Good day. And welcome to the Host Hotels & Resorts Fourth 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 yesterday’s earnings press release, in our 8-K filed with the SEC and in the supplemental financial information on our website at hosthotels.com. 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’d like to start by expressing my heartfelt condolences to Ernie’s family and to our friends at Marriott. I have known Ernie for 25 years and found him to be one of the most authentic, engaging and caring leaders in the lodging space. A visionary leader, a loving husband and father, and a respected colleague and friend, Ernie will be deeply missed and is leaving a lasting legacy within our industry and all the lives he has touched. Host has emerged from the most challenging year in lodging history as a stronger company with robots long-term growth prospects. Our hotels have streamlined their operating models and minimize operating expense growth from second quarter lows, while accelerating RevPAR from $9 in April to approximately $42 in January. As a result, we have cut our hotel level operating loss by more than half from $163 million in the second quarter to $75 million in the fourth. We have also achieved breakeven or positive hotel level operating profit at 20 hotels representing 24% of our rooms in the fourth quarter, a sharp increase from 14 hotels and 13% of our rooms in the third quarter. Additionally, we’ve invested in our long-term growth and enhance our ability to gain and retain market share by continuing to upgrade several significant hotels and delivering the new AC Hotel Scottsdale North. Moreover, we’ve entered 2021 with $2.5 dollars of total available liquidity. Our investment grade balance sheet has been further strengthened by opportunistic asset and land sales at pre-COVID-19 valuations and debt refinancing that has pushed our earliest maturity to late 2023. Last week, we announced a best-in-class second amendment to our credit agreement, which provides us greater flexibility to acquire hotels early in this new…

Thank you, Jim. Good morning, everyone. Following the revenue related green shoots Jim details on group bookings and transient demand, I would like to give you a better sense of how we expect property level expenses to trend relative to revenues this year. Since the start of the pandemic, we have worked closely with our property managers to aggressively limit costs and evolve the operating model to adjust for the business environment. In the fourth quarter, excluding service, property level expenses were approximately 65% lower compared to the fourth quarter of 2019. Including wages and benefits costs, variable expenses were roughly 82% lower year-over-year, broadly in line with RevPAR declines of 79.7%, while fixed expenses were approximately 47% lower. Variable expense reductions have consistently been in line with overall revenue declines through the downturn. Fixed expenses that are somewhat associated with business volume, such as maintenance, marketing and utility costs, saw a dramatic reduction in the second quarter and have slowly increased as business improved through the back half of the year. Brand programs to services, such as above property sales offices and IT has seen material reduction, as our operators have restructured their shared services organization. Finally, costs below the gross operating profit line which include taxes and insurance and are traditionally completely fixed saw modest reductions in the fourth quarter due to one-time credit, such as operating profit guarantees associated with the Marriott Transformational Capital Program. As a result of our property and brand management teams efforts to ensure that cost growth remains in line with slowly improving revenue, our quarterly expense reduction ratio, which measures the year-over-year decline in property level expenses divided by the year-over-year decline in total revenues was fairly stable at approximately 0.8 in the second, third and fourth quarters. This means that for…

[Operator Instructions] And our first question is from Smedes Rose with Citi. Please proceed with your question.

Hi. Good morning. Jim, I wanted to follow up on your commentary around a pipeline like of an interesting and actionable properties and that sounds like quite a bit of a change from your last call and I just kind of wondering if you could talk about what’s causing more opportunities to come to light for you? And maybe you could just kind of touch on how you’re thinking about underwriting those properties as we move forward?

Sure, Smedes. Happy to address your question. I think what has changed is the simple fact that a lot of owners of hotels who were holding off bringing their properties to market have now started as we have messaged today to see light at the end of the tunnel here. I think that you can tell from our commentary and from our release that we feel confident that assuming the vaccine continues to be rolled out and there isn’t any disruption due to new variants being found, which it doesn’t appear to be today anyway. It’s a beginning of a new cycle and there are a lot of buyers who sat on the sides -- sidelines to wait for the time when there might be more buyer interest and we’re starting to see that now. And the pipeline has truly meaningfully expanded between the fourth quarter and the early part of this year. So when I say there are actionable opportunities. These in many instances are private owners who have wanted to monetize their investment for one reason or another, modestly along the lines of distress, there’s not that much distress out there. But we are seeing owners who say this is the time and this is the time to take these assets to market. I don’t think that there is a lot of just price analysis occurring, based on the conversations we’re having. These are people who really want to sell their hotels. Now, we are in a really unique position, given the fact that we have $2.5 billion of cash and we have the ability to acquire up to $2 billion of assets out of existing liquidity, subject to maintaining $600 million of liquidity inside the company. And that gives us the ability to go out and buy…

Great. Appreciate the detail. Thank you.

