Good day, and welcome to the Host Hotels & Resorts Incorporated Second 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, Shantelle. Good morning, everyone. Welcome to the Host Hotels & Resorts second 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 second quarter results, and update on our capital allocation activities and our outlook for 2019; Michael Bluhm, our Chief Financial Officer, will then provide commentary on our second 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. I want to start by emphasizing how proud I am of all that we have and are accomplishing in here at Host. Our successful execution continues to underscore the advantages of our geographically diversified portfolio of iconic and irreplaceable hotels our unprecedented scale and platform to drive internal and external growth and the power and flexibility of our investment-grade balance sheet. Together, these key pillars form the foundation of Host, the premier lodging REIT. On the operations front, we delivered adjusted EBITDAre of $460 million and adjusted FFO per diluted share of $0.53, which was in line with the consensus estimates for the quarter. Our performance this quarter was driven by 10 basis point increase in comparable total RevPAR to $305 which includes all hotel level revenues including food and beverage and other revenues. We had strong comparable hotel EBITDA margins despite flat revenues and pressure on wages and benefits. Our EBITDA margin declined 20 basis points, which included a 30 basis point negative impact related to the timing of the receipt of the New York Marriott Marquis tax rebate which we received in the second quarter of 2018 and six basis points related to severance from a planned operational restructuring at one of our properties this year. Excluding these one-time impacts, our EBITDA margin would have increased an impressive 16 basis points. We generated exceptional bottom line performance results despite the comparable hotel RevPAR decline of 1.5% in the second quarter. The second quarter RevPAR results was driven by an occupancy decrease of 140 basis points which was partially offset by a slight increase in average rate. The factors that affected RevPAR this quarter include an estimated 90 basis points impact from disruption related to the Marriott…

Thank you, Jim, and good morning, everyone. Building on Jim's comments, all of us at Host are pleased with our strong continued bottom line performance this quarter. Our asset management and enterprise analytics teams continue to assist their managers with controlling costs to drive margins in a low total RevPAR environment. With that, let's discuss the details of our result for the quarter. On a constant currency basis, comparable total RevPAR, which includes all hotel level revenues including food and beverage and other revenues, improved 10 basis points to $305, representing an all-time high for the company. Strong food and beverage spend and ancillary revenues resulted in the record performance. Comparable room RevPAR decreased 1.5% on a constant currency basis, which was driven by a 140 basis points decrease in occupancy, partially offset by a 30 basis point increase in average rate. As Jim mentioned, renovation disruption from the Marriott transformational capital program reduced our second quarter comparable RevPAR by 90 basis points. Consistent with STR data for the overall industry, we experienced weaker than anticipated RevPAR in the second quarter due to softness in business transient demand especially in the top markets. Our relative overweighting in the U.S. in Seattle, which declined a combined 10% also hindered portfolio performance. Excluding these two markets, comparable RevPAR increased 20 basis points. Moving on to comparable hotel EBITDA margins, we continue to deliver impressive margins through our internal initiatives and the benefits from the Marriott-Starwood merger synergies, demonstrating the benefits of our scale and integrated platform to deliver continued operational outperformance. As Jim mentioned for the quarter, comparable hotel EBITDA margin declined by 20 basis points. However, after factoring in 30 basis point impact related to the timing of tax rebates for the New York Marriott Marquis and six basis points related…

Thank you very much. Ladies and gentlemen, at this time we would like to open the floor for questions. [Operator Instructions] Our first question will come from Smedes Rose, Citi.

Good morning. I guess I wanted to ask you really -- I think in the past you've said about $2 billion to $2.5 billion of total investment capacity, including share repurchases. So now that you've resumed the repurchase activity, is that kind of the priority going forward, particularly given that shares obviously are lower now than where you've been buying them back half?

Yes, Smedes, as with any time we deploy capital, we will assess the underlying fundamentals and our view of likely future performance and value when we are making a decision to invest in our portfolio to buy an asset or to buyback stock. So, I just point you to the fact that we had a $1 billion authorization. We had $755 million remaining for the year. We will take calls of underlying operating trends and a view of our NAV given current facts and circumstances and act accordingly.

Thank you.

Thank you very much. [Operator Instructions] Our next question will come from Anthony Powell, Barclays.

Hi. Good morning, guys.

Hi.

Hi. In terms of the asset sales, could you remind us how many assets and even number or percent of EBITDA fit into kind of the low profitability bucket? And how quickly could you sell these assets over the next few quarters?

