Good day and welcome to the Host Hotels & Resorts Third Quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Tejal Engman, Senior Vice President of Investor Relations. 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 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're 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, cash burn, and hotel-level results. You can find this information, together with the 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 website at hosthotels.com. Participating in today's call with me will be Jim Risoleo, President and Chief Executive Officer; and Sourav Ghosh, Executive Vice President, Chief Financial Officer and Treasurer. And now, I'd like to turn the call over to Jim.

Thank you, Tejal, and thanks everyone for joining us this morning. I hope all of you and your families remain safe and healthy. Over the last several months, we've transitioned from responding to the challenges posed by this pandemic, to rebuilding our business within its confines. To that end, I would like to highlight three key achievements since our last earnings call. First, we've achieved gradual but steady revenue growth, with our portfolio delivering sequentially higher RevPAR each month from a historic low of approximately $9 in April to a preliminary estimate of $37 in October. Although third quarter and October RevPAR remained more than 80% lower year-over-year. Third quarter revenues grew over 90% quarter-over-quarter, as our operators maximized their efforts to access all potential sources of wholesale demand, which continues to gradually increase. Second, we have reduced our third quarter hotel-level operating loss by approximately 40% from second quarter levels, including the benefit of a $23 million employee retention credit. Based on third quarter results, and excluding the employee retention credit benefit, we have reduced our monthly ongoing hotel-level operating loss by approximately 25% on average compared to the second quarter. Our sequential revenue growth has flowed through to our bottom line, as our operators have continued to do an outstanding job of minimizing expenses. Finally, we have further strengthened our robust liquidity by raising over $600 million of capital through opportunistic asset sales and debt refinancing and repayments. As a result, if fourth quarter operations are commensurate with the third quarter, we expect to end the year with approximately $2.4 billion to $2.5 billion of total available liquidity, including cash and FF&E reserves, with no debt maturities until 2023. As we enter the ninth month of the pandemic with daily COVID-19 case counts in the United States near…

Thank you, Jim, and good morning everyone. Building on Jim's comments, our third quarter top-line performance improved from the historic lows reported in the second quarter. RevPAR for the third quarter declined by 84.1% year-over-year compared with a 93% year-over-year decline in the second quarter. Year-over-year occupancy and ADR declines both improved on a sequential basis as we reopened 20 hotels in the third quarter and summer leisure travel bolstered overall hotel demand. Compared to STR Data for U.S. upper tier hotels in our top markets, our total portfolios ADR declines were 150 basis points better than the industry's. We outperformed on average occupancy in 11 of our top markets in the third quarter. However, our overall occupancy declines were 370 basis points greater than STR, primarily because our portfolio has more hotels in prime, downtown location than the industry does. Notably, our RevPAR was in line or better than the industry's in our resort oriented markets such as Jacksonville, Florida Gulf Coast, Miami, Phoenix, and Hawaii, as well as in Northern Virginia and New York, where we benefited from crew business and corporate room blocks. Our operators continue to be able to preserve and in some cases to even exceed rates versus the same time last year at properties that are high in demand, especially on strong compression dates such as national holidays. For example, our Florida Coastal Resorts delivered 22% year-over-year ADR growth in September. In general, rate doesn't appear to be driving occupancy to the extent it normally would in a downturn. Customers are more sensitive to cleanliness and sanitization standards than to room rates. We therefore remain hopeful that rate degradation will be less severe than in prior downturns and that branded hotels will benefit from having stringent cleanliness standards to help gain customer trust and…

[Operator Instructions]. Your first question comes from the line of Rich Hightower with Evercore. Please proceed with your question.

Hey, good morning, good afternoon, as the case may be you guys.

Good morning, Rich, good afternoon, as the case may be to you.

Exactly. A lot of ground we could cover here, but I guess one question I want to talk about, maybe the impediments to stronger sort of group business bookings, as we think about the second half of next year and beyond. And if you had to sort of weight the different factors that might be holding that back, I mean, is it public health or is it sort of corporate profits, and companies thinking about their budgets, I mean between those two or maybe other factors, what do you think might be the biggest hindrance at this point? Thanks.

