Host Hotels & Resorts : First Quarter 2023 Earnings Call Transcript

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EDITED TRANSCRIPT

HST.OQ - Q1 2023 Host Hotels & Resorts Inc Earnings Call

EVENT DATE/TIME: MAY 04, 2023 / 2:00PM GMT

OVERVIEW:

Co. reported 1Q23 adjusted FFO per share of $0.55.

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MAY 04, 2023 / 2:00PM, HST.OQ - Q1 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 N. Marcus Host Hotels & Resorts, Inc. - SVP of IR

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

Stephen White Grambling Morgan Stanley, Research Division - Equity 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 morning, and welcome to the Host Hotels & Resorts First Quarter 2023 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Jaime Marcus, Senior Vice President of Investor Relations.

Jaime N. Marcus - Host Hotels & Resorts, Inc. - SVP of IR

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 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, in 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.

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

Thank you, Jaime, and thanks to everyone for joining us this morning. We kicked off the first quarter of 2023 with meaningful outperformance, delivering a RevPAR improvement of 31% compared to the first quarter of 2022, exceeding the top end of our first quarter RevPAR guidance by 4 percentage points. During the first quarter, we delivered Adjusted EBITDAre of $444 million and adjusted FFO per share of $0.55. Our Comparable Hotel EBITDA of $439 million in the first quarter was 18% above 2019 and 44% above 2022, driven by both occupancy increases and continued

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MAY 04, 2023 / 2:00PM, HST.OQ - Q1 2023 Host Hotels & Resorts Inc Earnings Call

rate strength, particularly in the group business segment at our downtown hotels. First quarter Comparable Hotel EBITDA margin of 32.5% was meaningfully ahead of 2022 and exceeded 2019 for the fourth consecutive quarter.

Our strong performance in the first quarter, coupled with our improved outlook for the year, allowed us to substantially raise and tighten our full year RevPAR growth guidance range to 7.5% to 10.5%, nearly doubling the midpoint of our full year expected RevPAR growth to 9% from 5% last quarter. This marks the fourth consecutive quarter since the onset of the pandemic that we have achieved RevPAR, Adjusted EBITDAre and EBITDA margins ahead of 2019. And at the midpoint, our full year 2023 RevPAR guidance is 7% above 2019. Our outperformance is a result of the capital allocation decisions made over the last 6 years and our unwavering focus on expense control and margin improvement. It is worth noting that at the 9% midpoint, we raised our adjusted EBITDA guidance by $125 million, which is significantly above our first quarter outperformance of over $40 million relative to consensus. Lastly, at the midpoint of our range, our full year 2023 EBITDA is forecasted to be 3% above 2019. We are also providing second quarter Comparable Hotel RevPAR growth guidance of 4% to 6%. Sourav will discuss our updated guidance assumptions in a few minutes.

On the capital allocation front, during the first quarter, we sold the 277-key Camby Autograph Collection Hotel in Phoenix, Arizona, for $110 million or 14.3x trailing 12-month EBITDA. When calculating the EBITDA multiple, we included approximately $23 million of estimated foregone near-term CapEx. In connection with the sale, we provided a $72 million loan to the purchaser with up to an additional $12 million available for a property improvement plan not to exceed a 65% loan-to-cost ratio.

During the quarter, we also repurchased 3.2 million shares at an average price of $15.65 per share through our common share repurchase program, bringing our total repurchases for the quarter to $50 million. Over the past 2 quarters, we have repurchased $77 million of stock at an average repurchase price of $15.75 per share. We have approximately $923 million of remaining capacity under the repurchase program.

We continue to be optimistic about the state of travel today despite the underlying uncertainty in the economy and lack of clear visibility in the second half of the year. We are not seeing any signs of a slowdown and our outlook for the rest of the year has improved since our last earnings call. Leisure rates remain well above 2019 levels and the moderation we saw in the second half of last year plateaued in the first quarter. For context, transient rates at our resorts were 54% above 2019 in the first quarter, which was in line with the fourth quarter. On the group front, in the first quarter, we booked over 500,000 group rooms for 2023 and total group revenue pace is now 2.5% ahead of the same time in 2019. The group booking window is extending as most of our top markets picked up more group rooms for 2024 in the first quarter than the same time 2019. While business transient demand is continuing to evolve, rates in the first quarter were up 10% to 2019, with demand holding steady compared to the fourth quarter.