Anthony, we haven't really sat back and said that this is the portfolio of hotels we want to dispose off. We look at sales on an opportunistic basis whether we see a need for high capital expenditure investments in properties, markets that we don't have a favorable view of for the long-term. On every asset that we evaluate whether or not to sell, we start with doing a whole value which is a 10-year pro forma including 10 years of CapEx over and above the FF&E reserve. And if we feel that we're able to transact in the market at a price that's greater than a whole value and the market dynamics are such that we think the buyer can perform as today with strong financing markets -- financing markets have never been stronger quite frankly both from a proceeds perspective and an interest rate perspective then we'll move forward. But we have no problematic plan in place to sell assets.

Okay. Are you marketing more assets currently?

I think that what we will point to you is the assets that we've discussed on the call.

Got it. Thank you.

Our next question will come from David Katz, Jefferies.

Hi, everyone. Good morning.

Good morning, Dave.

Listening to your commentary as well as the commentary of others and then looking at the capacity that you have, I'd love to hear your commentary around the availability of assets to acquire right as well as what the tolerance for loan to values and valuations has done over the past couple of weeks as best as you can assess it. And just I'd love to hear your thoughts about how you're thinking about that? And whether having the capacity and just sitting tight for a period of time is not maybe a very solid choice.

Sure. David, I'll take the first part of the question and Michael can talk about the financing market. With respect to the acquisition marketplace, we always have a pipeline of assets that we are evaluating and underwriting. We've been very disciplined and our view towards performance of these assets. Going forward, and we have taken into consideration that the current economic times that we live in today and we'll look at buying an asset relative to as -- an example buying back our stock. It's not to say that if a very attractive opportunity presented itself that we wouldn't pursue it, but to date we just haven't seen a lot out there that make sense for us. There is a gap between buyer-seller expectations. And I think part of that is being driven still by the flush financing market that's available to buyers today -- to sellers today to refinance our assets. So, I don't know if you want to talk about the...

Yeah. I think that's a great point. I mean look, David the financing markets remain quite hot. And you've seen from a lot of our peers selling assets into it. It really has given the ability to drive pricing. I mean today in the CMBS market, you can still sort of get 75% LTV financing at really record low borrowing rate. And that's both from the single borrower as well as in the conduit market. And when you look in terms of the bank financing, you saw we just typically are one of the biggest branch in the company has done $2.5 billion of bank credit that market right in a low and longer environment we continue to -- that will continue to expect and be a big catalyst for the -- for borrowers and, again, also an environment where you're seeing a record low borrowing rates.

Perfect. Very helpful. Thank you.

Thank you. Our next question will come from Michael Bellisario, Baird.

Good morning, everyone.

Good morning, Mike.

Hey, Michael.

Just on the capital allocation front, maybe ask a little bit differently. Maybe could you tell us how much of your buyback activity is being driven by the absolute returns you're seeing in your stock today versus the relative returns compared to where you're selling assets at net that valuation arbitrage that would be helpful?

Michael, a couple of things in there. So look first of all, I’d say that relates on -- we don't know necessarily what type of IRRs or buyers are I think they're buying at. We certainly have as Jim had pointed out; we have whole values that discount back the cash flows of properties as well as the capital requirements at our cost to capital. And when someone's paying a higher price in that then presumably they're getting a higher return and/or expect to get a higher return than what we think it's going to get. Look as it relates to the capital allocation, we took you through kind of what we bought in the open market as well as in the 10b5 and collectively sort of fair to say is kind of the weighted average price at sort of $18.04, which works out to about a 20% discount to consent NAV, which look in today's environment I think when you think about sort of -- some of the return profiles of a lot of the assets we look at in the past as well as the stuff that we're selling we think that's a pretty good use of capital.

Thank you. Our next question will come from Rich Hightower, Evercore ISI.

Good morning, guys.

Morning, Rich.

Morning, Rich.

Maybe just to shift gears a little bit, so with all of the moving parts in the portfolio in terms of asset sales and what's in the comp pool out of the comp pool and so forth, wondering if you guys could help us bridge to a number for pro forma historical RevPAR, so that we're comping against the right number as we model going forward, or maybe you could cash it in terms of the assets we sold over X-percent below our average RevPAR for the portfolio, just something to help us with the numbers there?

Yeah. Rich the assets that we've discussed and sold year-to-date going back to the Westin Grand Central and the assets that have recently closed and the ones that are under contract, the combined RevPAR for that portfolio I think is around $136 that's about 27% below our company RevPAR. Is that the direction you're going with the question Rich?

