Host Hotels & Resorts : Second Quarter 2023 Earnings Call Transcript

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EDITED TRANSCRIPT

HST.OQ - Q2 2023 Host Hotels & Resorts Inc Earnings Call

EVENT DATE/TIME: AUGUST 03, 2023 / 5:00PM GMT

OVERVIEW:

Company Summary

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AUGUST 03, 2023 / 5:00PM, HST.OQ - Q2 2023 Host Hotels & Resorts Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Jaime Marcus

James F. Risoleo Host Hotels & Resorts, Inc. - President, CEO & Director

Sourav Ghosh Host Hotels & Resorts, Inc. - Executive VP & CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Anthony Franklin Powell Barclays Bank PLC, Research Division - Research Analyst

Aryeh Klein BMO Capital Markets Equity Research - United States Real Estate Analyst

Chris Jon Woronka Deutsche Bank AG, Research Division - Research Analyst

David Brian Katz Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure Dori Lynn Kesten Wells Fargo Securities, LLC, Research Division - Senior Analyst

Duane Thomas Pfennigwerth Evercore ISI Institutional Equities, Research Division - Senior MD

Michael Joseph Bellisario Robert W. Baird & Co. Incorporated, Research Division - Director and Senior Research Analyst Robin Margaret Farley UBS Investment Bank, Research Division - MD and Research Analyst

Smedes Rose Citigroup Inc., Research Division - Director & Senior Analyst

Tyler Anton Batory Oppenheimer & Co. Inc., Research Division - Research Analyst

William Andrew Crow Raymond James & Associates, Inc., Research Division - Analyst

P R E S E N T A T I O N

Operator

Good afternoon, and welcome to the Host Hotels & 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 Jaime Marcus, Senior Vice President of Investor Relations. You may go ahead.

Jaime Marcus

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 EBITDAre 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 and our 8-K filed with the SEC, and in the supplemental financial information on our website at hosthotels.com.

With me on today's call are Jim Risoleo, President and Chief Executive Officer; and Sourav Ghosh, Executive Vice President and Chief Financial Officer. With that, I would like to turn the call over to Jim.

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AUGUST 03, 2023 / 5:00PM, HST.OQ - Q2 2023 Host Hotels & Resorts Inc Earnings Call

James F. Risoleo - Host Hotels & Resorts, Inc. - President, CEO & Director

Thank you, Jaime, and thanks to everyone for joining us, this afternoon. During the second quarter, we delivered a Comparable Hotel RevPAR improvement of 2.7% compared to the second quarter of 2022. Our RevPAR 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 TRevPAR growth was 3.8% during the quarter, underscoring the continued strength of out-of-room spend. During the quarter, we delivered Adjusted EBITDAre of $446 million and adjusted FFO per share of $0.53, 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 TRevPAR, RevPAR and Comparable Hotel EBITDA and margins, ahead of 2019 levels.

Comparable Hotel RevPAR 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 RevPAR growth guidance range to 7% to 9%. Bringing the midpoint of our full year expected RevPAR 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 6 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 water mark 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 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's 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.

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AUGUST 03, 2023 / 5:00PM, HST.OQ - Q2 2023 Host Hotels & Resorts Inc Earnings Call

Golf and spa revenues remain robust with growth over the record highs of 2022, which we believe is further evidence of the leisure travelers' desire and ability to spend on experiences. In fact, we still had 5 resorts with transient rates of $1,000 or more. Notably, the top 3 resorts were recent acquisitions, underscoring the strength of our opportunistic 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 guestrooms 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, bungalows, a pool side 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 flood-proofing 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 covered 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 at Metro Center during the second quarter. The program, which began in 2018, included extensive guestroom and public area renovations at 16 assets and finished under budget.

During the pandemic, we expanded our reinvestment strategy to include 8 additional assets with required near-term CapEx, where we believed significant upside could be realized with transformational renovations. To date, we have completed 7 of those 8 assets. We believe these comprehensive renovations will enable us to continue to capture incremental market share above our targeted range of 3 to 5 points of RevPAR

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AUGUST 03, 2023 / 5:00PM, HST.OQ - Q2 2023 Host Hotels & Resorts Inc Earnings Call

index share gains and that is shaping up to be the case so far. Looking at results to date. Of the 7 hotels that have stabilized post-renovation operations, the average RevPAR index share gain is 8.8 points.

For the full year, our 2023 capital expenditure guidance range is $625 million to $725 million, which reflects approximately $240 million of investment for redevelopment, repositioning and ROI projects, as well as $125 million to $175 million for hurricane restoration work.

Remaining projects include the completion of a transformational renovation of the Fairmont Kea Lani, a repositioning renovation of the Hilton Singer Island and breaking ground on the Phoenician Canyon Suites Villas and the 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 capabilities, a diversified portfolio and the size, scale and team to continue executing across economic cycles. We have created meaningful shareholder value over the past 6 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 Sourav.

Sourav Ghosh - Host Hotels & Resorts, Inc. - Executive VP & CFO

Thank you, Jim, and good afternoon, everyone. Building on Jim's comments, I will go into detail on our second quarter operations, our updated 2023 guidance and our balance sheet and dividend.

Starting with business mix. Overall transient revenue was up 80 basis points to the second quarter of 2022, driven by rate growth, which offset a slight decrease in demand. Softening transient demand drove the miss to RevPAR guidance driven primarily by underperformance in San Francisco and Seattle and at our resorts to a lesser extent.

Resorts in the second quarter saw transient revenue down 8% over the all-time high of the second quarter of 2022. While transient rate at resorts was down year-over-year, it was still 61% above 2019, after being up 54% compared to 2019. In fact, transient revenue at our resorts increased in the second quarter compared to the first quarter despite the slight decrease in demand.

Business transient revenue was 16% above the second quarter of 2022, driven by a 10% rate increase. Demand also increased by nearly 6% above last year, driven by our hotels in New York, Boston and Washington, D.C. Our downtown properties accounted for 65% of the business transient demand, which is in line with pre-pandemic trends. Small and medium-size businesses continue to drive the recovery, representing the majority of our business transient demand today.

Turning to group, group room revenues were 4% above the second quarter of 2022, fully driven by rate growth. The 1.1 million group room nights sold in the quarter was slightly ahead of both last year and the first quarter, which aligns with 2019 seasonal trends. Washington, D.C., Chicago and Boston drove the group room revenue growth compared to 2022.

With respect to group mix, corporate group room revenue was up 9% in the second quarter, driven by nearly 6% rate growth. As anticipated, association group revenue was down almost 3% in the second quarter compared to last year, as the second quarter of 2022 had elevated association group volume driven by re-bookings for events that were canceled during the pandemic.

Social, Military, Educational, Religious and Fraternal or SMERF group revenue was up 3% in the second quarter, driven by 2.5% rate growth. Our 2024 total group revenue pace is above both 2022 and 2019, and we are encouraged by the citywide booking pace in New Orleans, San Diego, Seattle and Washington, D.C. all of which have citywide group room nights meaningfully ahead of the same time last year.

Shifting gears to margin performance, our second quarter Comparable Hotel EBITDA margin came in at 32.7%, which is 40 basis points better than the second quarter of 2019, but below the high watermark of the second quarter of 2022 when staffing at hotels lagged demand. Total comparable

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