Good morning and welcome to the Host Hotels and Resorts ' Third Quarter 2021 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the call over to Jaime Marcus, Senior Vice President of Investor Relations.

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 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 EBITDA RE, and hotel - level results. You can find this information together with 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. On 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. With that, I would like to turn the call over to Jim.

Thank you, Jamie. And thanks to everyone for joining us this morning. Despite the Delta variant, we continued to significantly outperform expectations and meaningfully be consensus metrics during the third quarter. We delivered Adjusted EBITDA RE of $177 million, which exceeded our interest in capital expenditures by $21 million and adjusted FFO per share of $0.20 during the quarter. In addition to delivering positive metrics each quarter this year, these metrics continued to see meaningful sequential increases over the prior quarter. Proforma total revenues in the third quarter increased 25% sequentially over the second quarter, while proforma hotel-level operating expenses grew only 21%. The increase in revenues was driven by strong leisure demand at resorts and hotels in Sunbelt markets and Hawaii, which led to a $67 million increase in adjusted EBITDA RE in the third quarter compared to the second quarter. RevPAR for the third quarter was strong as volume improvements extended across the portfolio and rates held up in Sunbelt markets. While we saw softer demand at September due to Delta variant concerns, RevPAR for the quarter still improved by 26% compared to the second quarter. Our hotels saw a 49% increase in business transient room nights, and a 72% increase in group volume over the second quarter. Our recent acquisitions all contributed to the out-performance during the third quarter and are exceeding our underwriting expectations. Preliminary October RevPAR is expected to be approximately $143, a $15 increase over September, and the highest RevPAR we have seen this year. We believe RevPAR will dip slightly in November due to seasonality, before coming back in December. While much of the recovery was concentrated at resorts in Sunbelt markets during the first half of the year, our urban markets saw significant RevPAR improvements during the third quarter. At the start…

Thank you, Jim and good morning, everyone. Following Jim's comments, I will go into detail on our third quarter cash flow, operations, expenses and our top-line outlook for the remainder of the year. As Jim mentioned, we delivered positive adjusted EBITDA, ROE and FFO during the third quarter. In addition, we achieved an important milestone this quarter with positive cash flow for the first time since the onset of the pandemic. We delivered adjusted EBITDA ROE of $177 million, which exceeded our interest and capital expenditures by $21 million. We continued to benefit from quarterly sequential improvements with 65 hotels achieving positive hotel level operating profit compared to 53 hotels last quarter. Subsequent to quarter end, these operational improvements led us to another important milestone of exiting our credit facility covenant waiver period, 3 quarters ahead of its exploration, and coming into compliance with our bond indenture debt incurrence covenants. This reduces our $2.5 billion credit facility interest rate by 40 basis points and gives us greater balance sheet flexibility. Moving on to top-line performance. While our Sunbelt hotels and our resorts continue to drive results, the third quarter represented the best quarter of the recovery for non - Sunbelt and large group hotels. Multiple hotels achieved positive EBITDA in the Chicago, DC, Boston, and San Francisco. And all hotels in Philadelphia and Denver maintained positive RevPAR for the second quarter in a row. Our large group hotels in San Diego, San Antonio, and New Orleans also maintained positive EBITDA in the third quarter. Expanding on Jim 's business mix comments, our hotels saw business transient room nights increase 49% over the prior quarter, with a 5% increase in ADR to more than $172. even more encouraging is that 40% of those room nights came from our urban and downtown…

Ladies and gentlemen, the floor is now open for questions. [Operator instructions] Your first question for today is coming from Rich Hightower. Please announce your affiliation, then pose your question.

Good morning, guys. I'm still with Evercore ISI. So a lot of statistics thrown out in the prepared comments, so thanks for the detail there. Maybe give us a sense -- there's a lot of time spent on the improvement in the urban and downtown segments of the portfolio and maybe give us a sense there of where you stand in October. And I guess, even November so far in terms of rate and occupancy versus the same period in 2019. And do you expect those hotels to bridge that gap in the same way that the leisure and resort segments have already done? Do you think that that gap could be fully bridged sometime next year? Is that a 2023 event? How do we think about that? Thanks.