Yeah. That's very helpful. And then maybe translating that number into an overall impact on what exists today that we should be comping against in forward period right? So that could be a 3% or 4% whatever sort of number that is almost on a weighted basis? We can talk offline if I'm not maybe being clear.

Yeah. We should probably talk offline. I think that -- I think based on the assets that we've sold we've probably seeing a tick-up in our total company RevPAR from call it $180 to $183.

Okay. Yeah, that's exactly what I'm after there. And then maybe secondly while I've got you, you did throw out some group pace numbers last quarter for 2020. I think maybe in the low single digit area. If you don't mind reprising those numbers where we sit today? And then maybe describe any changes in the 2020 group pace numbers versus 90 days ago?

Yeah. So, the group pace for 2020 it's holding, it's hanging in there. Total group revenue pace at this point is at 5.4% for 2020.

Okay, great. Thank you.

Thank you. Our next question will come from Bill Crow, Raymond James.

Good morning guys. A question for Michael on the housekeeping front, and then one for Jim. Michael, could you just kind of build us a bridge based on asset sales? And what the impact will be on 2020 EBITDA?

On 2020, yes…

Everything that's either -- that's been incorporated in your guidance to date for this year what is going to be full year number for next year?

Yes. If we go all the way back to the Westin Grand right that's a full year impact of $50 million.

Okay. For all of the assets relative to what this year's guidance is. Okay, got it. And Jim I guess, my question is when we think about what you…

I want to make one adjustment -- hey Bill I just want to make one adjustment, because I'm working off a sheet here that it's net $27 million.

Okay, all right. And maybe we'll follow-up just to make sure I'm clear. But Jim on the ancillary revenues that you call them and I'm thinking about parking, I'm thinking about fees the guest may pay et cetera. What is the ability to push those again next year? I mean, we can project RevPAR growth. We can think about food and beverage based on group and RevPAR et cetera, but the ancillary it feels like we're playing catch-up to some extent this year and I'm just wondering whether the growth goes out of the balloon next year?

I think it's going to be an ongoing process first, Bill. I don't have hard numbers to talk about, but we're being thoughtful with respect to making certain that our customers are understanding day one what they're being asked to pay and they're achieving real value for any fees that they might be asked to pay. I would expect that we will continue to see increased capture on cancellation fees just from some automated systems that have been put in place, not that we're seeing a tick-up in cancellations. I don't want to call anybody with that thought because we're not seeing a pickup in cancellations. And we are continuing to see a strong out of room spending definition in particular with respect to golf and spa. So, it's an area that we continue to be focused on going forward.

Okay. Thank you.

Our next question will come from Wes Golladay, RBC Capital Markets.

Yes, good morning everyone. I just want to go back to that comment about the business travel being a little bit softer and the consumer hanging in there. How does this translate into the resource? It sounds like the Phoenician is doing quite well. Is the corporates still spending there?

Yes. Actually, I think in Michael's prepared remarks, I'll let him talk about a little more, but we saw a very strong group performance at the Phoenician to the point where some of the transient business was yielded out in favor of group, allowing us to really compress transient rate with respect to what collets. The leisure travel continues to be strong overall. Revenues increased 12% in the quarter and that was driven by almost an 8% increase in our resorts.

And you're modeling this divergence to continue throughout with the guidance that sort of we should expect?

Our guidance is granular. I mean this is property-by-property forecast to arrive at our guidance for the full year.

Got it. Thank you.

Our next question will come from Patrick Scholes, SunTrust.

Hi, good morning Jim and Mike. Just another way of asking the capital allocation question here. Is it fair to assume that all the proceeds from this next round of asset sales will be used for repurchases? And then, it looks like in 2Q, your repurchases were from asset sales. Would you also consider dipping in at this point, dipping into the balance sheet to do repurchases? Thank you.

Patrick, to Jim's point, I mean I think how much cash is tangible. And we're thinking about in the context of whether we're investing externally investing in our portfolio or buying back stock. We just talked about kind of where we brought back or close to $0.25 billion of stock certainly don't like that price, but like being a buyer at that price. But again, we have to take that into consideration there are other -- all of our capital investment opportunities.

The only thing I'd add to that Patrick is that acquisitions carry a very high volume there.

Okay. Thank you.

Our next question will come from Shaun Kelley, Bank of America.

Hi, good morning everybody. I was just wondering if you could speak a little bit more about the operating profit guarantees for Marriott are going to play through once the renovation start to roll-off, right? So you're in the middle of the process now and obviously they've been creating a lot of cushion. What happens as the renovations are completed? And did it sort of made whole up until you return to a certain level of profitability, or do they roll-off as soon as sort of the CapEx is down and you've kind of have to fight for yourself while you're stabilizing?

