Greetings and welcome to the Host Hotels & Resorts Second Quarter 2020 Earnings Webcast [Operator Instructions]. As a reminder this conference is being recorded. I would like to turn the call over to your host Ms. Tejal Engman, Vice President of Investor Relations for Host Hotels & Resorts. Please go ahead.

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 Law. 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 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 in the supplemental financial information on our Web site at hosthotels.com. Participating in today's call with me will be Jim Risoleo, President and Chief Executive Officer; Brian Macnamara, Principal Financial Officer and Controller; and Sourav Ghosh, Executive Vice President Strategy and Analytics. And now, I'd like to turn the call over to Jim.

Thank you, Tejal and thanks everyone for joining us this morning. We hope that all of you are staying safe and healthy during these extraordinary times. The lodging industry experienced a challenging second quarter with record revPAR declines in April followed by a slight improvement in lodging demand through May and June, working with our operators we responded swiftly to the changing demand landscape by reducing our second quarter hotel operating expenses by 72% year-over-year. As states and markets began to ease their lockdowns, our portfolio achieved over 100% hotel revenue growth from the lows of $24 million in April to $49 million in June. Toward the end of the second quarter, we successfully amended our credit agreement and achieved outstanding terms that preserve our liquidity and retain our flexibility to capitalize on value enhancing investment opportunities. All-in-all, we emerged from the most challenging quarter on record for Host and the travel industry with significantly lower operating costs, greater balance sheet flexibility and access to $2.5 billion of liquidity. Starting with operations, our second quarter expense reductions and revenue growth were driven by exceptionally agile asset management and the swift reaction of our world-class operators. As lodging demand plumbed a record lows in April, we worked with our operators to suspend operations at 35 hotels, reduce hotel fix costs by approximately 50% and reduce overall hotel operating costs by 72% year-over-year. Cost savings were primarily driven by steep reductions and wage and benefit expenses and the fixed portion of above property allocated cost, as well as by suspending most brand standards and contributions to hotels FF&E reserve accounts. At operational hotels, our managers significantly scaled down operations by closing guest room floors and meeting spaces. When leisure demand began improving through May and June, we swiftly pivoted to reopen hotels…

Thank you, Jim. Good morning, everyone. Building on Jim's comments, the volatility in the second quarter was unprecedented as the demand landscape changed over the course of the quarter. Although, second quarter RevPAR declined by 93% year-over-year, it grew 133% from the depths of the crisis in April through the end of June, when 10 of our hotels exceeded or were close to achieving breakeven EBITDA. For the quarter, we delivered a RevPAR of over $14 driven by average occupancy of 8.8% and an average room rate of approximately $162. Total RevPAR of approximately $23 benefited from $14 million of mostly COVID related group cancellation and attrition revenues recognized in the second quarter, compared to $10 million of similar revenues recognized in the first quarter. In the second half of this year, we do not expect to recognize any further cancellation and attrition revenues related to the pandemic, as we continue to prioritize the rebooking of group business. Our second quarter results include a $45 million for health care benefits and special pay for the nearly 80% of hotel level employees that have been furloughed. We have accrued $35 million for that expense in the first quarter. In the second quarter, we accrued an additional $32 million for similar payments that will be made in the third quarter. The decrease in the third quarter primarily reflects the reopening of several suspended properties since April. As Jim mentioned, we work closely with our operators to reduce expenses and have realized a 72% decrease in second quarter hotel level operating cost. Our wage and benefit expands during the quarter was approximately 81% lower, excluding one-time wage and benefit related special cost. Our variable costs decrease 93% due to lower occupancy, while our fixed cost, including fixed wage and benefits expenses were approximately…

[Operator Instructions] Our first question comes from the line of Anthony Powell with Barclays. Please proceed with your question.

Hello, Good morning. Question on cash burn and capital allocation. How comfortable are you pursuing some of these opportunities like CapEx and acquisitions with cash burn at $50 million a month at the hotel level? Do you need to see cash burn come down more before you continue with your CapEx or would you consider maybe reducing CapEx, if cash burn want to stay to be levels for a long period of time?