Yeah, Rich, I will -- I'll start here and then Sourav, feel free to jump in as well. The number that we provided for our October RevPAR is a preliminary portfolio number. And we do not have granular data at this point time on performance at the urban hotels versus Sunbelt leisure hotels. We did a rollout and we saw that $143 is a good number and that's the number we provided. So we're confident given the trajectory of the business return that we saw in the third quarter, in particular, that the business is going to continue to ramp. And the encouraging -- a lot of encouraging data points, as you said, in our prepared comments. But one of the most encouraging, with respect to the urban hotels, is the level of leisure business we saw come back to those properties as amenities started to open up, such as Broadway in New York, we saw the Boston Marathon, we've had really strong performance on the leisure side. We're seeing a lot of solid business transient come back to the urban properties as well. And that's business transient from our traditional -- more traditional accounts. The top 10 accounts that are household names, financial services, consulting defense-related businesses, government accounts. So we are very encouraged with the ramp that we're seeing occur to give -- go from 50% at the beginning of the quarter to 56% in occupancy at the end of the quarter, and see a nice uptick in rate is very encouraging to us. So as vaccines continue to be rolled out, we had good news. I guess was just yesterday, that adolescents are now approved for vaccines. So down to children now to 5 years older are eligible to get a vaccine. We think that's very encouraging. We feel that businesses are going to get back to work. They're going to open their offices. And there is clearly a pent-up demand on the part of businesses to get out on the road and meet people. We're experiencing it ourselves in our offices. The number of folks who want to come by and say hello face-to-face, really is testament to the fact that there's no substitute for in-person communication and in-person collaboration. Sourav, I don't know if you have anything else that we can add at this point in time.

Yeah. Hey, Rich, I can give us some color at least on the BT front as it relates to October, specifically. We do expect October to be the strongest [indiscernible] month for 2021, approximately 6000 room nights was all we have on the books for BT, and that's a 17% increase over September. If you recall, from the beginning of the year from January through July, we had about on average a 30% sequential improvement in BT room nights every single month. We saw a slight increase from July to August, and then a slight dip from August to September. But now we have picked up and back on the trajectory that we had seen early on in the year. So very encouraged. And as Jim talked about our overall BT rate is actually up 5% quarter-over-quarter, and that's holding strong. As it relates to 2019, we're about call it around 50% of 19 levels as we stand right now and we expect that to continue to improve with every single quarter going forward.

Perfect. Thank you, guys.

Your next question is coming from Smedes Rose. Please announce your affiliation then pose your questions.

Hi, it's Smedes with Citi. Sourav, you gave a lot of specifics around labor and cost ratios, which we'll probably going to look through in more detail. But I guess in general, I just wanted to ask you about the pace of labor costs, particularly for hourly workers, and tying that back to your initial cost savings [Indiscernible] you tell me if this is fair, but it seems that labor, it definitely moves higher than maybe what those -- some of those initial goals were provided. And I'm just wondering if it takes you longer to get said cost-savings target or have you just been able to offset and replaced the cost with other savings?

I'm sure Smith you are breaking up there a little bit, but I think I got your question. On the labor front. What I'll start off with sort of end with $100 million to $150 million that we may have messaged is when we were going into 2020, we were expecting higher than inflationary growth in a few of the Sunbelt markets, and that's obviously pre -pandemic. So as we went through the pandemic there were obviously the rate of acceleration in terms of wage growth in those markets went up. For the portfolios, I can give you some specific numbers here. For the portfolio, I would say, we expect a CAGR from 19% to 22 of about five to 7%. Now I would break that down between urban and Sunbelt markets. For urban, just given a lot of those are covered under the CBA, that would be around 3% to 4% CAGR from 2019 to 2022. In the Sunbelt, that CAGR would be about 6% to 8%. So again, the overall portfolio we expect that CAGR of 2019 to 2022 to be about 5 to 7. Now, as it relates to the 100 million and 115 million that we messaged, remember that was in relation to 2019 revenues and expenses. So reality is, depending on how quickly we get back to 19 levels of revenue, you can see all that benefit come through to the bottom line, obviously, depending on how much inflationary -- above inflationary growth we see in wages and benefits, it will be shaved off, and that will impact margin going forward. So hopefully that answers your question.