We're hopeful and we believe that the first, for yourself is going to put us in a very good place Shaun because, as these properties are fully renovated, we do expect meaningful increases in yield index which should translate into strong improvements in EBITDA. The way the operating performance guarantees were calculated is really based on the anticipated disruption at each property based on the scope of the renovation and based on our 20-plus years of data related to renovations and our ability to really forecast displacement of business whether you're doing rooms, whether you're doing rooms and bathrooms or a lobby or food and beverage or a meeting space. So, it's a property-by-property analysis. We have some ability to adjust those based on timing of the renovation and the like. But instead of said amount -- I think that the said amount was $83 million in the aggregate. And as we stated earlier today between comp -- non-comp for this year, we will receive $23 million.

Got it. Yes it is. Sorry, I don't think I framed -- phrased that pretty good well. But that's what I was looking for. And then secondarily Jim or Michael can you just mention what you're seeing on group bookings for sort of 2020 and beyond just sort of the all future periods type level of interest or demand on the really leading or really far out group side would be helpful. Thanks.

Yes. I'd tell you -- I mentioned the number for 2020. We're seeing total group revenue pace up 5.4% for 2020. For 2023, the numbers are up approximately 2%, but it's really a little bit early to start thinking about any years beyond 2020.

And Shaun the only thing I would add there is that for how the year shape up in 2020, we've got almost 60% of the room rents on the books already.

Great. Thank you, both.

Thank you. Our next question will come from Chris Woronka, Deutsche Bank.

Hey, good morning guys. I wanted to ask about margins and you've got through a lot of color on some of the things that were impacting you this year between the renovations and the out of room spend. But as we look forward and in consideration to the fact that the performance guarantees ultimately burn off, is there anything secular that has changed in terms of the margin structure at the hotels? So, in other words if we enter a softer patch, do you think margins hold up better this time, or is there something tangible that you can point to that's hotels now that maybe wasn't there last time?

Look I think as far with -- I think we've all learned a lot to the last recession about sort of really deploying resources quickly to adapt to changing fundamentals. I mean I think you saw that this quarter. We talked about it. I mean as soon as we started think these things slow down, we are very front footed and putting together action plans particularly around employee management. And as a result we're adding -- we were able to kind of adapt quickly. And when we sort of think about going is the extent of things are going to continue slowing down, we're going to be very quick to adapt. I'll give you a fair amount of -- a fair amount of how you came out of this quarter. I mean we kind of get a little bit more granular. We saw really interesting productivity gains in both rooms and food and beverage which was again very much of it prescribed by our hotel managers and our asset managers working with our managers to work around scheduling and sort of employee management better. I'm also very quick on inventory control around F&B and every facet really well and our cost of goods sold, cost structure and how that improved from last quarter. And look as we talked about last quarter, we did have a fair amount of gives and takes on the undistributed operating expense column whether with any due to related things or a lot coming out of the Starwood Marriott synergies that helped us enable to keep that below inflationary growth. And so what I think -- I think you're getting a feel for the way that we are approaching slowdowns and as you can expect sort of a similar proceeds until we slowdown any further.

Yes, the only thing I would add Chris is that's changed and I think we're going to continue to see change in a positive way is technology. And our -- we embraced technology. We think we're on the forefront of technology working with our operators. That will allow us to continue to improve productivity going forward. So, I think that's only going to get better. And I do believe that it's a new paradigm for the operating expense model in the world of hotels. Additionally, we are keenly focused on cost creep. It's so easy when times are good for the extra body here or the extra controllable whether it'd be in rooms or F&B to come back into the system. So, we're keeping a keen eye on all of that.

Okay, very good. Thanks guys.

Thank you. Our next question will come from Robin Farley, UBS.

Great. Thank you. My question is actually along similar lines that you were talking about. Just that you've done such a solid job of incremental things to offset the margin pressure that I'm just wondering what there might be sort of incremental in 2020. And I know you're talking about sort of further productivity, but I was thinking specifically are there Starwood synergies that will be incremental in 2020 that aren't contributing in 2019 yet? Anything that doesn't sort of start to contribute till next year? And then can you remind us the Marriott, I think you said it was $23 million of profit guarantees in 2019. And is that -- I'm sorry if I missed if you said that upper down next year versus the incremental amount of that in 2020? And then anything else sort of incremental to I believe the cost save this year will continue into next year but just thinking about anything incremental? Thanks.

