Good morning, and welcome to the Host Hotels & Resorts Fourth Quarter 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Jamie 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 EBITDAre, 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 and our 8-K filed with the SEC, and in the supplemental financial information on our website at hosthotels.com. With me on today's call are Jim Risoleo, President and Chief Executive Officer and Sourav Ghosh, Executive Vice President and Chief Financial Officer. With that, I would like to turn the call over to Jim.

Thank you, Jamie. And thanks to everyone for joining us this morning. We ended the year with strong operating improvements across our portfolio driven by continued rate strength. For the full year 2022, we delivered adjusted EBITDAre of 1.498 billion, all owned hotel EBITDA of $1.573 billion in all owned hotel RevPAR of $196, which helped us achieve the high-end of our full year 2022 guidance range. During the fourth quarter, we delivered adjusted EBITDAre of $364 million and adjusted FFO per share of $0.44. Our all owned hotel EBITDA of $373 million in the fourth quarter was 5% above 2019, driven by rate strength out of room revenues, and expense efficiencies resulting from operating improvements. All owned hotel RevPAR for the fourth quarter was approximately $197, a 60-basis point improvement over the fourth quarter of 2019. As a reminder, fourth quarter operations were impacted by Hurricane Ian, yet RevPAR all owned hotel EBITDA and EBITDA margins, though exceeded 2019 levels for the third consecutive quarter since the onset of the pandemic. All owned hotel revenues in the fourth quarter were up 1.1% over the fourth quarter of 2019. While all owned hotel operating expenses were down 40 basis points. In addition to delivering strong operating improvements over the course of 2022, we continued to be recognized as a global leader in corporate responsibility. While we work toward achieving our 2025 environmental and social targets, we introduced our 2050 vision of becoming a net positive company, which is detailed in our 2022 Corporate Responsibility Report. We now have a total of 10 LEED certified properties, including three LEED Gold hotels, plus our corporate headquarters. In addition, we were named to the Dow Jones Sustainability Index World which recognizes global sustainability leaders across all industries for the fourth consecutive year, and…

Thank you, Jim, and good morning, everyone. Building on Jim's comments, I will go into detail on our fourth quarter operations full year 2023 guidance and our balance sheet. Starting with business mix, overall transient revenue was up 60 basis points to the fourth quarter of 2019, driven by a 22% rate growth. Thanksgiving and the festive season saw RevPAR growth of 5% and 6% over 2019, respectively, driven by rate growth of over 30% for both periods. Despite impacts from flight cancellations and cold weather in Florida during the festive season, occupancy continued to increase sequentially this holiday. Looking ahead, holidays in the first quarter of 2023 are shaping up well. Martin Luther King Junior weekend achieved a revenue that was 22% above last year, driven by occupancy. Peasants' Day and Spring Break both have revenue pace ahead of 2022. Business transient revenue was down 18% to the fourth quarter of 2019, driven by 2% rate growth. This is a meaningful improvement from the start of 2022 when business transient revenue was down 48% to the first quarter of 2019. As we have discussed previously, properties are targeting high single-digit business transient rate growth in 2023. During the fourth quarter, business transient demand was in line with pre-pandemic monthly seasonality and was driven by San Francisco, Washington D.C. and New York, with New York just 5% behind 2019. Turning to group. This marks the second quarter the revenue has surpassed 2019 levels. Group room revenues were 2% above the fourth quarter of 2019 driven by 10% rate growth. While overall group room demand was down 8% to 2019, properties in New York and Phoenix achieved group demand above 2019 levels. The short-term booking trend continued with in the quarter, for the quarter group rooms sold up 21% over the…

[Operator Instructions]. Our first question is coming from Smedes Rose with Citigroup. Please go ahead.

I appreciate you guys are providing a range for the year that incorporates a wide range of macroeconomic outlook. And I'm just curious, what are you specifically seeing in your business, if anything, that would suggest a slowdown in the back half of the year, either on the group side or what sort of visibility you have?