Yes, Rich, Sourav can jump in on the way here. I'll start. I think it's the whole backup routine, generally in bookings, both on the business transient side and the group side is related to a couple of things. Number one, government restrictions and that's being driven by public health concerns. So I think we -- as we've talked many times, we're not going to see business return to any sense of normalcy until we have an effective vaccine or vaccines or therapeutics combined with the vaccine. That said, we did talk about -- I think Sourav talked in his comments or maybe it was mine about what we're seeing happen next year with respect to group cancellations. It's clear to us with Connect 2020 being held at Orlando World Center, the meeting planners want to get groups back on the road and in hotels, it's very important for associations to meet and for corporate groups to come together as well. So our mix from 2017 into 2019 average mix, group business was roughly on a revenue basis, call it 35% Association, 47% corporate, and 18% other, which is really smurf. I would tell you that, we're seeing a strong desire on the part of association business to come back, and we're all praying that we have an effective vaccine. So we can talk about how group pace is looking into 2022 and beyond. And I'll let Sourav take that.

Sure. So, Rich, I think more than pace, what we're focused on right now as we've talked about last quarter was really the tentative booking which was waiting in the sidelines because pace obviously as you would expect is down because of the uncertainty. But the tentative bookings have really pushed to the second half of next year. Right now, our tentative revenue on the books is up 32%. But clearly, people do want to meet, it's just a matter of like Jim said, when they're comfortable traveling again, and that's obviously a broader concern. The other stat obviously we did book, which is encouraging, we booked 300,000 rooms in the third quarter for 2022 to 2024, so for future years and compare that to same time last year, it's only down about 45,000 rooms. And from an ADR perspective, the other encouraging thing is ADRs for the rooms that we booked is less than a point down to same time last year, so again, encouraging trends when you look out into the future.

Your next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.

Hi, good afternoon. Question on transaction, do you still think that you'll see an increase in activity in the overall environment for transactions in let's say the first half of next year and a lot of your peers have talked about structures like JVs and club deals and other kind of alternative ways to start acquiring hotels? Would you consider those, as you start to ramp-up your activity?

Anthony, I think we would be very open to exploring club deals and JVs off-balance-sheet format if it made sense to us. We're in a unique position where under our existing credit facility waiver agreement, we can acquire up to $1.5 billion of hotels that have existing liquidity subject to maintaining $500 million of liquidity in the company. And as we discussed, we expect assuming that the fourth quarter trends mirror the third quarter trends and we're very pleased with how October has played out that will have $2.4 billion to $2.5 billion of available liquidity at the end of this year, taking us into next year. So I think that not only our club deals available. As you know, we were very successful in putting together a club deal in Europe with GIC and APG, the Euro JV where we acquired over 20 hotels as general partner and we would be very happy to do something like that again in the U.S. if the opportunity presented itself. One of the other distinguishing factors that we have available to us on the acquisition side is the ability to issue operating partnership units, that is truly distinguishing given the liquidity in our stock. And just the share of, I think we're trading on average now close to 14 million shares of stock a day. And it gives an owner the opportunity to provide some liquidity, but to provide the upside as well, going forward. So provide the upside in Host as our EBITDA continues to improve and our stock price continues to improve as well. So, to answer your question about what do we expect to see, every indication is and we're talking to a lot of people about this. Every indication is that come the first half of next year, as forbearance periods weigh, start to expire. And as owners who are in the unfortunate position where they don't have the liquidity, or they choose to not fund debt service payments and other expenses, we expect to see a significant number of properties come to market. So the answer is yes to both your questions.

Your next question comes from the line of Dori Kesten with Wells Fargo. Please proceed with your question.

Hi, thanks, guys. You detailed in your release your reasoning for drawing down your revolver in the quarter. And when would you expect to be out from under that bond covenant minimum? And are there any other similar constraints that we should be keeping an eye on at this point?

Dori, it's awfully difficult to speculate when we would be out from underneath debt incurrence test. I think a lot of it is going to depend on how quickly we have a vaccine and how quickly it's rolled out to the public. And when businesses are comfortable sending people on the road, which as I -- you know, in answering Rich's question, I mean we have a lot of government restrictions out there. We're going to have to see the restrictions loosen, and I don't think that various government authorities are going to be prepared to do that until we have a vaccine. So the short answer is, we don't know, whenever the debt incurrence test will -- we will come back in compliance with the debt incurrence test. We don't have any other issues that you should be aware of today. We're in very good shape. We've done a -- I think, a very good job, an amendable job of raising another $600 million of cash this quarter and a very opportunistic and low cost way. So, we're today focused on reducing expenses, putting the portfolio in a position where we can outperform when the markets do open up and maximizing our liquidity.

Your next question comes from the line of Smedes Rose with Citi. Please proceed with your question.

Hi, thanks. This is Stefan [ph] for Smedes. You spoke a little bit in the opening remarks of the break-even rate. So in that scenario, would you be more focused on driving occupancy before stepping rate just given the cost savings you're targeting or and then just to that how are you also thinking about margin kind of with shift in the business mix? Thanks.

