarter of next year. We remain optimistic about group business on a medium to long-term basis due to encouraging group booking patterns. Rebookings as a percentage of cancellations continue to increase with approximately 16% of group business that was canceled in 2020 now rebooked into future years. up from 11.6% in the second quarter. Moreover, group cancellations for 2021 remain concentrated through April, with groups that are scheduled for the second half of next year holding fairly steady. In the third quarter, we booked a net 81,000 group rooms for the second half of 2021, driven by San Francisco, San Jose, Orlando, New York, and the D.C. metro regions. We have 2.2 million definite rooms on the books for 2021, which on a full year basis is 31.5% lower than the same time last year, and on a second half basis is 7.7% lower. For context, we had approximately 3.2 million definite rooms on the books for full year 2020 at the same time last year. Finally, our operators achieved a robust sequential increase in 2022 to 2024 group bookings. We booked nearly 100,000 more room nights for these out years in the third quarter than we did in the second quarter, with room night activity down only 13% to the same time last year. Importantly, for these out years, ADR is only 80 basis points lower than the same time last year. in contrast to the deep discounting that prevailed in the aftermath of 9-11 and the great financial crisis. Moving on to business transient, demand remains minimal, but has improved from 11,000 room nights in July to 13,000 in August and 14,000 in September. A variety of industries are driving demand, including healthcare, consulting, technology, and financial and business services. with no particular standouts. In general, both group and business transient demand is being driven by smaller organizations rather than by the large corporate accounts. We continue to believe that business travel will recover in line with the broader economic recovery because of the ROI it generates for businesses. For every dollar spent on business travel, there is a $10 return in revenue and a $3 return in profit according to a 2013 analysis by U.S. Travel and Oxford Economics, which statistically modeled 14 industries over 18 years. Moreover, travel makes up only 1% of total U.S. corporate sales and roughly 2% of operating expenses, according to the U.S. Bureau of Economic Analysis, making travel cuts less impactful to long-term profitability than is commonly perceived. Turning to contract revenues, although TSA passenger volumes have slowed recently, they grew steadily during the third quarter as airlines continue to add more destinations. Our operators drove additional crew business to our hotels, resulting in 31,000 more contract rooms in the third quarter compared to the second quarter, a 71% sequential increase. And finally, Leisure demand, which relatively outperformed other types of demand through the summer, has held up better than it historically does post-Labor Day. As lines between work, school, and home remain blurred, our operators have created new offerings to appeal to consumers looking to escape the monotony of being at home. Hyatt introduced the Work from Hyatt package, and Marriott launched the Work Anywhere with Marriott Bonvoy package. The packages facilitate working productively from a hotel for the day, a short stay, or an extended resort workcation. Another example of our operators innovating to access all potential sources of demand. Moving on to cash burn, our hotel-level operating loss averaged $40 million a month in the third quarter, not including the employee retention credit received under the CARES Act. That's $10 million per month lower than the monthly cash burn scenario we outlined on our second quarter call and approximately half the worst case scenario of $70 to $80 million that we discussed in May. Our third quarter hotel level cash expenses, less the employee retention credit, increased by 19% on a revenue increase of over 90% compared to the second quarter. Our operators have demonstrated their commitment to achieving hotel-level break-even as soon as possible by continuing to minimize costs and add back expenses only as necessary to service business levels at the current low occupancy rates. Assuming operational performance remains at third-quarter levels, we would expect approximately $95 to $105 million of total monthly cash outflows. reflecting an average hotel-level loss of approximately $40 million a month, as well as estimated CapEx, interest payments, and general corporate overhead. Above property, corporate-level monthly cash flows will be sequentially higher in the fourth quarter due to the timing of CapEx and interest payments. Saurabh will provide greater details on our near-term cash burn trajectory in his prepared remarks. Moving to our final near-term objective of maximizing liquidity, we raised over $600 million of capital through opportunistic asset sales and debt refinancing since our last earnings call. We sold the 532-room Newport Beach Marriott Hotel and Spa for $260 million, which exceeds our pre-COVID internal hold value for this asset. Moreover, we reduced our future CapEx commitments with the sale of this hotel, including $19 million of contractually required owner-funded CapEx for the Marriott Transformational Capital Program and associated systems renovations. This was an opportunistic sale at pre-COVID pricing to a buyer who has strategic reasons to own the assets. We are pleased to have achieved a total CapEx adjusted valuation of 13.8 times 2019 EBITDA and a 6.8% cap rate based on 2019 NOI, and to have further enhanced our liquidity and reduced our near-term capital spending requirements. Moreover, there will be no incremental redistribution requirement imposed by the tax gain generated by the sale of the Newport Beach Marriott. Due to a combination of the first quarter, common cash dividend was paid in April 2020, and the anticipated net operating tax loss to be incurred by hosting in 