Sure,

Our next question is from Robin Farley with UBS. Please proceed with your question.

Great. Thank you. Jim, I was interested in your comment about looking outside of the top 25 markets now, when you when you think about acquisition. Would that still be urban? Are you thinking more resort and if -- as kind of part of the same question, I’m just wondering when you talk about IBM Watson, is there some risk with that the data points that are -- that AI would think these data points are going to continue that are really driven by temporary dynamics. And that we know will be temporary and the things that will change, but it wouldn’t necessarily be obvious to a machine predicting based on data points from the last two years. I guess, just thinking about that with that market you’re looking at? Thanks.

Yeah. Let me start by addressing IBM Watson, Robin. It’s a powerful tool for us. It does give us an opportunity to evaluate markets through predictive analytics. As I mentioned, I will say that it’s one tool that we use. We are still substituting. We will never substitute IBM Watson for our judgment on what we see happening in markets. And so it takes into account a lot of data. I mean, we have always looked at structured data and we continue to do that. IBM Watson looks at unstructured data. And yes, the world has changed, but I think that the unstructured data is out there and we’re very fortunate to have a tool like IBM Watson to capture that data. Additionally, as we think about markets, we are looking at markets where we believe that we can acquire hotels that will allow us to grow EBITDA at a higher level than our existing portfolio of assets. So in addition to looking at topline, we will be studying in detail the expense profile of each hotel. Because it’s critical that, yes, you have strong revenue management and you have the ability to sell your property, but it doesn’t do you a lot of good if you don’t have the flow-through. So controlling expenses is absolutely critical to how we look at properties going forward. I will tell you that one of the reasons we’re looking at markets outside the top 25 today is because we think that expense growth at least for the near-term is likely to be higher in major urban markets, as we come out of this, just given cost pressures that the urban markets are facing today. So further to answer your question, resorts -- I think our resorts story is incredible. If you look at the statistics, the RevPAR index here is, we’ve been able to achieve on the 16 resort properties we have and if you look at specific resort markets, like, Miami, The Gulf Coast of Florida and Phoenician, we couldn’t be more pleased with how our resorts have performed. So, yes, there’ll be at the top of the list. But I would tell you, more importantly it’s going to be assets where there are multiple demand drivers. So we are going to continue to look for properties where there’s a mix of business transient, leisure transient and group. We are strong believers in having diversity of demand and giving us the ability to pivot from one type of demand to the other depending on market conditions.

Okay. Great. Thank you very much.

Our next question is from Neil Malkin with Capital One Securities. Please proceed with your question.

Hey. Good morning, everyone. Hey, Jim, I think, it’s a good idea to generally avoid the markets where you have that ridiculous union pressure, making it unprofitable to operate. My question for you is on Hawaii, it’s a big part of your portfolio. Maybe I think it’s your either one or two largest market. I think that was actually one of the saving graces or at least relative to our expectations. ADR was very high, even though occupancy was around sort of a portfolio average. Can you give us an update on sort of how you see Hawaii playing out in terms of demands, sort of pent-up demand and then like maybe what the Asian travel kind of story or timeline looks like to that market as well?

Sure, Neil. We are -- our EBITDA in Hawaii is concentrated in three terrific hotels located on Maui. The visitation to Maui is driven by domestic U.S. travel. It’s really not driven by Asian travel. Asian travel is heads to a Oahu and the Big Island of Hawaii, predominantly, not on Maui. So, the ability that we have had on Maui to hold rate and to see rate pacing, total revenue pace up 11% in the back half of 2021, I think speaks loudly to the desirability of Maui in our resorts in particular. So we actually figured out how to navigate the testing requirements and the other requirements the State of Hawaii had put in place and took a family vacation to Maui over Christmas. And even though occupancies were very low, ADRs were very high. So I think that we are going to continue to see Maui and Hawaii travel increase, particularly as the vaccine gets rolled out. What’s apparent to us is that there is incredible pent-up demand out there, particularly on the leisure side and the amount of money that has been saved as a result of the various restrictions and lockdowns and the fact that people aren’t going to the office and they’re not commuting, they’re not going out to lunch, people aren’t going out to dinner is pretty incredible. So we will continue to see Hawaii grow over time. And the other data point that is just very, very encouraging is what we’re seeing with respect to villa bookings at the Andaz, the fact that we had a $3,700 ADR during the month of December for the villas and how we’re getting incredible demand on our 19 new villas that aren’t even complete. So we’re bullish on Hawaii and we think that leisure is going to really continue to carry today as we see business transient and group evolves.