Thank you.

Your next question is coming from Neil Malkin. Please announce your affiliation, then pose your question.

Good morning, everyone. Neil Malkin, Capital One Securities, good to be with you all. Great quarter, great announcements. Jim or Sourav, I thought it was pretty impressive that you were able to keep your occupancy fairly steady through the third quarter despite the vicissitudes of the Delta variant impact on particularly the corporate side of demand. Can you just talk about how you were able to do that? And what things -- leverage you were able to pull or what came in better than expected, that allowed you to maintain those occupancies again, despite the dip in the middle of the quarter from a national level? Thanks.

Neil [indiscernible] we're very encouraged with the trend line that we're seeing going forward. And I think one of the most encouraging data points with respect to the second half of the year and the third quarter and the fourth quarter, was the fact that we were able to maintain 1.2 million group room nights on the books, notwithstanding Delta. So it just points out that there's a lot of pent-up demand in the economy, in general, people want to get back out, they want to meet, they want to travel, we have seen a little bit of a pullback as a result of Delta as everyone else did. But as the Delta trend line started to diminish and we got over the peak and new cases, and people saw that we were going in the same direction as countries in other parts of the world were, they got back on the road. So there's no magic to it. I think one of the -- and we've talked about this a lot. The quality of our assets is really second to none. And the fact that we have continued to invest capital in our portfolio, we think is going to be a true competitive advantage as business really starts to open up. I mean, I said it in my prepared remarks with respect to market share gains as we embarked upon the Marriott transformational Capital Program back in '17 and '18, we underwrote 3 to 5 points, pick up in RevPAR yield index. That was pre -pandemic. Now that we're going to have a portfolio that is largely refreshed, I mean, we have spent $75000 a key on the 21 properties that we referenced, 16 Marriotts and five other assets. We would expect that we'll continue to see strong performance going forward. And I'm optimistic quite frankly, that we'll pick up more than 3 to 5 points in yield index. So I think it's a combination of the quality of our assets to location of our assets. Our asset managers and enterprise analytics team working very closely with the best in the business. Whether it's Marriott, Hyatt, our independent managers that are out there Just really being very thoughtful about revenue management strategies and yield management strategies in getting business in the hotels while maintaining rate integrity. And I think that's a big -- it's another big story as we open up for business again. This pandemic and post-pandemic has been marked by material yield and ADR integrity as opposed to what happened coming out of the Great Recession. So we're able to truly asset-manage these hotels and revenue -manage them to maximize RevPAR. And I expect we'll continue to do that going forward.

Thank you and congrats on the quarter.

Thanks, Neil.

Your next question is coming from Bill Crow. Please announce your affiliation, then pose your question.

Hey, good morning. Jim, Just curious on the group side, I think yesterday Marriott suggested their group revenues on the books for next year are down roughly 20%, and I think you said your pace is down 46%, rate up just a little bit. Is it a locational issue, is it just the big city-wide, or what creates such a big gap between what Marriott was suggesting for their portfolio and you who own a lot of the Marriott group houses?

Bill, I don't know if anybody on Host team, I don't know if Sourav listened to the Marriott call. I did not hear what they had to say. But we are at -- for 2022, as we sit here today, we had 54% of our group room nights on the books for next year that we had relative to the same time in 2019 for 2020. So we're encouraged that that number actually ticked up from 50% at the end of our second quarter call to 54% now. So I don't know what Marriott said with respect to pace, but we're actually encouraged. I mean We have roughly 2.6 million group room nights on the books. And if we looked at the same period of time, quarter three 2019, for quarter three 2020, just to give you some context. And this is what we talked about last quarter. We had 68% of our actuals on the books at that point in time I think the real number to look at is 68 to 54. And That's the gap that we're working really hard to close. Does that answer your question, Bill?