2020 also. We also completed the second closing on the sale of development land at the Phoenician, bringing our total land sales at that asset to approximately $83 million this year. As we have discussed in the past, The sale of this land wasn't in our underwriting when we acquired the hotel in 2015. However, it was a part of our vision to unlock the tremendous value we saw in the Phoenician. We are pleased to have executed an incredibly complex rezoning entitlement process by solving multiple technical issues. In so doing, we have successfully monetized approximately 38 acres of non-income producing land and created value for our stockholders, while retaining an additional 21.5 acres of land to create further values for a combination of future sales or resort expansion. The buyer plans to build approximately 165 luxury condominium units, 85 single-family homes, and 30 villas on these parcels, and residents will have the option to purchase an amenity program with the Phoenicians. to access resort amenities and other services. We anticipate that this build-in demand will help drive food and beverage, spa, and golf revenues at the resort. To conclude on our near-term objectives, we further enhanced our liquidity position by issuing a total of $750 million of Series I senior notes and two substantially oversubscribed trances, resulting in an attractive coupon of 3.5% and a re-offer yield of 3.6% to 3.7%. In conjunction with our Series I issuance, we completed a tender offer of our 4.75% Series C Senior Notes to 2023 with an approximately 81% participation rate. As a result, we further augmented our cash position by $343 million while extending our average debt maturity and maintaining our weighted average interest rate. Shifting to our longer term objectives, we are working with our operators to redefine our operating model. Cross utilization of management functions and a reduction in the fixed component of above property charges are two of the biggest contributors to our long-term cost savings target of $100 to $150 million, which is based on 2019 revenues and represents approximately 3% to 4% of pro forma 2019 hotel-level expenses. To date, our operators have made solid progress on both of these priorities as they restructure their workforce and their above-property shared services for sales marketing, revenue management, and IT. We remain deeply committed to working with our operators to create long-term efficiencies that will allow us to generate greater profitability at lower levels of occupancy. A more profitable operating model will not only make for a faster recovery to 2019 EBITDA levels, but it will also improve the long-term value of our assets. Now, turning to investments. Let me begin with our capital investment plans for the portfolio. We believe our ability to continue to invest in our portfolio is a unique competitive advantage that will positively influence our relative performance and our growth trajectory throughout this lodging cycle. Although we have cut our 2020 maintenance CapEx budget by nearly 40%, we continue to invest in the Marriott Transformational Capital Program as well as in other ROI projects. On a combined basis, these represent nearly 70% of our 2020 capital spend. Moreover, nearly 70% of our investment in the MARIA program will be complete by year-end 2020, and the entire program will be substantially completed by year-end 2022. As a result, we expect to gain REPPAR index share during the heart of the recovery. First, as we outperform the competition that is unable to invest this year or next. And second, as we maintain our red part index share gains when competitors disrupt their operations to renovate assets later in the cycle, with 2022 likely being the first year that many will be able to meaningfully invest in their portfolios. The Coronado Island Marriott Resort and Spa, for example, completed its Marriott Transformational Program renovations last year and has improved its rep part index share by 9.8 points through August this year, compared with the same period in 2018. This is nearly three times the program's expectations of three to four points of index share gains. It has also outperformed the San Diego downtown upper upscale submarket by 16 points year-to-date, implying over $2 million in incremental room revenues. Moving on to acquisition opportunities and the transaction markets, a record 26% of CMBS hotel loans were in special servicing in September 2020, compared with 1.9% in December 2019. And 70% of hotel loans are either in special servicing or on special servicing watch lists, according to TREP research. Delinquency rates are expected to move higher as forbearance agreements start to roll off. Additionally, some hotel owners who were hoping for a speedy recovery may not be able to sustain the cash outflows required to service their indebtedness and may decide to throw in the towel. So although we don't see high quality assets trading at this time, we continue to focus on opportunities where we can leverage our competitive advantages, such as deep owner, broker, and operator relationships, and our ability to do large transactions. Our reputation for providing speed and certainty of closing and ability to offer tax advantage structures to sellers are additional distinguishing factors. To conclude, Our near-term objectives aim to lower our cash burn and maximize our liquidity, while our longer-term objectives are designed to drive faster EBITDA recovery by structurally improving margins, gaining market share, and acquiring assets. With $2.4 to $2.5 billion of expected total available liquidity at year-end, we believe we have the ability to withstand prolonged business disruption and capitalize on opportunities for growth. We entered this crisis as one of the lodging REITs with the lowest leverage and greatest balance sheet capacity, and believe these remain key attributes that are necessary to create meaningful long-term value in this new lodging cycle. With that, I will turn the call over to Saurabh.