Anthony, the way we're thinking about the business today is really quite simple, liquidity is king and we are being very thoughtful about how we're allocating funds for CapEx in 2021. We -- it's something we talk about as a management team all the time. And, if we don't see the situation improve, you can expect to see us cut back. With respect to potential acquisitions, although, from a capital allocation perspective, we have the flexibility to invest in up to $1.5 billion of acquisitions with existing liquidity subject to maintaining $500 million of liquidity. I'll make a couple comments with respect to that. Number one; there aren't many opportunities in the marketplace today. We expect to see investment opportunities the latter part of this year and into next year as special servicers and other lenders resolve issues with their borrowers and in some instances properties are going to come to market. In other instances properties are going to be recapped. But it's the same thought process with respect to buying hotels at this point in time. We have to be comfortable that we're going to have the right amount of liquidity to ride through the crisis.

Thank you. Our next question comes from the line of Michael Bellisario with Robert W. Baird. Please proceed with your question.

Good morning, everyone. Jim, you mentioned a big number of potential cost savings. Can you maybe give us some insight into the conversations that you're having with the brand and then how receptive they are to all those reductions that you listed?

Yes, I want to point out that the number that we discussed was between $100 million and $150 million in permanent cost savings. And we were very careful, Mike, to use the word potential cost savings, because we have to reach agreement with our operators. And it's going to take some time to implement the cost savings on a permanent basis. So, I would tell you that they are very receptive. I think you're going to see and you've already seen it at Hilton, as an example, a meaningful reduction in their corporate headquarters staff. I think you're likely to see it unfortunately, at the other brands as well. And those functions, in many instances relate to the shared services that are above property. And we think that there is a good potential that we are going to be able to achieve these cost savings overtime.

Thank you. Our next question comes from the line a Shaun Kelley with Bank of America. Please proceed with your question.

Hi, good morning, everybody. Jim, can you talked -- you talked about a sequential setback or downturn in your markets. Could you give a little bit more color there? Do you think we see in the industry data that the industry has leveled off, but we haven't seen really a step function lower in occupancy levels, even in some of the Sunbelt markets? For the hotel data, we probably see more abrupt turnarounds and restaurant and other data. So, you can just give a little, maybe a little bit more color about what you're seeing in some of those. I think you call out 30-markets where there has been some regression; just a little bit more color there would be helpful.

Sure, absolutely. Shaun, as we think about it, maybe we were looking at the potential performance in an optimistic way. Because of the forward bookings we saw for the 4th of July weekend in particular, and I'll talk about one market that from our perspective was very meaningful and that is Miami Beach. We have the one hotel South Beach; we opened that property in early June. We saw good forward bookings. And going into the 4th of July weekend, we expected occupancy in the 70% plus range, it didn't materialize because they-- the mayor shut the beaches, shut the bars. As we all know, there was a surge in cases in Florida, and we ended-up running around 20% occupancy. So I think there's good news and bad news and what happened there, but the good news is that there is a lot of pent-up demand and whenever the virus is under control, we fully anticipate that people are going to get back on the road and continue to want to travel and to have a good experience in a luxury property. Obviously, the bad news is, there was a surge in cases and there's nothing we can do about that. I mean, we're all waiting as a nation to get the pandemic under control. And I think everyone's waiting for an effective vaccine or vaccines, or therapeutic to allow people to get back to business. So other markets continue to do well over the 4th of July. As an example, the Ritz -- two Ritz Carlton in Florida, the Ritz Naples and the Ritz Amelia Island, both ran occupancies in the 60s, and achieved ADRs of $600. Those rates were higher than same time last year. So again, we think if we hadn't seen the surge in cases in Florida then we would have done better than we did at those properties. So if I talk about seeing a deceleration, it's really based on our expectations.

Thank you. Our next question comes from the line of Neil Malkin with Capital One Securities. Please proceed with your question.

Hi, everyone. Good morning. I just wanted to go back to a group commentary you made a statement about 2021 group bookings being below this year. Just maybe one to get some more color and make sure I understand that and then with the group, maybe talk about the landscape for maybe the back half of next year, either in terms of people who have canceled in 2020 or incremental people, groups were maybe getting optimistic on what next year to look like?

