Good day, and welcome to the Host Hotels & Resorts Incorporated First Quarter 2019 Earnings Conference. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Gee Lingberg, Senior Vice President. Please go ahead, ma'am.

Thanks, Evony. Good morning, everyone. Welcome to the Host Hotels & Resorts first quarter 2019 earnings call. Before we begin, I like to remind everyone that many of the comments made today are considered to be forward-looking statements under federal securities laws. As described in our filing 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 results. You can find this information, together with reconciliations to the most directly comparable GAAP information, in today's earnings press release, in our 8-K filed with the SEC, and the supplemental financial information on our website at hosthotels.com This morning, Jim Risoleo, our President and Chief Executive Officer, will provide an overview of our first quarter results, our capital allocation strategy and our outlook for 2019; Michael Bluhm, our Chief Financial Officer, will then provide commentary on our first quarter performance, our capital position and our guidance for 2019. Following their remarks, we will be available to respond to your questions. And now, I would like to turn the call over to Jim.

Thank you, Gee, and thanks to everyone for joining us this morning. We are pleased to report another strong beaten raised quarter. Our first quarter results exceeded our expectations and beat consensus estimates for adjusted EBITDAre and adjusted FFO per diluted share. Adjusted EBITDAre increased 10% to $406 million for the quarter and adjusted FFO per diluted share grew 11.6% to $0.48, beating consensus estimates by $20 million, and $0.04 respectively. While we do not provide quarterly guidance, we indicated in our prepared remarks last quarter that 25% to 26% of EBITDA would be earned in the first quarter, we beat that forecast by $11 million. These strong results were primarily driven by an impressive EBITDA margin improvement of 50 basis points. Comparable hotel EBITDA margins improved for the sixth consecutive quarter and meaningfully exceeded our expectations, demonstrating the benefits of our scale and integrated platform, key elements underpinning our ability to deliver operational performance. We continued to benefit from our internal initiatives, the Marriott, Starwood merger synergies, the receipt of operating profit guarantees from the Marriott transformational capital program and increases in other ancillary revenues. These bottom line results are remarkable, considering the comparable constant dollar RevPAR decline of 1%. The RevPAR results were driven by an occupancy decrease of 180 basis points, which was partially offset by a 1.3% increase in average rate, the factors that affected RevPAR this quarter, including estimated 40 basis points of impact from the disruption related to the Marriott transformational capital program, an estimated 30 basis points impact from the government shutdown and a softer than expected March. Despite these headwinds comparable total RevPAR which includes all hotel level revenues, including food and beverage and other revenues increased 30 basis points to $274 million. These strong results continue to underscore the advantages of…

Thank you, Jim and good morning everyone. Building on Jim's comments, all of us at Host are pleased with the strong results we delivered in the first quarter. Through active portfolio management we have ensured that the Company is stronger than ever and well positioned for continued profitable growth. With that, let's discuss the details of our results. As expected demand was impacted by the government shutdown earlier this year and some renovation disruption as part of our Marriott transformational capital program. As a result on a constant currency basis, comparable RevPAR decreased 1%, driven by 180 basis point decrease in occupancy, partially offset by a 1.3% increase in average rate. Comparable total RevPAR which includes all hotel revenues, including food and beverage and other revenues, however, exceeded our internal forecast and improved 30 basis points to $274. Comparable hotel EBITDA margins, as Jim mentioned, improved for the sixth consecutive quarter exceeding our expectations and improving an impressive 50 basis points. These margin enhancements, the details of which I will discuss in a moment demonstrate the benefits of our scale and integrated platform, key elements underpinning our ability to deliver operational outperformance. These results led to an increase of 10% in adjusted EBITDAre to $406 million and 11.6% growth and adjusted FFO per share to $0.48, which exceeded both our internal and consensus estimates. Let me provide some additional color around our margin outperformance. Our asset managers and enterprise analytics team in collaboration with our managers continued to drive comparable hotel EBITDA margin growth and generate impressive profitability at our properties at this stage of the cycle. Our 50 basis points of margin expansion was 180 basis points greater than we would have expected with a RevPAR decline of 1%. Let me provide a quick high level context to our…

Thank you. [Operator instructions] We'll take our first question from Anthony Powell with Barclays. Please go ahead.