Yeah, thank you. If I could just put a little bit finer point on it. How our New York and San Francisco, in particular, stacking up next year, on a group basis? And then maybe, Sourav, if you could just tell us how much cancellation and attrition fee income was included in the third quarter results that'd be great. Appreciate it.

Well, San Francisco is going to have a challenging 2022. There's no question about it. As we look at convention calendars for next year, San Francisco is very challenged. They're down at the bottom of the pack quite candidly. I think a lot of that has to do with the fact that they were the last major city to open their convention center. I mean, they didn't open their Moscone until September of this year. So San Francisco will recover. It's going to take time for San Francisco to recover. With respect to New York, New York is a tough market if you want to talk about city-wise, because they don't have a lot of city-wise in New York City. And what we're seeing in New York is the return of a lot of affinity groups, a lot of our corporate groups are coming back. And we're very encouraged with what we're seeing in New York, particularly as International Inbound comes back into that market. International Inbound in New York City accounts for about 12% of our business. So again, as the borders open up and it's early, but we are encouraged with what we're seeing in New York.

Hey, before I give you an attrition cancellation number, Bill on the group front, one thing I'll say is we obviously are expecting more in the year for the year bookings in 2022. While yes, pace is lower than what we had in '19 for '20, it's somewhat expected it just to given the skittishness in terms of booking, particularly with the blip that we had with Delta, we do believe a lot of those accounts are going to come out in the sidelines and then book in the year for the year. So we expect in the year for the year activity to be much greater than what we had seen back in 2019. And also sort of since the start of 2021, just to put in perspective, we booked 600,000 room nights for 23 to 25 and that's like a 20% increase since the start of the year. And if you compare that same time period, the 3 years from 19, that was a 23% for future years. So that we're doing really well. It's a matter of 2022, which we feel will do well in the year for the year. [Indiscernible]

Let me add one more data point, Bill, for your benefit. As we look -- because we spent some time looking at citywide for 2022. And if we look at all citywide markets, we have about 89% of -- the citywide calendar equates to about 89% of 2019 citywide. And we have obviously a number of markets that are going to outperform like Minneapolis, San Antonio, Atlanta, Houston, Chicago and Boston. And on down the line with, quite frankly San Francisco being at the bottom of that list. But there's a lot of good news out there as well. And sitting here today at 89%, again, makes us feel pretty good about how things are going to evolve. Sourav, you want to answer the question about attrition cancellation?

Yeah. We recognize $16 million of attrition cancellations for the quarter.

Sixteen, is that what you said?

Yeah, one six, correct?

Yes. Thank you. Thank you both for the time.

Your next question is coming from Thomas Allen, please announce your affiliation then pose your question.

Morgan Stanley. Sir just thinking about the fourth quarter of the RevPAR trends. You talked about November RevPAR dipping business seasonality than back in December. Can you just help us think about the outlook on versus 2019 level and how you see trends going forward?

So October number is down about 34% to 2019. I'll put this in perspective. I think November, sitting here right now, would get somewhere in the neighborhood of down $5 to $7 from October, and then December, close to October RevPAR. That's what we're thinking, as we said as of today, just based on the data that's available.

Okay. And then, I mean, typically you haven't given monthly. So is that implying on a versus 2019 level, things are improving as we got through the year, or do you [Indiscernible] and then my follow-up question that I'm going to ask is, the borders are opening next week for more international visitors, are you seeing a material benefit from that and bookings yet or is it too early to tell or too difficult to tell. Thank you.

We have gotten anecdotal commentary on that, speaking with some of our hotels in New York, as well as our San Francisco, I mean, international flight bookings are certainly up 15% since the announcement has taken place. So 6 weeks out from the time of the announcement, the bookings are up 15%. And specifically for San Francisco, that's up 34%, and that compares to what it was 6 weeks before that announcement. So it's encouraging from a hotel's perspective in New York, we've definitely seen a transient pickup and we can attribute pretty meaningful percentage to pick up from Europe specifically. But I don't have any hard numbers yet that I can share.

