Host Hotels & Resorts, Inc.

everyone and welcome to the host hotels and resorts first quarter 2021 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the call over to Seychelle Engman, 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, cash burn, and hotel-level results. You can find this information, together with the reconciliations to the most directly comparable GAAP information, in yesterday'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, and Sourav 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. Since our earnings call in February, we have made excellent progress on operations and investments and achieved key milestones that we believe will accelerate our EBITDA recovery. To begin with, we significantly outperformed expectations for the first quarter, which recorded a gap net loss but delivered positive adjusted EBITDA RE and hotel-level profitability for the first time since the onset of the pandemic. We grew first quarter total pro forma revenues by 50% sequentially while holding hotel level operating expense growth to only 15% quarter over quarter as our operators successfully leveraged existing resources to meet a stronger than expected demand surge in March. As a result, we delivered $21 million of positive hotel EBITDA for the quarter, a significant improvement from the negative $62 million recorded in the fourth quarter on a pro forma basis. In addition, we acquired the Hyatt Regency Austin, the Four Seasons Resort Orlando, and Walt Disney World Resort, and nearly 300 acres of irreplaceable land adjacent to our Hyatt Regency in Maui. strategically investing approximately $800 million of capital at prices that are meaningfully below 2019 levels. Following these transactions, we have a substantial $1.5 billion of total available liquidity, including $131 million of FF&E reserves. Operations continue to improve, with April red par expected to exceed March as the vaccine-driven lodging recovery gains momentum. Finally, in addition to executing substantial strategic investments, we continue to focus on redefining our hotel operating model and positioning our renovated properties to gain market share, key long-term strategic objectives that we believe will position us to achieve best in class EBITDA growth through the lodging cycle. Beginning with our latest acquisition, the iconic and irreplaceable Four Seasons Resort Orlando at Walt Disney World Resort. We completed this off-market acquisition on April 30th for approximately $610 million, $40 million less than the price quoted by Real Estate Alert. The 444-room resort is located on 289 acres within Disney World. which is one of the world's most visited destination resorts. For context, the Magic Kingdom at Disney World alone attracted nearly 21 million visitors in 2019, according to ACOM and Themed Entertainment Association data. The draw of this one theme park at Disney World is on par with the approximately 23 million visitors that Boston attracted in 2019 and close to the 24.2 million visitors Miami drew that year. The Four Seasons Resort Orlando is the only fee-simple luxury resort within Disney World that's not owned by Disney. It provides complimentary transport to Disney World's theme parks and is the only AAA five-diamond rated hotel in Central Florida. Newly developed in 2014, This iconic resort is a market leader with a 2019 REBPAR index of over 215. It is now host highest ranked property based on its 2019 REBPAR of $561 and total REBPAR of $923. Moreover, it ranks fifth highest in our portfolio based on its 2019 EBITDA per keep of $81,500. As with all our strategic objectives, our capital allocation decisions are designed to grow our long-term EBITDA, and we expect this acquisition to elevate the EBITDA growth profile of the existing portfolio. The Four Seasons Resort Orlando achieved 90% EBITDA growth from 2016 to 2019. The hotel was profitable in March and the first quarter, and we expect it to be profitable this year with the latest property forecast indicating that the resort is likely to outperform our underwriting expectations for 2021. In general, the resort is well positioned to benefit from a surge in travel and leisure demand as the pandemic subsides and the 18-month celebration of Disney World's 50th anniversary begins in October. We believe these demand catalysts will help the Four Seasons Resort Orlando surpass its 2019 EBITDA performance sooner than the rest of our portfolio. Shifting to the Higher Regency Austin, we opportunistically acquired this 448-room Sunbelt Market Hotel on March 15th for $161 million. Acquired off-market at a 10% cap rate and an 8.8 times multiple on 2019 EBITDA, the Hyatt Regency Austin's purchase price represents a 20% to 25% discount to estimated pre-COVID pricing and a 40% discount to replacement costs. The hotel was profitable in the first quarter of 2021 and is expected to outperform our underwriting expectations into the second quarter. Longer term, we expect the High Regency Austin to exceed its 2019 EBITDA on a stabilized basis, with profitability to be enhanced by complexion synergies, incremental expense reductions, productivity improvements, and