Well, good morning, everyone.

Good morning, Anthony.

Good morning.

Good morning. Wanted to focus on the Marriott-Starwood integration benefits. It seems like you're doing even better than a 50 basis points of improvement that Marriott itself identified for it's a managed portfolio this year. What surprised to the upside from that integration? What's next for Marriott later this year and next in terms of further benefit? And as a result of this, do you think that you can maintain growing margins slightly at a 1% RevPAR growth level next year and year after?

Anthony, I'll give you a little color on some of the benefits in a more granular level that we receive this year. The - we calculate the total benefit in the quarter of about 78 basis points from Marriott Starwood integration, and roughly, let's call it 40 basis points to 50 basis points of that, is a result of lower travel agent group intermediary commissions, loyalty program, expenses and the establishment of that program services fund, that is very helpful and our ability to control costs, charge off and alike. The other piece of it is that we have, say - call 30 basis points or 40 basis points immediate ranges here in savings that are related to the new credit card program and the operating profit guarantee. So, we're confident that the margin performance is going to carry through for the rest of this year, and we would expect to see, I'm not going to say full point, but, call it another 50 basis points over the next couple years.

I mean, Anthony, I would say, to your question, it really wasn't any surprises. I mean, much of this is what we've been annotating to the market about what our expectations were around the benefits of these synergies and to your question of kind, what's coming next. I mean as you recall there is fair amount of things that really just start getting put in place over the past six months or so, in particular things like the reservation and yield management systems which really just integrated the end of last year. And so we still really haven't seen the benefits of that, particularly from revenue synergy. Group commissions for the large group intermediaries going through that reduction in group commission going to - into place until the end of last year. Last March was a smaller intermediaries where they changed it. The integration of the loyalty program just occurred towards the end of last year, the program services fund was in place at the beginning of this year. So there is still a fair amount of things that we sort of expect to continue to help drive the 40 basis points to 50 basis points of improvement for the next couple years that we've consistently talked about.

The other thing I would add, Anthony, is that a big driver for us in the quarter was the transient cancellation being pickup. The fees are now being automatically charged. So it's not like we're --- I'm not suggesting for a moment that we have higher cancellations, but the cancellations do occur are being charged to the customer. Lastly, too early to quantify but were very confident that over time as a result of the integration when it's done and we look back we will see significant top line impact going forward. I mentioned this a couple calls ago, our Starwood legacy hotels gained access to 30,000 business-to-business accounts that were in the Marriot pipeline that Starwood didn't have. So I don't even think we have seen the tip of that going forward.

And our next question will come from Smedes Rose with Citi. Please go ahead.

Hi, thanks. I wanted to ask you just about - and so being a large owner of Marriott's hotels, your thoughts on Marriott entering the home sharing business here in the US. Do you see that it's just a totally separate business or what are your thoughts around that?

Yeah. Smedes, we view the business as really complementary to our business, it is a different business. We actually view it positively because it's going to give our existing guests another place to go and to earn points or redeem points as part of the loyalty program. It will take some pressure off some of our hotels from that perspective. And it should also over time reduce the charge our cost associated with loyalty. We spent a fair amount of time looking at this and talking to Marriott about it and the test program that they run in London Tribute Homes by Marriott generated 7,000 room nights from customers who went on the Marriott website to look at a Tribute Home but ended up booking a standard hotel room. So we think more traffic through the system is good. These - the properties that they are contemplating putting into this program are not going to be competitive with us, there is going to be a minimum of three night stay whereas, our average stay is two night and its geared toward the leisure customer. Lastly, I would tell you that it's going to be initially heavily weighted internationally in markets that Marriott doesn't have a presence today. And in the US it's, for the most part going to be rolled out in markets where they don't have a presence today. So complementary, not competitive. And were excited for it going forward.

Moving next now to Jeff Donnelly with Wells Fargo. Please go ahead.