All right. Helpful. Thank you.

Your next question is coming from Dory Keston. Please announce your affiliation, then pose your question.

Thanks. Good morning. Wells Fargo. Now, that you've exited the covenant waiver period for your credit facility, what barriers exists for returning to paying the common dividend?

Hi Dori. The barrier than exist is our belief that we will see a sustained recovery and put us in a position when we start paying a dividend again, that we can maintain the dividend and increase the dividend on a regular basis. So we view paying dividend as one of the arrows in the equivalent of capital allocation.

and we realized that dividends are important to a lot of our shareholders. Our policy prior to the pandemic was to pay out 100% of our taxable income. As agreed, we have to pay out 90%. And as we see how business returns, and as we can wrap our arms around the pace of the recovery, we will take that into consideration as we think about reinstating the dividend.

Correct. Thank you.

Your next question is coming from Anthony Powell. Please announce your affiliation, then pose your question.

A transaction questions. We haven't got one yet. Just -- the pipeline has been very strong this year, the Big Sur acquisition is attractive. What's the pipeline look like going forward? And as you look at acquisitions going forward, given you exited the covenant waiver, how do you rank incremental debt equity offerings and using your cash balance as sources of funds for those deals?

Hey Anthony. The pipeline continues to be vibrant, I would say. As you know, the deals that we've been able to get done this year have been off-market transactions, and that's where we continue to stay focused right now. Because there is a fair amount of competition out there, given that the debt markets are flushed with cash, the CMBS market in particular, flushed with cash and a lot of the private equity firms were sitting on the sideline waiting for the CMBS markets to come back. So we are starting to see more competition. As we think about sources of capital, we're very, very delighted that we could exit the credit waiver amendment, 3 quarters before exploration. And one of the other data points that we didn't discuss is the fact that we had a debt incurrence test under our bond indenture. As you know, our portfolio is completely unencumbered, so it's all Balance Sheet that and we had a debt incurrence test under our bond indenture that precluded us from getting -- from issuing new debt. Hard to stop until we got back above 1.5 times interest coverage. So we have -- we met that threshold as well. I think it's going to on the margin give us a little more flexibility on the acquisition front. There were several transactions in the market that we worked on last year that had existing debt in place and that debt was prohibitively expensive to break and pay off, so we had to take a pass. But now with the fact that we can acquire assets with that, that gives us another opportunity to look at a few hotels out there that are encumbered with existing financing. So we're very happy with our cash position. We're happy with the fact that we have come out of the credit waiver amendments 3 quarters early. And between cash on hand and the ability to issue new debt, I think that is the direction you would see us going if we continue to deploy capital into new acquisitions.

Got it. So the bar is higher for ATM now; is that fair?

I think that's very fair. Yes.

All right. Thank you.

Your next question is coming from Chris Woronka. Please announce your affiliation, then pose your question.

Tapes Deutsche Bank. Thanks for all day points, guys, very helpful. Question is, Jim, you guys scheme out a bunch of data on your acquisition date and how much they're beating initial underwriting. And I think that was a comment probably on 2021. Could you just talk about -- if that's correct, could you talk about whether the expectations for future years have also changed? Thanks.