ROI investment opportunities. Turning to our strategic acquisition of nearly 300 acres of land adjacent to the Higher Regency mountains, We acquired the Royal Kanapali and Kanapali Kai golf courses for $28 million, or approximately $95,000 an acre, which represented a discount to pre-COVID values. We are evaluating numerous long-term value-enhancing opportunities for this land, which also provides the near-term potential to generate synergies with the Higher Regency Maui. To conclude on acquisitions, We have successfully invested $800 million in the first four months of 2021 at meaningful discounts to 2019 pricing levels. This is despite a highly competitive investments landscape with an abundance of capital seeking hotel deals. Our success is testament to the depth of our industry relationships and the strength of our reputation, which is based on decades of best in class execution. We believe this is an opportune time to strategically grow our portfolio's exposure to markets with high expected growth and to superior quality hotels. These early cycle investments have historically provided years of elevated EBITDA growth when time with a period of strong economic recovery. Turning to operations, business volumes grew in each month of the first quarter, with March achieving a rev par of $84.10, which was 115% higher than our December rev par of $39. Moreover, we outperformed the industry's luxury and upper upscale hotel rev par performance in our markets by over two points in March. Our leisure markets, such as Miami, Phoenix, and Hawaii, as well as some urban markets, including Washington, D.C., Northern Virginia, Atlanta, and Philadelphia, outperformed the industry over the first quarter. Our hotel EBITDA turned positive in March, allowing us to achieve $21 million of positive pro forma hotel EBITDA for the first quarter. First quarter revenues were primarily driven by strong leisure demand for our resorts and hotels in the Sunbelt markets and Hawaii, as well as by special group business at several of our urban hotels. As vaccine deployment accelerated through the first quarter, occupancy in our Sunbelt markets in Hawaii rose from an average of 20% in the first week of January to 57.4% in the last week of March. Compared to 2019, rate declines improved from negative 12.4% for the month of January to negative 6.5% for March on a portfolio-wide basis. Strong leisure demand over spring break resulted in the portfolio achieving a 12.2% increase in transient rate over spring break 2019. Eight resorts located in Miami, the Florida Gulf Coast, Jacksonville, Phoenix, and Maui delivered almost 24% ADR growth over 2019 for the first quarter. with average occupancies of approximately 50%. Overall, our luxury hotels have increased their Red Par Index by 23.1% over 2019, with the increase in market share driven by occupancy gains. The One Hotel South Beach and the Ritz-Carlton Naples were notable outperformers in the quarter, with occupancies ranging between 60% and 70%. and transient ADR above $1,000. As mentioned last quarter, our hotels in Washington, D.C. benefited from government agency group demand around inauguration, making D.C. one of our highest performing markets based on sequential red card growth. Other urban hotels also benefited from special group business, which included film production crews and sports groups, that collectively drove urban weekday occupancy 8.5 percentage points higher quarter over quarter. In addition, an uptick in leisure transient, business transient, and contract demand supported sequential rep part growth in multiple urban markets, including Chicago, Seattle, New York, Boston, and Philadelphia. In terms of business mix, leisure drove 90% of our first quarter transient room nights. Our operators drove most of our leisure business through direct bookings, with loyalty redemptions increasing 33% sequentially, driven by our resort portfolio. The much-talked-about pent-up leisure demand is evidenced in current holiday travel trends, which reflect lengthening booking windows and progressively higher levels of demand. For instance, at our Marriott-managed leisure market hotels, Occupancy on the books improved by 8 percentage points nine weeks out from Memorial Day compared to where those hotels were nine weeks out from President's Day. Similarly, holiday travel trends for July 4th weekend are expected to progressively strengthen relative to Memorial Day, after which many of our hotels are likely to revert to pre-pandemic cancellation policies for leisure bookings. We expect some of our Sunbelt markets, particularly in Florida and Phoenix, to hold occupancy while rates weaken over the summer. In Hawaii, our Maui resorts are demonstrating continued strength, with occupancy on the books ranging from the mid 80s to the low 90s for June and low to high 70s for July. Remarkably, June ADRs on the books in Maui are nearly 28% higher compared to June 2019, while July ADRs are approximately 50% higher than July 2019. Moreover, we have now completed the development of 19 new luxury two-bedroom villas at the end of this month. The villas already have 45% occupancy on the