Turning to first quarter results. Comparable Hotel RevPAR for the first quarter was approximately $218, a 31% improvement over the first quarter of 2022 and a 7.4% improvement over the first quarter of 2019. Comparable Hotel revenues in the first quarter were up 11% over 2019 and 34% over 2022, respectively. While Comparable Hotel operating expenses were up only 9% over 2019 and 30% over 2022.

Transient revenue was 13% above the first quarter of 2022 as a result of increased occupancy and easier comparisons due to Omicron, which allowed our managers to push rate higher. Revenue growth was primarily driven by our downtown hotels.

Our resort properties continue to outperform with 1% transient rate growth over 2022. In the first quarter, we had 6 resorts with transient rates above $1,000, led by the Four Seasons Resort in Residence, Jackson Hole at nearly $3,000 and the Four Seasons Resort Orlando at Walt Disney World Resort at over $2,000.

As a reminder, Hyatt Coconut Point and the Ritz-Carlton, Naples are both excluded from our Comparable Hotel results due to impacts from Hurricane Ian. Hyatt Coconut Point has been opened since November, and the final phase of restoration is expected to complete in mid-June with the reopening of its water park complex. The Ritz-Carlton Naples remains closed. However, we are nearing the end of our reconstruction efforts, which will enhance the resiliency of the property by elevating critical equipment, improving dry flood proofing measures and replacing major equipment with more efficient machinery. We have targeted reopening the resort, including the new 74-key tower expansion in July. We are excited to showcase the transformational repositioning of the Ritz-Carlton Naples.

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MAY 04, 2023 / 2:00PM, HST.OQ - Q1 2023 Host Hotels & Resorts Inc Earnings Call

As of today, we have received $98 million of insurance proceeds of the expected potential insurance recovery of approximately $310 million for covered costs. The proceeds received to date have all been classified as property damage. As a reminder, these 2 properties were expected to contribute an additional $71 million of EBITDA this year, which is not included in our full year guidance.

Turning to group, this is the third consecutive quarter group revenue exceeded 2019, driven by 14% rate growth over the same time in 2019 with over 1 million group room nights sold. Definite group room nights on the books for 2023 increased to $3.4 million in the first quarter. Which represents approximately 94% of comparable full year 2022 actual group room nights, up from 80% as of the fourth quarter of 2022. Total group revenue for the first quarter was 7% ahead of 2019, driven by continued elevated banquet and AV spend.

For full year 2023, Group rate on the books is up over 6% to the same time last year, a 90 basis point increase since the fourth quarter. In addition, total group revenue pace is up approximately 25% to the same time last year. We continue to be very encouraged by the large group base we have on the books, particularly when you consider that our -- in the quarter for the quarter bookings, remain elevated at 28% above the same time 2019. Sourav will touch on additional operational details and our updated 2023 outlook in a few minutes.

Our recent acquisitions continued to contribute to our outperformance and are meaningfully ahead of our underwriting expectations. Based on full year 2023 forecasts, EBITDA from the 8 hotels we acquired in 2021 and '22 is comfortably within our targeted range of 10 to 12x and well ahead of our underwritten stabilization period.

Looking back on our transaction activity since 2018, we have acquired $3.5 billion of assets at a 14x EBITDA multiple and disposed of $5 billion of assets at a 17x EBITDA multiple, including $976 million of estimated foregone capital expenditures. Comparing All Owned Hotel 2022 results for our current portfolio to 2017, we have increased the RevPAR of our assets by 9%, the TRevPAR by 15% and the EBITDA per key by 31%.

Moving on to portfolio reinvestment, during the first quarter, we completed comprehensive renovations at the Marriott Marquis San Diego Marina, bringing the number of completed properties in the Marriott Transformational Capital Program to 15 out of 16 assets. The final property in that program, the Washington Marriott and Metro Center, is underway, and we expect it to be completed in May. We also completed our comprehensive renovation of the Westin Georgetown, Washington, D.C. during the quarter.

In addition to these completed renovations, we are excited to announce our plans to develop and sell 40 fee-simple condominiums on a 5-acre development parcel at Golden Oak in Orlando, adjacent to our Four Seasons Resort Orlando at Walt Disney World Resort. The development will feature a 31-unitmid-rise condominium building and 9 detached condominium villas. We signed a contract to purchase the 5-acre development parcel for an additional $30 million at the time the resort was acquired. We are targeting a mid- to high teens cash-on-cash return for this ROI development project. Construction is expected to begin in the fourth quarter of 2023 and complete in the fourth quarter of 2025 with sales tentatively scheduled to commence in the first half of 2024.