Thank you.

Our next question is from Michael Bellisario with Baird. Please proceed with your question.

Good morning, everyone. Jim, you give a lot of…

Hi, Mike.

… input -- hi. Just question for you on the leisure side, you gave a lot of detail specifically on leisure heavy markets and then doing so well. Maybe can go the other side of the coin, what’s the update? What are you seeing in your coastal urban markets, both from a group and transient perspective? And then you mentioned the sequential BT uptick, is that occurring in any of these more impacted gateway markets?

Yeah. I’ll take part of this. I’m going to ask Sourav to also provide some commentary on it as well. So not surprisingly, the urban markets are still in very various stages of restrictions. As an example, in California, you still have, certainly, in Los Angeles County, I don’t know about San Francisco, but in LA County, in indoor dining is still closed. So you have the ability to eat outside of the restaurant, gyms are closed, the other amenities like hair salons, nail salons are open, but with 25% capacity. New York, as an example, Broadway is closed. They’ve opened up indoor dining. So until we see services returned to normal and we’re hearing that Broadway could open up soon. But until we see services returned to normal, I don’t think you’re going to see a lot of demand in the coastal markets. Sourav, you want to touch a little bit on BT trends?

Yeah. Sure. On the BT front, not as much demand, as you would expect right now in the coastal urban markets. We are seeing some demand as relates to consultants. So that Deloitte PwC’s of the world, as well as some project teams that are certainly going to these markets as well, obviously, some government and government contract business as well. So, at the end of the day, when you think about it, the offices really need to open up and the companies need to get comfortable with their folks traveling on business. And when that does happen, that’s when travel -- BT travel will be coming back in a meaningful way. And as Jim mentioned, just given the cadence of the recovery that we’re seeing with the vaccine administration across the U.S., that poses really well and we’re optimistic that recovery is going to occur sooner rather than later. I would mention just one thing on the group front is we did do future bookings of about 73,000, room nights from 2022 and beyond. And the encouraging sign there is 30% of that 73,000 room nights was made up of Boston, New York and Seattle. So those are, again, obviously, urban markets and that’s an encouraging sign for the future.

Okay.

So, Mike, the other thing I would add here and this will impact the urban markets. We’ve had conversations with our managers, obviously, around a lot of matters. But in particular, when we’re talking about BT, we are of the opinion that we might see 50% to 60% of corporate travel returning by quarter four this year. So that’s an encouraging sign for us. The other encouraging sign is that most special corporate accounts have held rates flat in 2021 versus 2020, and if you recall, 2020 was flat to 2019. So that’s a very encouraging sign that corporate accounts aren’t pushing back on rate when they’re negotiating. So there are a lot of green shoots out there, and again, not to keep talking about the vaccine, but it’s all dependent on the country getting vaccinated and us achieving herd immunity and offices opening up and people getting back on the road.

Perfect. Thanks for the follow up.

And our next question is from Shaun Kelley with Bank of America. Please proceed with your question.

Hi. Good morning, everyone. I wanted to dig in for a moment on one of Sourav’s comments, just talking about the flow-through kind of coming out of this crisis and thrive, appreciate you kind of trying to put that into terms that I think we’ll understand as analysts. I just want to sort of reframe it a little bit, I think, what you said was, you could expect for this year something like $0.65 to $0.70 on the dollar of rev of like, let’s call it, revenue, flowing through to the bottomline. So one is just to clarify, am I thinking about that correctly. And then two, if I am, if we go back and look, I believe the flow-through rates, let’s go back to like 2009, 2010, at least as an industry they were decently lower than that and I believe what happened was occupancy hadn’t fully recovered yet. And so it took a little longer to hit, there’s really high flow-throughs, because first, you’re filling up, yeah, there’s more variable expense attached to that. And then it’s really the rate portion of the equation that drives the higher flow-throughs. But is that going to be -- is that equation going to be a little different this go around and/or could you see higher flow-through as rate actually starts to come back as well? So just maybe help us break that down a little bit?

Sure. Thanks. So let me just give it, I think, give an example, so let’s puts the numbers into perspective. If you just take the Smith’s Travel numbers for 2021, they’re estimating RevPAR down to 56%. What we’re saying with this expense ratio and let’s take the midpoint of what we’re saying between 2.65 and 2.7, that’s 0.675. What we -- if you take 0.675 and multiply that by 56%. All we’re saying is that expenses would reduce by 37.8%. That’s what we were saying is the -- to the midpoint in 2021. We have not seen this from the last downturn where we went -- had a ratio of as high as 0.8. It got as high as 0.69 back in 2009 relative to the peak and that would every subsequent year, obviously, that ratio starts going down as expenses are coming back. So this time around, definitely more incremental expenses are being taken out. So you would expect better flow-through to your point as ADR starts coming back in a meaningful way. And the quicker the revenues come back, the better the flow-through will be, because you would also be having the benefit of expenses not growing at inflation over multiple years, so the sooner revenues come back, the better flow-throughs going to be, the quicker you would have margin expansion. Hope that makes sense?