Yeah. Just circling back on the synergies, the Marriott and thinking about what's transpired since Marriott and Starwood got together. Do you guys know offhand how your RevPAR index of your hotels has performed in the past year? Ideally those hotels, not affected by renovations, I'm just curious if you have also seen revenue share gains, as well as expense savings as a result of the combination.

I would say - no, it's a good question, Jeff. No, we've actually seen a slight uptick in our index from our Starwood hotels.

Our next question will come from Chris Woronka with Deutsche Banc. Please go ahead.

Hey, good morning guys.

Good morning, Chris.

Hey, Chris, good morning.

Want to ask about some of the internal initiatives that are driving the margin performance, you guys have been working on those for a lot of years you are getting really strong results right now and you did last year too. I guess the question is kind of; a, how sustainable. But more than that, it's really, I think it would be a strong term just say, you're redefining the cost structure hotels. But some of these things relate to food and beverage, seem like they still have legs. So maybe give us a big picture view of what you still want to do in the hotels on the - on some of these costs initiatives.

Sure. Our outperformance on margins is directly tied to our scale and our integrated platform, which we think distinguishes us from other lodging REITs in this space today. The amount of data that we have available to mind throughout the portfolio is - it is quite extensive. And we receive monthly data feeds from all of our properties that allow us to identify best practices from property to property. And as we wrap our arms around, something that property a might be doing and decided has the ability to be rolled out to the entire portfolio. That's something we take up with the brand. So we think that puts us in a very unique position. And, if you want to get a little more granular about it, we're going to continue to think about consolidating kitchens and reducing costs from that perspective, to be more efficient, New marketplaces grab & goes, we're doing them in New Orleans and the Logan and the Sheraton in Boston. And where we can we will consolidate wage codes and combine jobs but being very thoughtful about our associates and making sure that they're well taken care of.

Our next question will come from Michael Bellisario with Baird. Please go ahead.

Good morning, everyone.

Hey Mike.

You may be talking about your disposition outlook a little bit, how you're thinking about some of the non-core properties that still might be in your portfolio. And then also New York City too with what remains there to potentially sell just kind of buyer interest pricing trends and kind of how you're thinking about the potential sources and uses of that capital that might be coming in the door. That'd be helpful.

Yeah, it's - as you know, Mike, it's a hypothetical question, but I'll give you some color around it as I can. As we think about continuing to prune the portfolio, we will be opportunistic in taking assets to market, responding to unsolicited offers, where we feel that we can achieve a value that's in excess of our internal hold value. And we continue to be very disciplined with respect to our underwriting for new investment opportunities, as well as for assets we might want to sell by looking at the near term, RevPAR performance of an asset in a particular market, the capital needs and what we think is a fair and reasonable residual cap rate. So, if market opportunities present themselves we will continue to prune. If they don't, we're very comfortable with the portfolio we have today. We're not in any rush to grow the portfolio or shrink the portfolio. I want to make that really clear. We're very comfortable with the assets that we own today. So, you asked specifically about New York. You can look at what we've done in New York over the last year and the fact that we've sold three hotels which we deem profitability challenged. We're very happy with the execution that we were able to achieve. And much like the commentary I just gave you around how we view value, that's how we view value on all assets, regardless of what market we might be in.

We'll take our next question from Robin Farley with UBS. Please go ahead.

Great, thanks. The margin improvement in the quarter was so strong. I wonder if you can help us think about how much the reduction in occupancy, just since losing occupancy is kind of a better piece of RevPAR to lose and losing the rate because of all the variable expenses. Just maybe help us think about how to quantify how much margin is helped by losing, 100 basis points of occupancy, rather than losing 100 basis points of REIT? Thanks.

Robin, I don't know that I can quantify that to the detail today. But I will tell you that we are very, very happy with the fact that we were able to increase productivity, both at the room's level and at the food and beverage level with a decrease in occupancy.

Our next question will come from Jared Shojaian with Wolfe Research. Please go ahead.