At this point in time, we're not seeing any signs of weakness in any business segment. Our group pace is performing exceptionally well. I mean, 2022, we ended up, I think with 3.8 million group room nights at the end of the year which was 84% of 2019 actual. Rate was up 6% in 2019. 2023, we're very encouraged about how group is set up. We have 2.9 million definite room nights on the books that's a 400,000-room night increase since quarter three. That equates to 80% of 2022 actual room nights. At the same time last year, we were at 71%. So we picked up 9 points and the other really encouraging thing is that total group revenue pace is up, I think, 17% to the same time last year. So group is really set up well. And if you go back and look at how we're set up relative to 2019, we're only down 70 basis points in total revenue pace. So the short-term nature of the bookings is expected to continue. And as a result of the solid base that we have on the books, we're encouraged with how group will likely perform this year. So no indication of any slowdown there. I think your other question was related to business transient. We continue to see improvements in BT. I think BT is going to evolve over time. BT room nights were down in quarter 4, I think, about 20% to quarter 4 of 2019, but we saw a pickup in bookings from Q3 about 500 basis points. So business transient revenue was down 18% due to an improvement in rate. Again, bought up from where we were in Q3, so special corporate, the encouraging piece on the business transient side is we expect to see high single-digit rate increases that is going to hold. In January, very strong months for business transient demand. It was the best in the month for-the-month pickup by our top accounts. So no signs of weakness in the business transient front at all. And one thing I would point out, I think Sourav mentioned it in his comments, very encouraging that New York City is only 5% below where it was in 2019. So no signs of weakness. We felt it was prudent to give a range, given the uncertainty on the macroeconomic front that exists today.

Our next question is coming from Anthony Powell with Barclays. Please go ahead.

Just a follow-up to that prior question. I mean, if you were to build a bottoms-up guidance range for 2Q through 4Q, I guess how many percentage points would you be adding to that midpoint? And what does that imply rather for a theoretical margin decline this year given what potential higher RevPAR.

Anthony, so let me start off by saying sort of what I said in my prepared remarks is, the second half of the year for us in our guidance assumes some sort of a slowdown, whether it's at the low-end, which would be a severe slowdown over the high-end, which is a mild slowdown. And our midpoint is effectively a moderate slowdown. The way we are thinking about it when you look at our guidance is the second half. I'll sort of go through each segment. From a group perspective, we are assuming that the second half will only see about half the group room nights pick up in the year, for the year compared to 2022. And as you may recall, 2022 had meaningful in the year for the year pickup. And as I said in my prepared remarks, in the fourth quarter alone, we had 21% more pickup in the quarter for the quarter. So in other words, the anticipation is if there is a slowdown, you would have less in the year for the year pickup. That's on the group side. The rates, obviously, in the group sides are locked in, so that's a positive. On the transient side, we expect that second half to be somewhat flattish. So with leisure rates being slightly up driven by our downturn in convention hotels, but our resorts somewhat flat to maybe slightly down depending on the market. So overall, transient rates and occupancy to be about flattish for the second half. And so when you really think about our guidance for the full year, our occupancy ends up being up a couple of points and rate effectively flattish again, all this is tied to the midpoint. When you think about sort of our margin performance quarter-by-quarter, reality is the distribution of EBITDA that we saw in 2019 is going to be very -- but we are expecting very similar in 2023. So in '19, we had, I think, it was about 27% or so of our EBITDA came from Q1, about $29 million from Q2, 20% in Q3 and 24% from Q4. Very similar sort of cadence is what we are expecting from 2023.

Our next question is coming from David Katz with Jefferies.

Jim, I wanted to go back to something you touched on in your comment and just to make sure we're clear about it. You talked about some of the hotels you bought that are, I think you said currently run rate in about 10x or 12x EBITDA based on sort of what you paid. Could you just go back to those circumstances and talk about if we found ourselves at a 2019 normalized environment were those multiples or cap rates would be.