For the full year, our 2023 capital expenditure guidance range remains at $600 million to $725 million, which reflects approximately $275 million of investment for redevelopment, repositioning and ROI projects and $100 million to $125 million for hurricane restoration work. The projects include a transformational renovation of the Fairmont Kea Lani, the Phoenician Canyon Suites Villa expansion, the Four Seasons Orlando at Walt Disney World Resort luxury condominium development and completing construction of the tower expansion, guestroom renovation and lobby transformation, a Ritz-Carlton Naples Beach, which was delayed by Hurricane Ian.

In closing, we are very pleased with our strong first quarter performance and our improved outlook for the rest of the year. We believe Host is well positioned to outperform in the current macroeconomic environment. We have a best-in-class balance sheet. We are diversified across geographies and business mix. We have redefined the operating model and we have transformed our portfolio through reinvestments in transactions, which taken together have dramatically improved the EBITDA growth profile of our portfolio.

With that, I will turn the call over to Sourav.

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MAY 04, 2023 / 2:00PM, HST.OQ - Q1 2023 Host Hotels & Resorts Inc Earnings Call

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

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

Starting with business mix, overall transient revenue was up 13% to the first quarter of 2022 driven by over 9 points of occupancy growth and continued strength in leisure rates. Our downtown hotels led revenue growth as strong demand fueled significant rate increases.

Holiday performance in the first quarter was strong, particularly at our downtown hotels. Downtown hotels saw increased leisure demand over last year, gaining more than 10 points of occupancy for both Martin Luther King Jr. and President's Day weekends. Downtown properties also drove overall portfolio spring break RevPAR growth of 7%, which is quite impressive when you consider the elevated resort comparisons from the "mother of all spring breaks" last year.

Quickly looking forward to holidays in the second quarter, room revenue pace is up low single digits over last year for Memorial Day, Juneteenth and the fourth of July.

Resorts in the first quarter saw an overall RevPAR increase of approximately 5% compared to 2022. As expected, the return of Caribbean tourism let consumer hesitancy to travel to downtown markets and lower repeat travel to Florida markets impacted performance at our resorts. However, the impact was not as significant as we expected. And it is notable that Miami, Jacksonville and the Florida Gulf Coast are still significantly outpacing 2019 RevPAR levels by an average of over 30%. Our resorts in Hawaii achieved 11% RevPAR growth over last year, entirely driven by rate.

Business transient revenue was down 14% to the first quarter of 2019, which represents a 400 basis point sequential improvement to the fourth quarter. Downtown properties accounted for over 60% of the portfolio's business travel demand and small and medium-sized businesses continue to drive the recovery, representing approximately 75% of our business transient demand today compared to approximately 60% at the same time in 2019. It is also worth noting that business transient revenue was only down 7% to 2019 in the month of March.

Turning to group. This marks the third quarter that group revenue has surpassed 2019 levels. Group room revenues were 4% above the first quarter of 2019, driven by a 14% rate growth. Phoenix, San Diego and Miami, drove group room revenue growth compared to 2019. The short-term booking trend continued with a pickup of 102,000 room nights or 28% of rooms booked in the quarter for the quarter. Near half of the in the quarter for the quarter rooms booked were in San Francisco, Washington, D.C. and New York.

Corporate group room revenue was above 2019 for the third consecutive quarter, up 6% in the fourth quarter, driven by 26% rate growth.

Association Group revenue has nearly recovered down just 2% in the first quarter compared to 2019, driven by 1% rate growth.

Wrapping up on group with social, military, educational, religious and fraternal or SMERF groups, revenue was 12% above 2019, driven by 8% rate growth.

Shifting gears to margin performance. Our first quarter Comparable Hotel EBITDA margin came in at 32.5% which is 175 basis points better than the fourth quarter of 2019 and 220 basis points better than the first quarter of 2022. All departments had margin improvements compared to 2019. Compared to 2022, all departments, except for Other Revenues had margin improvement as attrition and cancelation revenue was below 2022. Margin expansion can be attributed primarily to rate growth, banquet and AV growth and our efforts to redefine the operating model, and we are encouraged that we were able to maintain last quarter's margin expansion compared to 2019 in the first quarter.

Turning to our updated 2023 guidance. we significantly raised and tightened our full year Comparable Hotel RevPAR growth range to 7.5% to 10.5%. Our improved outlook is driven by outperformance in the first quarter, better visibility into the second quarter and continued strong group booking activity in the second half of the year. As it relates to the business transient recovery, it is worth noting that we may not see a decrease in demand if a slowdown occurs in other parts of our business as business transient demand is still not fully recovered to 2019 levels.

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