Sure. I think the message around group was that our total group revenue pays for 2021 is down high single digits for next year over the same period of time last year. And most of the cancellations that have occurred in 2021 have occurred in the first quarter. So the business is hanging in there certainly for the second half of the year. We all hope it's going to show up, we all hope by the end that we are going to have a vaccine and/or therapeutic and we'll continue to see groups want to get back into the hotels and have their meetings. Again, the positive is that our tentative business for 2021 is 30% over the same time last year. So that just goes to prove that there is a lot of pent-up demand. And we are fully confident that the group will recover. We've always said that the way this recovery was going to play out was drive to leisure transient first with business transient second and which group last and I think that's exactly how things are playing out.

Thank you. Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question.

Hi, good morning, gentlemen. Two-part question, one topic, which is long-term or permanent impairment. And the first part is on business travel, you sounded confident that you thought business travel would recover to previous levels and decided some historical information. But we've never really been stressed like this. And we've never had the technology that's been proven in such a way. So I'm just curious about your thoughts. Why we wouldn't see a 10% or 15% or 20% permanent impairment in business travel in the future? And the second thing is; are we seeing a long-term or permanent impairment in values of hotels in certain markets where the government reaction to COVID, the labor reaction to reopening might change investors' views? Thanks.

Sure. I'll take the second question first, Bill. I think it's too soon, really too soon to say what's going to happen to values over the long-term. I mean everybody in the public space is trading at a significant discount to replacement costs today. I think that we are probably less than 50% of replacement class. I mean we put some data on replacement costs in our investor presentation for everyone to see, and it's a very granular analysis that we provided. So some of the assets that are in the market today; at the height of the pandemic or trading a 20% discount to where they were valued at pre-COVID where they revalue February 1st. So I'm confident that that over time as cash flows recover, and as EBITDA recovers, that values for the most part across the country, will get back to pre-COVID levels and improve. I mean there are going to be some markets where-- I think it's going to be more challenging, quite frankly. And those are markets where you're still dealing with supply issues or you're dealing with high cost structures. And those assets might have a bit of a challenge maintaining their value going forward, but for the most part, I think we're going to get back to where we were pre-COVID and grow from there. And I'll just point out the fact that we have a very strong geographically diversified portfolio. So with no more than 11% of our EBITDA coming out of any one market. So we are very well positioned regardless of what happens going forward. And your question with respect to business transit, and whether or not business transit recovers to pre-COVID levels, I think that the technology has been helpful today. We're doing this on an earnings call and…

Thank you. Our next question comes from the line of Rich Hightower with Evercore ISI. Please proceed with your question.

Hey, good morning, everybody. So, Jim, just to just to follow up on the prior question, and maybe to combine it with another question on acquisitions. Look at some point. I mean, it's premature to maybe talk about this right now. But maybe sometime in the early to mid-part of next year, Host is going to have the flexibility to go on a shopping spree of sorts, certainly relative to several public and private peers. And so as you think about, what the portfolio looks like today, what you want to look like over the next 5 to 10 years, what's on your screen as far as that is concerned? And where's the puck going in terms of what Hosts should look like, again, and that sort of 5 to 10-year outlook as you think about what the portfolio needs to look like?

Yes, Rich, I think that you're going to see the portfolio likely look like it looks today, with a continued focus on upgrading the overall quality of the assets that we own. It is a - let me step back for a minute and just talk about how we think about the business today. Number one, I've already said it, strong geographic diversification we think is critical. And investment grade balance sheet, we think is critical, two really distinguishing factors. And the best portfolio of iconic and irreplaceable hotels in the industry, which we think we have today. So as we think about building the portfolio out over time, we like -- we talked about this. We like the model that we have with strong geographic diversification, with a business mixture differentiation in the hotel between a combination of leisure transit, business transit and group. So multiple demand generators and strong markets with high barriers to entry and that's how we would think about building the company over the next three to five years.

Our next question comes from the line of Lukas Hartwich with Green Street Advisors. Please proceed with your question.

Thanks. Good morning. Hey, Jim, can you provide an update on the competitive dynamics for hotels versus short-term rentals?