Yes, I'll take the first part and then Sourav can jump in. So clearly, our margins will perform better, if we can drive rate at the expense of occupancy, it will just provide for better flow through to the bottom line. And we won't have the incremental cost associated with housekeeping and other expenses associated with having more rooms occupied. That's not to say that we're not going to take every, every room night that we can. But as we think about margin performance, the better margin performance is driven by rate going forward. And, we're very, very pleased with the fact that we're not seeing the rate degradation that we've seen in other recovery periods. When we look at what happened after 9/11 and what happened after the Great Recession. So, fingers crossed that that continues to be the trend going forward. And I'll let Sourav talk a little bit about how we think about break-even occupancy and ADR.

So from a mix perspective, that was your second part of the question and how we're managing margins. Despite changes in mix right now the situation we're in is most of our revenues is coming in, is really rooms only revenue. So reality is whether we look at leisure business or group any business coming in because it's primarily rooms only. Our focus is really on expenses that can really reduce and drive higher margins at the rooms' level. Food and beverage outlets in a lot of cases are running in limited operations and as we have said before, before we bring back on any food and beverage offerings, we're ensuring it's actually profitable and we drive profit to the bottom line. From a margin perspective, it's obviously is a lower margin business, but at the end of the day, we're looking at EBITDA dollars, not necessarily EBITDA margin. So once revenues do recover and -- and we're sort of in a position where we're getting back to pre-COVID levels of revenue, then the focus will be on margin expansion. And as we have messaged before, we're really focused on driving the $100 million to $150 million of incremental EBITDA compared to 2019 levels. And we have made quite a bit of progress on that. And a lot of it is tied to the food and beverage department, where there's been significant level of management of reduction. The severance that we had in the third quarter is directly tied to reduction of almost 30% of management headcount, which we believe is going to be a permanent reduction going forward.

Okay, thanks. And then just one more on transaction, can you just talk about competitive positioning versus private equity or other additional kind of capital, just given basically higher leverage. And then as you think about potential acquisitions or dispositions, whether there's market you'd like to add exposure to or exit?

Yes, I'll take the second part of the question, first. We're generally market agnostic, we do believe that maintaining broad geographic diversification is a way to run the business. That said, some markets are going to open up better and sooner than other markets. So we will take all that into consideration in our underwriting criteria as we evaluate opportunities going forward. With respect to competitive positioning, I just make an observation that today, the debt markets are generally closed for the level of debt that private equity firms typically need to drive their returns there -- there levered returns in the high teens to low 20s or call it, mid-teens to low 20s. So we're not seeing any really competition out there today. In fairness, there's just not a lot of products on the market right now. I mean, we're evaluating every deal that we would deem to be attractive. We haven't come across anything that that meets our underwriting criteria, given the facts and circumstances of where we're in the cycle and in the recovery phase.

Your next question comes from the line of David Katz with Jefferies. Please proceed with your question.

Hi, good morning, everyone. Thanks for all the detail and thanks for taking my questions. And Jim, I will admit, I've gone back and forth just a little bit. But I wanted to just get your updated thoughts about discussions with the largest brands, and the degree to which they can and are reevaluating the value that they deliver and what you frankly, what you pay for it, and what we can recently expect to sort of come out of all this, what your view of success really is?

Sure. Well, I think what the brands deliver to us is a testament to the way we have been able to grow the business in a very challenged environment. And, we love the fact that the brands are listening today, and I'll let Sourav jump in on this in a few minutes. They heard us loud and clear, they heard us with respect to brand standards. As you know, that there are roughly 300 brand standards at the major brands, and that would be Marriott, Hyatt, and Hilton, and we have worked closely with them to reevaluate each of those standards going forward. And it relates to the most basic David, food and beverage offerings, when the restaurants have to be open, how long do they have to be open, what you have to offer to your customers. The fact that we're talking about and seeing and I'm going to let Sourav give a little more detail on this, and seeing a true reduction in expenses of between $100 million to $150 million based on 2019 pro forma performance, I think is a strong testament to the fact that the brands get it today. They're one with us when it comes to understanding the challenges that owners face. And we interface with both brands, our two major operators, Marriott and Hyatt on a weekly basis. So Sourav you want to talk a little bit about how -- what sort of progress we're making on $100 million to $150 million?