Well, Chris, we are in the middle of the budgeting process. So it's a little early to give you specific numbers, but I would venture that give -- coming off the strong base in 2021 that we're seeing it really every deal that we've acquired this year, that 2022 is likely to outperform our underwriting expectations as well. When we -- when we underwrote the acquisitions throughout the course of this year, we were in a very -- period of great uncertainty. We didn't really have a sense on how Delta COVID was going to behave. And when we, when the country was going to be able to get COVID under control. So, long way of saying that we were conservative in our underwriting. And conservative in our underwriting. But as we looked out to, say '23, '24 and beyond, and the financial performance that we baked into these properties, it penciled on an IRR basis and allowed us to pull the trigger and deploy capital. I think that it's going to be meaningfully better across the board. I mean, if you just look at where we put capital and what's happening in these markets, some of the best highest growing -- highest growth markets in the country with meaningful barriers to new supply. If you think about Alila, truly iconic and irreplaceable asset, to be able to buy that at 9.3 times on this year's EBITDA, an asset that is generating $275,000 a key in EBITDA and we're not seeing any slowdown there. The Four Seasons Resort Walt Disney World, we're just starting to see, the benefits of the celebration the 50th anniversary celebration of Walt Disney World that just kicked off in October. So I expect that we're going to see our performance going forward. And I think that you'll see it across all of the assets we bought that and we're going to continue to see it in our resort portfolio, which is comprised of 16 properties now. And we will see business return to the major urban markets. We've been encouraged there as well this last quarter.

Okay. Very good. Thanks, Jim.

Sure.

Your next question is coming from Chris Darling. Please announce your affiliation, then pose your question.

Hi. Good morning. I'm with Green Street. Just going back to the Ventana acquisition for a second. You mentioned 8 times to 10 times stabilized EBITDA multiple by about 2025. But given you're acquiring it at just over 9 times multiple, does that imply that this is really the high watermark for the near-term and you might be expecting a dip in performance over the next couple of years? And then also curious if you could comment on the Terniums of the Hyatt management agreement there?

Well, with respect to the terms of Hyatt's management agreement, that's not something that we're in a position to talk about. Chris, I will tell you that the World of Hyatt is doing an incredible job filling that -- filling Alila Ventana and they were getting between 65% and 75% of our room nights through World of Hyatt redemptions. And as a high redemption hotel, we're getting a -- the premium rate. The highest rate that the property is selling rooms for. So at 59 rooms, that gives us the opportunity to really yield manage, to revenue manage the rooms that are not being sold through the World of Hyatt redemption program. With respect to our stabilized EBITDA multiple, we gave a range of 8 to 10 times. Is 8 doable? I think it is doable. But are we being conservative and throwing a range of 8 to 10 out there? I think that's the way you should think about it.

All right. Thanks.

Your next question is coming from Ari Klein. Please announce your affiliation, then pose your question.

Thank you. BMO. Maybe on the disposition, you sold a few post a quarter and, I guess, or importantly, some others that might be on the market. How should we think about asset sales from here? Have you done most of the heavy lifting? Is there anything else that you'd look to sell?

Yeah, Ari. I mean, it's -- real estate alert is always good with publishing a rumored acquisition or a rumor disposition. And I'm very glad that on the?5-pack that? they indicated we were going to sell for $500 million and we ended up selling for $551 million. With respect to future dispositions, I think that you should think about our capital allocation strategy, really with one bottom-line goal in mind. Everything that we do is meant to elevate the EBITDA growth profile of the portfolio. And if we were to sell other assets, it would be because we believe that we are getting fair value for the assets relative to our whole value, and that by making those dispositions, we can redeploy that Capital either into new acquisitions or into assets that we currently own that are going to grow faster than the rest of the portfolio on average. So as you're thinking about [indiscernible] going forward, I think that's the way -- that's the bottom line. It's all to elevate the EBITDA growth profile of our portfolio.

Got it. Thank you.

Ladies and gentlemen, that is all the time we have for questions. I would now like to turn the floor over to Jim for any closing remarks.

Well, thank you, everyone. I'd like to thank you all for joining us on our third quarter call. We appreciate the opportunity to discuss our quarterly results with you, And I look forward to meeting with many of you, unfortunately, virtually in Nareit next week. We really wanted to have the Nareit meeting in person at the Wind Hotel in Las Vegas, but there wasn't universal support among all the -- REIT teams to meet in an environment where masks are required and they're still required. So for those of you that I don't meet virtually, enjoy the upcoming holiday season. Be well and stay healthy and we, at Host, thank you for your continued support.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.