Sure, happy to. I would tell you that short-term rentals right now when I'm talking about Airbnb, in particular, have seen a surge and drive to leisure business. As you know, the same thing that we've talked about people wants to get out, and they have been driving to Airbnb in leisure and drive two leisure markets. Our point of view is as we start recovering, and markets start opening up, the urban markets in particular that are going to be more challenged. We think that the short-term rental business, some of the other platforms that are out there that were out there, I don't quite know what's going on with them, but Lyric and Sander and some of those, as well as Airbnb are going to face serious financial difficulties. And it's difficult enough for hotel owners that have well-heeled equity partners with them to work their way through this pandemic with literally no cash flow or minimal cash flow coming in. I think that issue is compounded by the individual Airbnb owners who have taken on a lot of debt, unfortunately and nowhere to turn, when it comes to servicing that debt. So I think you're going to see in the urban markets in particular, a recalibration of alternatives accommodations.

Great. And then do you expect hotels to permanently close in large numbers in markets outside of New York?

I don't know if I can say large numbers today. But I do think you're going to see a lot of hotels adapted for other uses in markets across the country. I think it's too soon to say, but there are markets that had excess supply coming into this pandemic. And those markets, I think, are going to be fairly challenged coming out. So I would expect that if people again, it's going to be dependent upon the wherewithal of the individual owners and what the dynamic and fundamental looks like on a market-by-market basis with respect to assets that may be taken back by lenders and what those lenders might do with those properties. And when they bring them to market whether the buyers going to continue to operate that particular facility as a hotel or look to an alternative use. So I do think it's a little too soon to say, but we would expect to see this happen across the country.

Thank you. Our next question comes from the line of Smedes Rose with Citi. Please proceed with your question.

Hi, thanks. Jim, you mentioned in your opening remarks that Host is less likely to have to issue equity, I assume relative to other hotel REITs. Could you just talk about conditions where you think Host would need to issue equity relative -- particularly I guess relative to maintaining and investment grade rating. Potentially not passing the revised covenants, which I know has been pushed out. I mean it's just -- maybe just talked in general about the potential to have to do that or want to do that?

Well, look, I mean, we think that we are in a unique position along with maybe one or two other REITs that are likely to have to issue equity just to delever the balance sheet. So, if we look at where our current leverage ratios are in credit covenants are today or even better go back and look at where we were at 2019. As we came into this year 1.6x leverage and interest coverage at north of 9x. We don't have to get back to 2019 levels to still be in a very strong position from a balance sheet perspective. So I don't see instances as I sit here today where we would have to issue equity to delever the balance sheet. We don't have to get back to 2019 levels to have a really strong balance sheet. We will be open minded around accretive investment opportunities and use our equity to pursue deals that makes sense for us. That will be accretive to our shareholders.

Thank you. Our next question comes from line of Chris Woronka with Deutsche Bank. Please proceed with your question.

Hey, good morning, guys. Jim, I was hoping to circle back to that some of the commentary about potential chain or cost savings on the management side coming out of this, does that potentially extend to just less brand managed hotels, fewer brand managed hotels? Or is there is there possibility of negotiating some of the kind of the base rate fees or anything like that?

Well, I don't know that it necessarily it -- I guess, Chris, what I would take from your question is that brand managed hotels aren't a good thing. That's not the way we view the world. We like the affiliation we have with Marriott and Hyatt; we think they do a fantastic job for us. We like their strength of their loyalty program and the strength of their group sales engines, in particular for some of our bigger hotels. That said I think that there are properties that are more fitting to be managed under a franchise operator model. Those would be the smaller hotels that they don't have a big group component. And I think the cost savings will come whether they're brand manager, whether they're franchise managed.

Thank you. Ladies and gentlemen, this concludes our time allowed for questions. I'll turn the floor back to Mr. Risoleo, for any final comments.

I'd like to thank everybody for joining us on the call today. I know these are exceptionally difficult and challenging times for all of you. We really appreciate the opportunity to discuss our second quarter results with you. And we look forward to talking with you in a few months to discuss our third quarter results. Hopefully, we'll be able to get together in person in the not too distant future. So have a great day and a great weekend everyone.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.