Host Hotels & Resorts, Inc.

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

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 for the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed, and we're 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 results. You can find this information together with reconciliations to our most directly comparable gap information in yesterday's earnings press release, in our APA files with the SEC, and in supplemental financial information on our website at hiztotales.com. Participating in today's call with me will be Jim Rosolio, President and Chief Executive Officer, and Saurav 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'd like to start by expressing my heartfelt condolences to Ernie's family and to all our friends at Marriott. I have known Ernie for 25 years and found him to be one of the most authentic, engaging, and caring leaders in the lodging space. A visionary leader, a loving husband and father, and a respected colleague and friend, Ernie will be deeply missed and is leaving a lasting legacy within our industry and all the lives he has touched. Post has emerged from the most challenging year in lodging history as a stronger company with robust long-term growth prospects. Our hotels have streamlined their operating models and minimized operating expense growth from second quarter lows while accelerating REVPAR from $9 in April to approximately $42 in January. As a result, we have cut our hotel-level operating loss by more than half, from $163 million in the second quarter to $75 million in the fourth. We have also achieved break-even or positive hotel-level operating profits at 20 hotels representing 24% of our rooms in the fourth quarter, a sharp increase from 14 hotels in 13% of our rooms in the third quarter. Additionally, we've invested in our long-term growth and enhanced our ability to gain and retain market share by continuing to upgrade several significant hotels and delivering the new AC Hotel Scottsdale North. Moreover, We've entered 2021 with $2.5 billion of total available liquidity. Our investment-grade balance sheet has been further strengthened by opportunistic asset and land sales at pre-COVID-19 valuations and debt refinancing that has pushed our earliest maturity to late 2023. Last week, we announced a best-in-class Second Amendment to our credit agreements. which provides us greater flexibility to acquire hotels early in this new lodging cycle. With the highest quality portfolio in the company's history and a balance sheet that allows us to capitalize on external growth opportunities, we are very well positioned to elevate our EBITDA growth profile through the vaccine-driven recovery. My comments today will focus on top-line trends, ROI projects, and our latest views on transaction markets and acquisition opportunities. Saurabh will detail our hotel's operating expense control and the improvement in an outlook for cash barn and hotel EBITDA. He will also walk through the additional flexibility and optionality created by the Second Amendment to our credit agreement. Starting with group booking trends. we saw a marked increase in group booking activity for our Marriott managed hotels in January. Our hotels booked approximately 101,000 group room nights for 2021, a 32% increase over January of 2019, with January typically being a slow month for group booking activity. In addition, our hotels had an impressive lead to booking conversion rate of 22%, compared to approximately 16% in January 2019. While there are several types of groups being booked, we are pleased to see bookings for incentive meetings, which have returned after a hiatus in 2020. We also saw improved future group booking activity in January, with approximately 73,000 future group room nights booked for beyond 2021. representing a 42% increase to January of 2019. Through this January, we had approximately 1.6 million definite room nights on the books for full year 2021. Approximately 1 million of these occur in the second half of the year and are fairly evenly split between the third and fourth quarters, where bookings are largely continuing to hold. Should the groups materialize, our second half 2021 group business will have recovered to almost 50% of second half 2019 levels, based on definite group room nights on the books. While group pace is less meaningful today, as most meeting planners remain on the sidelines, we are encouraged by our total group revenue pace for the latter half of 2021. Pace in the second half of 2021 is down only about 25% compared to the same time last year, versus the first half being 84% lower than last year. This could improve with additional in-the-year, for-the-year group booking activity, assuming state and local restrictions are relaxed and attendees become more comfortable with travel. Staying with group, We believe that the location and quality of our hotels, as well as our longstanding sales relationships with key travel managers, favorably positions them to gain market share when group demand returns to urban markets. For example, when demand from government agency groups surged around inauguration, our D.C. hotels ran occupancies of 81% and 78%. on the day prior and the day of inauguration respectively. And we temporarily reopened the higher agency Capitol Hill to capitalize on this demand. For those days, our hotels occupancies were 13 and 11 percentage points higher than other luxury and upper upscale hotels in the DC Metro region. Moreover, we achieved an ADR that on average was $26 higher each day for the three days of January 19th, 20th, and 