books at an ADR of $1,700 for the remainder of the year, and bookings continue to grow. Moving on to groups, we achieved 264,000 group room nights in the first quarter, with one highlight being a corporate group of over 4,500 room nights at the Orlando World Center Marriott. The lead for this group came from last October's Connect 2020 conference held at that hotel, which demonstrated how a group event of over 1,000 in-person attendees could be held safely. We currently have 1.5 million definite room nights on the books for full year 2021, with approximately a million of those in the second half of the year. Cancellations remain above 2019 trends, but continue to decline week over week. Encouragingly, our Marriott managed properties booked a total of approximately 144,000 new rooms across the second, third, and fourth quarters of 2021, with strong lead conversion rates compared to 2019. Group room nights currently on the books represent approximately 11% of total available rooms in the third quarter and 13% in the fourth quarter. Booking momentum was strong in the first quarter, with nearly 165,000 and 154,000 new group room nights booked for 2022 and 2023, respectively. Importantly, our operators have continued to hold future group rates. Compared to 2019, ADR for definite rooms on the books is flat in 2022 and 1.5% higher in 2023. Turning to business transient, demand continues to make steady progress and first quarter bookings were 21% higher than the fourth quarter of 2020, driven by steady month-over-month progression. Our hotels in San Francisco, San Jose, accounted for approximately 30% of the sequential increase in room nights, while ADR rose 17%, or $26, over last quarter due to increases from high-rated markets such as Miami, Florida Gulf Coast, and Phoenix. Most of the special corporate business in the quarter was driven by consulting, project business, and government accounts. To conclude on operations, there were 76 hotels open for the first quarter. We reopened Higher Regency Capitol Hill on May 1 and expect to reopen the Western Chicago River North and the Ibis Rio de Janeiro later this month. By the end of May, we expect only the Sheraton Boston to remain under suspended operations. Reflecting on the last 12 months, which have been the most difficult in host history, I am proud of all that we have accomplished and excited by the clarity of our mission, which is to position the company to deliver best-in-class EBITDA growth through the new lodging cycle. To achieve that goal, our three strategic objectives remain. To redefine our operating model with our managers, to position our renovated hotels to gain market share, and to allocate our capital strategically through acquisitions as well as through development projects. We have quantified the potential returns expected from these investments in the past, and I am going to put all the numbers together for you now. From redefining our operating model with our managers, we expect to generate $100 to $150 million of potential long-term cost savings based on 2019 revenues. From our goal of gaining three to five points of weighted index growth at the 16 Marriott Transformational Capital Program hotels, as well as five other hotels where major renovations have been recently completed or are underway, we expect to generate $21 to $35 million of incremental EBITDA over time on a stabilized annual basis. And finally, from recently completed and ongoing ROI development projects, we expect to generate $25 to $35 million of incremental EBITDA on a stabilized annual basis. It typically takes renovation and development projects two to three years to stabilize. As these projects are at different stages of renovation and development, stabilization will occur over several years. As a reminder, our recently completed and ongoing development projects include the ground-up development of the 165-key AC Hotel Scottsdale North, 19 new luxury villas at the Andaz Maui, repositioning and expanding the Ritz-Carlton Naples, and 60,000 square feet of additional meeting space, as well as an aquatics park at the Orlando World Center Marriott. Our acquisitions of the Four Seasons Resort Orlando and the Higher Regency Austin are provide us a pro forma 2019 hotel EBITDA base of $1,547,000,000. While it makes sense to think of 2019 as the base year, the timing of a return to 2019 levels of hotel EBITDA remains highly uncertain, particularly given the unprecedented pandemic-driven nature of the downturn. The recovery may may span several years and our portfolio is likely to continue to evolve over that time. However, our goal is for the initiatives and projects underlying our strategic objectives to add a potential $145 to $220 million of incremental EBITDA over time on a stabilized basis. With the lodging industry's supply-demand fundamentals continuing to improve, We remain focused on long-term growth and on building a business that is stronger than it was in 2019. We are pleased with our execution to date and feel optimistic about our future as the pandemic recedes and travel continues to rebound. With that, I will now turn the call over to Saurabh.