Host Hotels & Resorts, Inc.

Good afternoon and welcome to the Host Hotels and Resorts second quarter 2023 earnings conference call. Today's conference is being recorded and at this time I would like to turn the call over to Jamie Marcus, Senior Vice President of Investor Relations. You may go ahead.

Thank you and good afternoon 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, and comparable hotel level results. You can find this information together with reconciliations to the most directly comparable GAAP information in yesterday's earnings press release in our 8K filed with the SEC and in the supplemental financial information on our website at hosthotels.com. With me on today's call are Jim Rizzoglio, President and Chief Executive Officer, and Saurav Ghosh, Executive Vice President and Chief Financial Officer. With that, I would like to turn the call over to Jim.

Thank you, Jamie, and thanks to everyone for joining us this afternoon. During the second quarter, we delivered a comparable hotel red par improvement of 2.7% compared to the second quarter of 2022. Our red par performance for the quarter came in below our quarterly guidance, primarily as a result of moderating transient demand in San Francisco and Seattle and at our resorts to a lesser extent. Comparable hotel tread par growth was 3.8% during the quarter. Underscoring the continued strength of out-of-room spend. During the quarter, we delivered adjusted EBITDA RE of $446 million and adjusted FFO per share of 53 cents. While our second quarter comparable hotel EBITDA of $449 million was 9% below 2022, it was 9% above 2019. Second quarter comparable hotel EBITDA margin of 32.7% exceeded 2019. This marks the fifth consecutive quarter since the onset of the pandemic that we have achieved TREBPAR, REBPAR, and comparable hotel EBITDA and margins ahead of 2019 levels. Comparable hotel REBPAR for July is expected to be approximately $209. which is 2.5% above July of 2022. Our performance in the first half of the year, coupled with the macroeconomic backdrop in the second half, led us to tighten our full-year red card growth guidance range to 7% to 9%, bringing the midpoint of our full-year expected red card growth to 8%. At the midpoint of our guidance for full year 2023, comparable hotel EBITDA is forecasted to be approximately 9% above 2019. As we look at the current macroeconomic picture, it is important to consider how our outlook has shifted over the past six months. As the second quarter progressed, we started to see a moderation in volume at our hotels in San Francisco and Seattle. which were already affected by softer demand. At the same time, many high-end leisure travelers took the opportunity to travel internationally, and we did not see a corresponding level of international inbound demand, which impacted volume at our resorts. Against this backdrop, we were pleased to deliver positive REVPAR and TREVPAR growth for the quarter. especially given the high watermark of the second quarter of 2022. We remain optimistic about the state of travel for several reasons. First, group business continues to improve. During the quarter, we booked over 310,000 group rooms for 2023, and total group revenue pace is now 4.2% ahead of the same time 2019, up from 2.5% as of March 20th, and 3.2% as of April. The group booking window is continuing to extend, and groups continue to spend more than contracted. Second, business transient demand continued its gradual improvement during the second quarter. Rates were up 10% to both 2022 and 2019, and demand improved nearly 6% compared to the second quarter of 2022. While demand is still down 19% compared to 2019, it improved 190 basis points from the first quarter. Third, leisure rates at our resorts remain well above 2019 levels, despite some expected moderation in the second quarter. For context, transient rates at our resorts were 61% above 2019 in the second quarter. an increase from 54% in the first quarter. Fourth, as evidenced by the airline and TSA data, we expect international demand to be a tailwind going forward. In June, U.S. international outbound air travel grew to 110% of pre-pandemic levels, while international inbound was only 80%. This aligns with U.S. outbound summer flight bookings, which are up 27% year over year, while corresponding inbound bookings were up only 3%, according to RateGain. It is the first summer since 2019 that U.S. travelers had enough lead time to plan an unrestricted international vacation, and we expect these trends will revert over time. Finally, and most importantly, we are not seeing evidence of a weakened consumer at our hotels. Comparable hotel food and beverage spend was up 6% to last year, driven fairly evenly by banquets and outlets, indicating the strength of both group and transient customers. This is particularly encouraging as outlet revenue grew 5% despite flat portfolio-wide occupancy. In fact, our resort outlet revenue per occupied room grew 5% in the second quarter compared to 2022, and it was also the highest in host history at $196. Other revenue also continued to grow, with all line items up over last year except for attrition and cancellation fees, which are moderating as expected. Golf and spa revenues remained robust. with growth over the record highs of 2022, which we believe is further evidence of the leisure traveler's desire and ability to spend on experiences. In fact, we still had five resorts with transient rates of $1,000 or more. Notably, the top three