21st. Our hotels significantly outperformed other luxury and upper upscale hotels due to their coveted downtown locations, ability to accommodate large groups, and their 30-year relationships with key government agencies. At the end of the third quarter, we had approximately 118,000 definite room nights on the books for the fourth quarter. which would have represented a 7% sequential decline. However, our hotels were able to drive 38,000 in the quarter for the quarter bookings for a total of 156,000 group room nights in the fourth quarter, representing a 23% sequential increase over the third quarter. Additionally, Fourth quarter group bookings delivered a 12.3% higher average rate than third quarter 2020, helped by this short-term group demand that was driven by small to mid-sized corporate accounts and SMURF groups. Rebookings as a percentage of cancellations continue to increase, with approximately 24% of cancellations at our Marriott managed properties now rebooked and a funnel of tenanted bookings that would take the total rebook to almost 37%. In the fourth quarter and full year 2020, we collected approximately $11.5 million and $52 million of group attrition and cancellation fees respectively, and expect to collect an additional $12 to $14 million in full year 2021. Moving on to leisure trends, Leisure demand remains concentrated in Sunbelt markets and key leisure destinations, such as Hawaii, as most city and Metro destinations remain in various stages of restrictions. As with group over the inauguration in DC, we find that the location and quality of our resorts has enabled them to significantly gain market share. In the fourth quarter, our 16 resorts gained 17.8% RevPAR index share relative to their comp sets. This was driven by 8.1% better occupancy and 9% better rate compared to their RevPAR index scores in the fourth quarter of 2019. Moreover, we have gained 30% RevPAR index share in Phoenix, nearly 26% in the Florida Gulf Coast, 14.4% in Miami, and nearly 12% in Maui, Oahu, as our hotels outperformed their peers in capturing leisure demand. Our most recent acquisition, the One Hotel South Beach, continues to be an outstanding performer despite the pandemic. The hotel achieved 90% occupancy at a nearly $2,000 rate on New Year's Eve, and has just finished President's Day weekend with occupancy averaging nearly 90% from Friday through Sunday with a blended ADR of approximately $1,430, which represents a nearly 4% year-over-year increase. Encouragingly, Leisure Red Park performance continues to improve over holiday weekends. For example, at our Marriott Managed Hotels, Repar improved by 60% three weeks out from President's Day compared to where those hotels were three weeks away from Columbus Day. In addition, we have observed a lengthening of the booking window in the Florida Gulf Coast, Miami, and in Hawaii, where travelers are getting more comfortable with the testing requirements and process. With upcoming leisure holidays over spring break and Easter, we expect leisure occupancy to continue to improve, driven by our Sunbelt markets and Hawaii. For the second half of the year, transient revenues at our three Maui hotels are pacing 11% higher compared to 2019, while total revenues are pacing almost 20% higher. In the fourth quarter, we grew leisure room nights by 62,000 or by 13.6% over the third quarter. Our Sunbelt markets ran 31.6% occupancy in the first week of the quarter and progressed to 33.5% throughout the quarter, with growth driven by Miami, the Florida Gulf Coast, Phoenix, and San Antonio. Moreover, Our loyalty redemption in the fourth quarter was 25% higher than the third quarter and represented the highest rewards demand since the start of the pandemic. Resort properties accounted for 65% of the growth in loyalty redemption room nights driven by Phoenix, the Florida Gulf Coast, Hawaii, and Orlando. Moving on to business transits. Demand remains low but has improved by 13% sequentially in the fourth quarter, which was the strongest quarter since the pandemic impacted travels. Cities that drove most of the increase over the third quarter were San Antonio, Houston, and Philadelphia. As with group, business transient demand continues to be driven by smaller organizations rather than by large corporate accounts. whose decisions remain on the sidelines, is partly due to liability risk that we expect will fade as vaccine deployment accelerates. Shifting to portfolio reinvestments, let me begin by saying that our ability to continue to invest in our portfolio is a competitive advantage that we expect will favorably position hosts to gain market share and deliver superior revenue and EBITDA growth through this lodging recovery. Three to five points of weighted index growth at our renovated hotels in 2019 would have translated into roughly $38 to $63 million of incremental revenues and $21 to $34 million of incremental EBITDA on a stabilized, analyzed basis. In addition to this, we expect our ROI projects to materially enhance the underlying value of our real estate. Last year, we completed extensive resort renovations and repositionings at the Hyatt Regency Maori Resort and the Don Cesar in St. Pete's Beach. Within the Marriott Transformational Capital Program, we plan on completing the Ritz-Carlton Amelia Island in March this year, following several notable completions such as the JW Marriott Atlanta Buckhead, among others, in 2020, and the San Francisco Marriott Marquis, Santa Clara Marriott, New York Marriott Downtown, and Coronado Island Marriott Resort and Spa in 2019. We continue to invest in the Marriott