Hey, good morning, everyone. Thanks for taking my question. So I want to ask you about your RevPAR in the quarter which was down 1%. And appreciate all the color you've given us on the call so far. But you're also keeping the guidance unchanged for the full year of flat to plus 2%. Is there anything you're seeing in bookings rather than some of the macro day that you talked about that's giving you the confidence you'll see accelerating RevPAR growth throughout the year? And I guess a different way to ask this is, do you need demand to accelerate or does the current booking environment support flat to 2% growth as some of the non-comp hotels and other noise rolls off?

Sure. If you look at the 1%, down for the quarter and you take into consideration the disruption from the Marriott capital program of 40 basis points and the effects of the government shutdown of 30 basis points that left us with, call it another 30 basis points to get back to even. A lot of that was the result of a slowdown in business travel in the month of March, that we saw as a result of - and we are proud about this a lot and talked to a lot of people about it, including our operators and others, the spring break season this year, given the late Easter was elongated. And that really put a crimp in business travel. So as we look at the remainder of the year, I mentioned in my comments and Michael did as well that we saw strong booking activity in the quarter for the second quarter of 20% and 5% for the year, we have 85% of our group business on the books, which is exactly where we were last year. We were very encouraged in the quarter with a pickup in corporate group bookings, which was up 4.1% and higher food and beverage spend, which was quite profitable business and we hopefully we would continue to see that over the course of the year. And then lastly we saw a pickup in business transient pace, revenue pace for the year, up about 1.3% in the quarter. So all the factors we look at make us - put us in a very comfortable position to maintain our RevPAR guidance of zero percent to 2%. The other thing I would add is that we always anticipated that our first quarter was going to be the worst quarter of the year. And as we look out, I've said that the second half of the year is going to be stronger. And it gives us confidence to hold the course.

We'll take our next question from Rich Hightower with Evercore ISI.

Hey, good morning guys.

Hey, Rich.

So, Jim I want to ask, I guess one question about out of room spend, but it's a two parter question. First of all, are you guys able to quantify the margin benefit from some of those spend categories, whether it's on the F&B or the catering side and just help us understand the margin and flow through profile of that segment. And then secondly, it's not the first quarter or the first company where we've seen non-room spend outpace room revenues. And I'm just wondering is there anything structurally related to that, in terms of the ability to price, one segment of the business versus the room segment and anything we should be paying attention to there?

Yeah, there's a lot in that question. I just want to make sure I heard it clearly. So the question is, give it a little bit more background on the margins in different departments, as well as sort of understand kind of what's happening with trends out of room spend.

Yeah, that's right. And then, on the second part, is there anything structural that we need to focus on between room revenue and out of room revenue, in terms of pricing power overall?

Yeah. Rich, I don't know that there's anything structural that we're seeing in the business, per se, but as we think about our absolute margin performance, and really break it down a little more granularly; food and beverage operations contributing 19 basis points; rooms productivity contributed 8 basis points; so - utilities was another 9 basis points; fund distributor operating expenses was 5 basis points; so - and I mentioned earlier today the pickup in cancelation fees 20 basis points. So it's a number of different areas of the P&L that are being touched. And our intention, going forward is to continue to be focus on this and look for other opportunities to improve our margin performance whether it's - we have continued lower charge out rates for the loyalty program, we're receiving benefit from lower travel agent commissions from Marriott's book direct campaign and we saw a pickup of about of 2.3% in the quarter. So I don't there's anything really that's structurally has changed.

Our next question will come from Patrick Scholes with SunTrust. Please go ahead.

Hi good morning. Two questions for you. How do you think the quarterly trajectory of RevPAR growth looks for the rest of this year? That's my first question. And how are you pacing overall for your Company for group in 2020 and in 2021?

Yes. For us for the balance of the year, and it may be different for others in the industry and for the broader industry, we would expect that our third quarter will be our strongest quarter; our fourth quarter will be the second strongest; the second quarter, third; and the first, the weakest. So it's in line with we anticipated at the beginning of the year. For 2020, Patrick, our group revenue is - group revenue pace, total revenue pace is up 3.5% and we have about 50% of the room nights on the books for the year compared to 34% last year.