Yes. Robin, I'll start with our forecasted operating profit guarantee payments based on our anticipated construction spend next year for the transformational capital program. It's likely at this point that we're going to be circa $200 million plus or minus. We won't know until we get through the capital budgeting process, which is starting in earnest in the next week or two actually, but we won't be done with this until the end of the year. Right now we would be looking at operating profit guarantees of $16 million again plus or minus. I don't want to give you a hard number because both of those numbers are subject to change, but just directionally that's kind of how we are seeing things. I think that as the Starwood acquisition gets fully integrated into the Marriott system that the focus is likely to change. Believe me, we're not going to take our eye off the cost side of it, but the focus is likely to change to yield index and improvements in the top-line we bought. We also see we think incremental benefits from the rollout of Marriott's enhanced reservation system going forward that's very early stages. So we are constantly looking at the next initiative that we can to drive top-line as well as bottom-line.

And just to clarify the operating profit guarantee, $16 million plus or minus obviously not a firm number yet compares to the $23 million in 2019, but not all of that goes into the comp hotels. So is it possible that the amount that's applied or attributed to the comp hotel base is actually up next year or will it be...

Now, we can get back to you on that one. I don't have the comp numbers in front of me right now for next year.

Okay. All right. Great. Thank you.

Thank you. Our next question will come from Thomas Allen, Morgan Stanley.

Hey. Good morning. So couple of questions on RevPAR. First your -- and you just had answered me was that ADR is still growing and occupancy is down a lot. I think there are a lot of dynamics at play. So can you just talk about why that's happening?

I'm sorry, Thomas. Could you repeat the question? Why...

When we look at first half RevPAR, right your occupancy is down a lot, but your ADR is up. I think there are a lot of dynamics that's driving that. But I just want to kind of hear from you why occupancy will be down and rate will be up?

Well I think what has happened -- so let's take New York for a minute and just focus on that market. And then we can also talk about Seattle to say it's the same dynamic, but it's slightly different. Both of those markets have a lot of new supply. New York's new supply is I think it will be our forecast 28,000 rooms coming online this year – 28,000 29,000 rooms. Seattle just had a 1,300 room hotel opened in downtown Seattle. Seattle had less city-wides over the course of the year. So some of the lower-rated transient business did not show up in Seattle as well. And the same thing in New York, we saw lower-rated transient business not show up in New York. Both of those markets are driven by international inbound travel. We had seen a decline in international inbound travel from -- in particular from Canada and Mexico. And I think that's why you're seeing occupancy decline, but rates go up.

That's helpful. So two follow-up questions actually on the same topic. So first is can you quantify what international inbound travel is declining? And then second, just when you think about guidance and Michael in your prepared remarks you said that the midpoint of guidance implies that second half is in line with the first half like it feels like things have deteriorated in the past few months. And so are there things that are kind of supporting and that's adjusting for the Marriott renovation guarantees? Are there things that are supporting the second half from like a comparability standpoint or anything else that should kind of stabilize RevPAR versus continue to deteriorate? Thanks.

With respect to international inbound Thomas -- very fine market obviously, but year-over-year according to the data from U.S. travel is flat.

And then look Thomas as it relates to the forecast, I'll point you a couple of things. I mean, first of all, I'll start with it actually would be a record group room nights and we get 90% of our business -- we will give you the update on kind of how we're looking for 2019 and we get the 90% of the business on the books start there. And second, we spend a lot of time with our properties in the past -- over the past month or so really understanding what they're seeing in the individual markets? What they're seeing within their comp set? And how they're competitively positioned? What they're and certainly what those markets individually are experiencing. As we talked about, New York and Seattle were big drivers of the quarter. New York in particular, where I think, you get into sort of May. I think everyone was almost surprised by that market in particular. And so, as we thought about forecasting it was very much and sort of detailed bottoms-up analysis with our properties. Very thoughtful about the direction that thing has been heading in the past, couple of months. We carried that direction forward, and -- but certainly did not bring it down further, assuming a further decline. Beyond the type of -- the type of that we've been experiencing over the past few months. Again, I think we've seen from a lot of other companies as well, is getting the information we have in front of us today. And the outlook based on what we've seen over the past couple of months. And we shared that forward. And we think we were in pretty conservative in our outlook.

Excellent, thank you.

Thank you, Shaun.

Thank you very much. Ladies and gentlemen, at this time we have no further questions in the queue. So I'd like to turn this conference, back to Mr. Risoleo, for any closing remarks.

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

Thank you very much. Ladies and gentlemen, at this time, we'll now conclude today's conference. You may disconnect your phone lines. And have a great, rest of the week. Thank you.