Transformational Capital Program, as well as in other ROI projects, which on a combined basis represent nearly 71% of our 2021 capital spend. Moreover, nearly 85% of our investment in the Marriott program is expected to be complete by year end 2021, and the entire program should be substantially completed by year end 2022. Having completed seven of the Marriott program renovations through year end 2020, We expect to complete an additional four hotels in 2021, thereby transforming 11 of the 16 hotels that make up the program. We expect to benefit from $16 million of operating profit guarantees from Marriott in 2021 without experiencing commensurate revenue disruption given the current low rent par environment. In addition, We expect to deliver 19 new two-bedroom luxury villas at the Andaz Maui at Wailea Resort in April this year. The 11 existing villas achieved a red par of approximately $1,700 in 2019. And while they exhibit strong demand throughout the year in normal years, recent demand for villas has more than tripled from pre-pandemic levels. ADRs for these villas ran at almost $3,700 a night in December and at $2,400 a night in January. We already have 300 room nights on the books for the new villas with a transient rate of $1,990 a night, and the hotel has only just begun marketing them. Although the villa expansion wasn't part of our original underwriting when we acquired the hotel in 2018, We are currently exceeding our project underwriting assumptions for 2021 on both rate and occupancy. We are excited to announce the repositioning and expansion at one of our top performing hotels, the Ritz-Carlton Naples, where we see an opportunity to create meaningful value while also transforming the resort to meet today's luxury standards. A new tower and reconfiguration within the existing hotel will increase the suite count at the Ritz from less than 8% of total inventory to almost 20%, or 92 keys, while adding 24 keys overall. In 2019, the resort's 35 suites achieved rev par of approximately $800, almost double the overall rev par of the resort, and are highly sought after by the hotel's loyal customer base. Additionally, An expanded club lounge will eliminate the size constraints on upsells, which generated an annualized ADR premium in excess of $220 in 2019. Business interruption estimates continue to be low due to the impact of COVID-19 on occupancy, which also makes this an opportune time to renovate the guest rooms and to make ROI-generating upgrades to the resort's pools, pool bar, and restaurants. The project will commence in May 2021 and is expected to be complete in December 2022. At stabilization in 2023, we expect this project to generate nearly $10.5 million of incremental annualized EBITDA, which represents a 12% cash on cash return on incremental investment based on our underwriting. Finally, On acquisitions, in the first weeks of 2021, we have seen a marked increase in the number of attractive hotels coming to market. From looking at just a handful of deals in the fourth quarter of 2020, we now have a solid pipeline of interesting and actionable opportunities to evaluate. In many instances, the hotels we are looking at are owned by private owners who have been contemplating liquidity events for some time. While we expect to face strong competition for acquisitions, we are very well positioned due to our deep relationships and our ability to move quickly, fund large equity investments with cash, and provide tax-advantaged alternatives to sellers. This management team has a strong capital allocation track record, having acquired $1.6 billion of assets and sold $3.3 billion of assets at favorable multiples in 2018 and 2019. The biggest shift in our acquisition strategy is our consideration of markets beyond the top 25. IBM Watson, a recently developed predictive analytics model, mines over 1 million discrete structured variables and leverages natural language processing insights from over 3 million unstructured data sources. to forecast rep hard growth by market. We use this proprietary top-line predictive model in our research-based expectations for hotel operating expense growth by market to narrow down the markets that are likely to outperform the revenue and EBITDA growth profile of our existing footprint. While we believe this is an opportune time to deploy capital, as we are at the beginning of the lodging cycle, and appear to be heading into a period of strong economic recovery, let me emphasize that we are not looking to acquire for acquisition sake. We are optimistic about finding opportunities that will truly elevate the EBITDA growth profile of our existing portfolio. To conclude, we are very encouraged that vaccine deployment in the United States has gained momentum with over 55 million doses administered already and 1.7 million new doses being administered each day, according to CDC data. As the Washington Post recently reported, the United States has purchased enough supplies to vaccinate all American adults, making the vaccine-driven recovery more certain today than it has been since the pandemic began. McKinsey estimates that the U.S. may achieve herd immunity by the third or fourth quarter, and that a transition to normalcy is possible as early as the second quarter of 2021, aided by the spring weather and the vaccination of the highest risk population. Should this scenario materialize, we expect to be able to achieve positive hotel EBITDA at some point in the second half of the year and to continue to benefit from a rebound in travel as the pandemic recedes. With that, I will turn the call over to Saurav.