It does. Thank you very much.

And our next question is from Lukas Hartwich with Green Street. Please proceed with your question.

Thanks. Good morning.

Good morning, Lukas.

One of the lines that -- hi, Jim. One of the lines of the AC hotel development in the Phoenician land sale, I’m just curious if there are more opportunities in the portfolio to unlock hidden value that maybe aren’t apparent to us in terms of the disclosure that we get?

Sure. There are, Lukas. And we are very thoughtful about having conversations with respect to value enhancement opportunities until our projects are permitted and are designed and are underwritten, and that is one of the reasons why we were really happy to share with you today, in my comments, what we’re doing at our Ritz Carlton in Naples. So the ability to truly create what we believe based on our underwriting is a 12% cash on cash return on that value enhancement opportunity addition -- in addition to really truly increasing the underlying value of that hotel through the repositioning of it, the addition of suites and the refresh of the guest rooms and the bathrooms in a luxury resort is very attractive to us. And we are working on a number of additional opportunities to either add rooms at properties where we think it makes sense to take excess parcel of land where it makes sense and develop a select service hotel on it. So, the short answer is, you’ll be hearing a lot more from us over the course of time as we move through the entitlement process and as we complete our design, costing and underwriting. And it’s -- we have a whole team in designing construction who was on this. We are in the unique position as a company, because we have an integrated workforce, with designing construction, asset management, enterprise analytics investments and the like within the company to do this sort of work. So we’re excited about it. It’s a key focus for us. We think that many times it’s -- you’re in a better place to invest in your own assets than you are to make acquisitions. That’s not saying that now is not the time to make acquisitions, it is, but we’re going to continue to invest in our properties as well.

Make sense. Thank you.

Our next question is from Anthony Powell with Barclays. Please proceed with your question.

Hi. Hello, everyone. Just a question on, I guess, competition for transit -- for transactions. It seems like the resort and Sunbelt opportunity seems to be very popular right now. Do you see more competition for those hotels versus maybe recovery plays in urban markets and how do you think cap rates are going to trend between kind of Sunbelt resort, urban group and urban guests visit transit hotels and how do you view cap rates going in as part of your underwriting as you look to buy hotels this cycle?

Anthony, I think that, it’s -- cap rates are one metric of the underwriting, obviously, by and large, there aren’t many hotels out there today that I would deem to be stabilized operating -- that have stabilized operating models, as we’re looking at them. We obviously look back at 2019 and get a sense of how the asset would have traded at that point in time with the cap rate might have been back then and apply that to the pricing expectations that a seller has. And it’s just -- it is -- it’s all over the Board today. So we’re seeing certain assets that are going to trade at a discount to pre-COVID pricing. We’re seeing assets they’re going to trade at pre-COVID pricing. So cap rate is one metric that we’re looking at. But we’re also looking at how quickly we think we can stabilize the asset with the EBITDA growth will be -- what that EBITDA multiple is going to look like with a discount to replacement classes, supply demand factors at any given market. It’s just a number of different things today. I mean, there’s not one way that you’re going to underwrite a hotel in this environment. I will tell you that it’s -- if you think about a bar, so it’s multiple dates on the store, its cap rate is one, EBITDA multiple is another, replacement costs is yet another and demand trends in any given market. So there is not one way to do it. We’re taking into account a lot of different things in our underwriting model.

Got it. And what about competition, do you think it will be easier to maybe buy urban hotels this time around than the resort properties that are popular right now?

I think it’s too soon to say that. Clearly, the urban markets are going to recover. It’s just a question of when the restrictions are lifted, when people get back to work, when international travel starts coming back into the U.S. So I would not right off the urban markets. But they’re going to recover a little slower than the resorts and in certain other markets just given the dynamic that I’ve referred to.

Yeah. Right. Thank you.

And we have reached the end of your question-and-answer session. And I’ll now turn the call over to CEO, Jim Risoleo, for closing remarks.

Well, thank you, all for joining us on the call today. We really appreciate the opportunity to discuss our fourth quarter results with you and we look forward to talking with you over the coming weeks and months, hopefully in person. Please stay healthy and positive and have a great day.

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