Sure, hey David. So I would start by saying that Marriott has actually restructured and reduced above property shared services, for sales and marketing, revenue management and IT and are right now working towards reductions of their program Shared Services fees for the following year. For this year, Hyatt has also reduced the fixed component of their above property IT costs by 15% and chain marketing fees by as much as 50%. And moving forward, they're really committed to making their fees more variable, so that the cost is actually tied to exactly what you were talking about the value proposition to the owner. In terms of the $100 million to $150 million the way we think about it is, we would expect that long-term, there'll be permanent reduction of the fixed portion of the above property cost by as much as 10% to 20%. So putting that into the context of dollars that would be somewhere between $20 million to $25 million of that $100 million to $150 million. Obviously, I would remind everybody that's tied to 2019 revenues. So assuming we get back to 2019 revenues, we'd be on the above property fees $20 million to $25 million of savings with a 10% to 20% reduction of the fixed piece of the above property costs.

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

Hey, good morning, Jim. So when looking at forward group bookings, I'm just curious, what the curve looks like? Is it a gradual rate of improvement in activity over time? Or is there kind of a point on the calendar where things really start to hockey stick?

Hey Lukas, right now. Sorry go ahead.

Go ahead.

I think right now, what's happening is even for future bookings, the encouraging thing like I was saying there is booking activity for future years; however their activity is definitely lower than what you would have expected, because there are folks waiting on the sidelines. That's why you have a lot of tentative bookings, but not necessarily definite on the books, looking at the future years. However, there isn't really cancellations that are taking place. And that's encouraging. It's just that the booking activity is somewhat sort of, I would say is slower than you would typically expect, because of all the uncertainty exists in the short-term.

Right. In terms of that tentative demand that's kind of waiting on the sidelines, is there a sense of knowing their mind? Are they thinking, well, third quarter next year is really fumble strongly consider booking some business. Is there some point in mind that these meeting planners where they're thinking -- where they're going to get serious about booking? Or is it kind of more of a gradual increase in just latency?

I think your third quarter timeframe is the right timeframe, Lukas. I mean, everyone feels that the first half of next year is going to be -- continue to be challenging. And that when we do get a vaccine, it's going to take some time to get it rolled out among the population. So people are looking at the second half of next year and beyond.

Your next question comes from the line of Chris Woronka with Deutsche Bank. Please proceed with your question.

Hey, good afternoon, guys. I was hoping to drill down maybe a little bit on the actual property costs. You guys cover a lot of ground on shared services and above property, but how much of an opportunity do you see on some of these labor initiatives like no stay over housekeeping and changing up some of the food and beverage operations, how much of that realistically do you think you can make permanent, are the brands willing to accept that or the customers willing to accept it?

I think on the housekeeping side Chris, it is really going to be opt-in to housekeeping services as opposed to opt-out going forward. And it's going to vary on, frankly, the type of property we have and the personal profile of the customer. There are going to be some customers, if they're staying at one of our luxury hotels, who are going to continue to demand housekeeping on a daily basis. And depending on different types of properties, customers may not very well, they may not want people in their rooms, to clean the rooms as long as they can get clean linens and towels and bathroom amenities that they need delivered to the front door. So, with respect to food and beverage, I think that we have seen a meaningful change on the F&B side going forward. I don't think you're going to see as one example, breakfast, buffets or likely hot breakfast buffets are likely to be a thing of the past. Hot offerings in the M Clubs and the highest concierge lounges are likely to be a thing of the past. So those are going to be permanent cost savings. I don't know Sourav; you have anything else you want to add, with respect to how we're thinking about the operating model?

Yes, I think the only thing I would add is what this pandemic sort of has allowed us to do is really look at zero-based budgeting and ground-up budgeting, and tie that with what the value proposition is to the customer and not only to the customer, but also from a brand perspective what the value proposition is to the owner. So at the property level, it's really understanding what the customer wants, and what the customer needs, and how we would shift the operating model based on that. So the minimum sort of base labor standards are being completely redefined. So going forward, and it's complete, it's going to be tied to what Jim talked about earlier is how brand standards get reevaluated based on customer preferences. So this is an opportunity where we’re able to actually do a zero-based budgeting roundup budgets to figure out what is the right labor model. And that's where we're pretty confident; we think we're going to get savings not only from a housekeeping perspective, but from food and beverage, particularly in the kitchen department, as well.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Jim Risoleo for closing remarks.

I'd like to thank everybody for joining us on the call today. As always, we appreciate the opportunity to discuss our results with you. I look forward to talking to you, we all look forward to talking to you next week or the week after at NAREIT and over the coming weeks and months. So please, everyone stay healthy and stay positive. We'll all get through this and I wish you all good day.

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