Well, we don't expect to get back to 2019 levels of rate or performance at these properties, David. We are very confident that the rate set the hotels are able to charge today for the most part, sustainable. There might be a little bit of a pullback. But we did message when we bought each property what the EBITDA multiple was based on 2019 numbers and what the cap rate was. And I can't tell you how pleased we are with the performance of these properties over the last several years. So we feel very confident that we're going to be able to close to maintain the current rates that we're getting today subject to there being a very severe downturn that's affecting the consumer. We're just not seeing it today.

Our next question is coming from Chris Darling with Green Street.

Can you provide an update on '23 group pace across some of your larger group focused markets. So thinking specifically about San Francisco, New York, Orlando and then maybe any other data points that might be helpful as well.

Sure. So in terms of group pace some of our larger markets, what's trending really well. And I would say, like effectively what we have on the books for 2023, over 50% are from markets which are San Diego, Orlando, D.C., San Antonio and San Francisco. So whatever we have on the book for 2023, over 50% are from those markets. And when we're looking at sort of citywide data, we are at about 80% of 2019 levels that it relates to citywide and the markets that are above that threshold are Boston, San Antonio, San Diego, Atlanta, Chicago and the ones which are sort of below that threshold are Philadelphia, Seattle and certainly San Francisco and I would say New Orleans.

Our next question is coming from Chris Woronka with Deutsche Bank.

Jim, it's a bit of a hypothetical question, but obviously, there's a lot of talk about getting back to prior or maybe not peak occupancy levels, but still having a lot of occupancy to recover with group and a little bit of corporate. But that with the mix effect that may come at the expensive rate. So the question would be, I know you don't solve for any one metric is it reasonable to think that some of the more price-sensitive business and opaque business, things like that, you have your operators essentially intentionally keep that out of the business as we go forward and that we are structurally lower arc but higher rate. Is that a decent way to think about it?

Chris, I'd say it a little differently. It's easy to buy occupancy in certain markets at certain hotels. We don't think that's the right revenue management strategy. We believe that given the flow-through you get to EBITDA from rate increases relative to occupancy increases, which is about 80% -- 60% for rate, 40% for occupancy that every dollar in rate is worth more money. We continue to see occupancy evolve, but we're going to continue to hold rate at high levels and continue to increase rates. I think we're encouraged, in particular, by group rate that we've been able to achieve that's locked in with definites on the books, up sequentially quarter-over-quarter and for 2023 looking pretty positive for us as well as the growth in business transient rate as well. So the total group revenue pace for 2023 is up 17% at the same time last year and down only 70 basis points to 2019. That's very encouraging to us. So that's the strategy that we intend to employ going forward. And we are in favor as a general statement of cutting rate to buy occupancy.

Our next question is coming from Duane Pfennigwerth with Evercore ISI.

If we go back in time to the structural margin improvement commentary, your view of the world may be back in Q3 of last year, what has been the biggest change or biggest surprise since that time? Obviously, Naples has some lingering impact. But for example, has the fill rate on open position surprised you since the fall. And then maybe just as a follow-up, while I have you, has your forward visibility into 2Q changed year-over-year? Maybe you could contrast where you stand today on 2Q versus this time last year and what the rates on those forward bookings look like?