resorts were recent acquisitions, underscoring the strength of our opportunity state capital allocation strategy. Leading the pack was Alila Ventana Big Sur at nearly $1,800, and the Four Seasons Resort Orlando at Walt Disney World Resort and Four Seasons Resort and Residences Jackson Hole, both at over $1,600. Moving to our reconstruction efforts following Hurricane Ian. In June, we completed the final phase of the restoration work at the Hyatt Regency Coconut Point, with the reopening of its water park and outdoor dining complex. And last month, we reopened the completely transformed Ritz-Carlton Naples, which combined a comprehensive renovation of the existing resort with the addition of a new 74 key tower. As part of the renovation, we expanded the guest room bathrooms to increase fixture counts, elevated the design and functionality of the rooms, and combined standard guest rooms to create multi-bay suites. We also enhanced the arrival experience with a reimagined lobby and lobby bar. The ROI development of the Vanderbilt Tower added a net 24 additional keys, increased the suite count to 92 from 35, and added new pools, cabanas, bundalos, a poolside F&B outlet with a bar, and an expanded club lounge, that eliminates the capacity constraint on upsells. In addition to the renovation and expansion, our reconstruction efforts allowed us to opportunistically enhance the resiliency of the property by elevating critical equipment, improving dry floodproofing measures, accelerating future building envelope waterproofing, and replacing major equipment with more efficient machinery. The transformation of the Ritz Carlton Naples has been extremely well received since the reopening and we are optimistic that the resort is set up to exceed our underwriting expectations. As an example, Pace for the 2023 festive season is well above historical levels with the expanded suite inventory and new club level facilities in high demand. The new lobby champagne bar has quickly become the place to see and be seen in Naples for both guests and locals. We are extremely pleased with the transformation of this iconic resort, and we are excited to see the results it delivers over the years to come. In terms of insurance proceeds related to Hurricane Ian, to date we have received $113 million of the expected potential insurance recovery of approximately $310 million for cover costs. The proceeds have all been allocated to property damage thus far. Turning to group, revenue exceeded 2022 by 4%, marking the fourth consecutive quarter group revenue exceeded 2019. Definite group room nights on the books for 2023 increased to 3.7 million in the second quarter. which represents approximately 103% of comparable full year 2022 actual group room nights, up from 94% as of the first quarter. For full year 2023, group rate on the books is up 7% to the same time last year, a 30 basis point increase since the first quarter. In addition, Total group revenue pace is up approximately 19% to the same time last year and up 4.2% to the same time 2019. Looking ahead to 2024, we have 2.2 million definite group room nights on the books. Total group revenue pace is up 13.5% to the same time last year and up 1.5% to the same time 2019. We are encouraged by the ongoing strength of group, as evidenced by accelerating booking activity, lengthening booking windows, and tentative room nights ahead of both last year and 2019. Moving to portfolio reinvestment, we completed comprehensive renovations at the final asset in the Marriott Transformational Capital Program, the Washington Marriott and Metro Center, during the second quarter. The program, which began in 2018, included extensive guest room and public area renovations at 16 assets and finished under budget. During the pandemic, we expanded our reinvestment strategy to include eight additional assets with required near-term CapEx, where we believe significant upside could be realized with transformational renovations. To date, we have completed seven of those eight assets. We believe these comprehensive renovations will enable us to continue to capture incremental market share above our targeted range of three to five points of REBPAR index share gains, and that is shaping up to be the case so far. Looking at results to date, of the seven hotels that have stabilized post-renovation operations, the average REBPAR index share gain is 8.8 points. For the full year, our 2023 capital expenditure guidance range is $625 to $725 million, which reflects approximately $240 million of investment for redevelopment, repositioning, and ROI projects, as well as $125 to $175 million for hurricane restoration work. Remaining projects include the completion of a transformational renovation of the Fairmont Key Lani, a repositioning renovation of the Hilton Singer Island, and breaking ground on Phoenician Canyon Suites Villas and a luxury condominium development at Four Seasons Resort Orlando at Walt Disney World Resort. More broadly, we will continue to be strategic and opportunistic in our approach to driving EBITDA growth. We have an investment-grade balance sheet independent analytic capability, a diversified portfolio, and the size, scale, and team to continue executing across economic cycles. We have created meaningful shareholder value over the past six years by improving the quality of our cash flow, and we believe Host is ideally positioned to outperform in the current macroeconomic environment. With that, I will turn the call over to Saurabh.