Our next question comes from David Katz with Jeffries. Please go ahead.

Hi good morning everyone. Thanks for taking my questions. You've covered a lot of ground and a lot of detail and I appreciate that when you made some comments earlier about some of the detail that's available to you in the operating model, from the plethora of data that's available to you. And I found some of those examples to be interesting. Can you elaborate a bit more on those and what inning you are in and how much more of that bodes for you to do and further degree that we can maybe process that into some earnings power overtime, that would be helpful.

Yeah. Look, I think there's a couple of things to talk about here. I mean if you kind of think about how operationally we've been [technical difficulty] of these markets that we talked about in our prepared remarks and it is very broad, right. It was sort of top line right, stronger the revenues, strong F&B capture particularly from our corporate group business. Rooms and F&B productivity we continue to find ways to beat that savings and as Jim pointed out in a declining occupancy environment, it's pretty spectacular. We did point out utility expenses and how much we save here, but in aggregate undistributed operating expenses in total were sub-inflationary which is very impressive when you sort of think about an environment that we're in today. The Marriott's sell with synergies we continue to really hold tight on sort of the 40 basis points to 50 basis points a year. So as we sort of think about the duration of our ability that really ease our savings as compared to our peers we feel pretty good that we've got a nice setup going in the year or two to continue.

Moving next to Stephen Grambling with Goldman Sachs. Please go ahead.

Thanks. Coming at the M&A environment from a slightly different angle. What are you seeing in the supply of iconic assets coming to market and where a seller expectations? And perhaps as a follow up as we think about the $2 billion to $2.5 billion in liquidity, did I hear you correctly that you're more focused on individual assets versus portfolios and where do buybacks fit into that creation?

Yeah. I'll take the part on the M&A landscape today and how we're thinking about the market. I have been very clear that our investment capacity is $2 billion to $2.5 billion assuming we go to three times leverage. And we don't intend to invest beyond that level. I would tell you that we're rather agnostic with respect to whether it's a one property deal or a multiple property deal. It all starts with the assets, the markets, seller expectations, our underwriting. And that's how we're approaching the business. So with respect to the landscape today, we always have an ebb and flow of assets in our pipeline. And that exists today, we have a fairly healthy pipeline of assets and we're underwriting. It is very difficult to opine on hypothetical situations of what seller expectations are until you get to the table and see if you can make a deal. So it really is all over the board. Sellers are motivated by different reasons.

Yeah. Let me - just a quick comment on buybacks. I mean, it remains obviously one of our - one of our key investment opportunities, and we think about it in the context that we think about any investment opportunity, whether it's investing in our own assets, whether it's buying, growing externally. And so as we sort of think about different opportunities, it absolutely sort of factors into our thinking about sort of where we think we can generate the highest rate of return for our shareholders. This quarter, we did not buy back any shares. But that again, is more of a function of just sort of our investment opportunities.

Our next question comes from Shaun Kelley with Bank of America. Please go ahead.

Hi, guys. A lot of the ground's been covered. So just a quick one on, could you just elaborate on the program services fund savings and the charge out ratios? Just maybe a little bit more of the mechanics of how that works, when that has gone into effect? And what kind of the magnitude that drives of savings that drives for Host?

Yeah. Shaun let me I start off with the program services line, because - and I'd say the majority of what the - that entails is potential reservation system, where we expect we're probably going to save somewhere around 8 basis points in costs associated with that. And really that's a function of - and good on Marriott, really sort of rewarding the largest contributors to their system overall. And when they sort of think about fair sharing of costs, it's all taken into consideration. And so, certainly a decent margin benefit that we expect to get and continue for the year.

And this does conclude today's question and answer session. At this time I would like to turn the conference back over to Jim Risoleo for additional or closing remarks.

Thank you for joining us on the call today. We really appreciate the opportunity to discuss our first quarter results and 2019 outlook with you. We look forward to talking with you in a few months to discuss our second quarter results, as well as providing you with more insight into how 2019 is progressing. Have a great day.

And this does conclude today's conference. Thank you for your participation. You may not disconnect.