Sure. So I'll start with the second half of your question first. In terms of rates, we feel very good about the rates into Q2 and the rest of the year, what we have on the books. And as Jim mentioned, our group rate is up 6%. We expect business transient rates to be up in the high single digits. In terms of actual demand, it is still very short-term booking. And that goes to my remarks of sort of the short-term pickup that we are expecting. We saw in the fourth quarter, meaningful in the quarter for the quarter pickup that seems to continue. So while we do have a meaningful amount of group on the books, we are still expecting a significant amount of pickup in the first quarter for the first quarter and the same thing in the second quarter. So from a visibility standpoint, I wouldn't say it's incremental, maybe slightly more incremental relative to the fourth quarter. As it relates to our operating model changes, what I do want to point out is we have said the $100 million to $150 million of savings relative to 2019. Those expense savings, we have achieved a bulk of those savings. And frankly, the balance of it is really going to be driven by occupancy coming back. We are still, as Jim mentioned, 10 points off of 2019 from an occupancy perspective. And I would say with every point of occupancy gain, that would equate to roughly 30 to 40 bps of margin gain. So that is pretty meaningful when you think about it. So if we get back to sort of '19 occupancy levels, you're looking at anywhere from 300 to 400 basis points of margin improvement. And one of the things I would like to highlight is when you look at our expenses, specifically to $100 million to $150 million and you compare that really to 2019, our F&B revenues are down for 2023 to the midpoint relative to '19, 1.5%, but our expenses are actually down 2%. So it shows that all the operating model changes and a big piece of it was in food and beverage has made a huge difference. Sales and marketing expense relative to '19 for 2023, again, to the midpoint, we'll be down less than 1%. So again, when you're comparing sort of the margin performance to '19, it really tells the story. And like I said, we'll be only slightly down at the midpoint. And of course, at the higher end of the guidance, we'd actually be above 2019.

Our next question is coming from Ari Klein with BMO.

Maybe following up on the margin question. What's the wherewithal to cut expenses if the macro is a little bit more difficult than you anticipate given some of the labor challenges that we've had over the last couple of years.

Sorry, I was on mute. Apologies. So I'm assuming you're talking about what if any sort of a pullback we can have if there is a slowdown in the second half. And the reality is, I think we now have a playbook going through COVID as to what would need to happen if there is slow down, and that is really a payoff department by department. So we feel very confident that if there is a slowdown, the changes that we would actually have to make if we are in that situation? And whether that's modifying hours of operations or driving efficiencies in any single department. So we are going to be well prepared for that.

Got it. And then just on the balance sheet. Can you update us on your priority and how you're thinking about acquisitions, dispositions and underwriting and admittedly more uncertain macro?

Sure. As we sit here today, we are in a very strong position. And given the balance sheet that we have, people be well positioned regardless of what happens over the course of the year. As you see from our CapEx guidance this year, we're going to continue to invest in our portfolio. Just a point of reference over the course of 2020 through 2022, we invested $1.5 billion in our assets, which is really a distinguishing factor that sets us apart from other lodging REITs. We're well positioned to outperform going forward, and we will continue to pursue ROI projects such as a complete transformation Fairmont Kea Lani and expansion at the Canyon Suites as the Phoenician and the completion of our repositioning a new tower at the Ritz-Carlton in Naples. So we will continue to look for opportunities to deploy capital in our assets. Those underwrite generally to low to mid cash-on-cash returns, unlevered cash-on-cash returns. So we think that's a very good place to free capital. On the acquisition front, there are a number of properties in the market right now that we are evaluating. I would just say that the bid-ask spread hasn't come to the middle yet. So for the near-term, we're not anticipating, when I say near-term talking about the next 60 to 90 days. I'm not anticipating acquiring any assets that could change. I'll just point out that the Four Seasons Jackson Hole was roughly a 30-day process for us which puts us in a really strong position because we are the only player out there that can really do a meaningful transaction of our cash. As we sit back and look at how the year might evolve a tracking all the CMBS loan maturities for 2023, 2024. We will see if certain owners are in a position where they're going to have to sell the asset, just given the current interest rate environment relative to where the environment was when they put their current debt financing in place and the fact that their asset is likely to need a significant CapEx because they haven't been able to invest over the course of the pandemic. And I think you could see us as the year evolves assuming distress presents itself, investing across markets that are different than markets that we invested in 2021 and 2022.

Our next question is coming from Robin Farley with UBS.

I was actually going to ask you about your acquisition plans. And I think you answered most of that question already. But I'm kind of intrigued by your last comment about investing in different markets than you did in the last two years. And just wondering if that means more sort of rather than resort markets or kind of what that might mean? And then, if I could just ask a clarification. When you were talking about your revenue pace, group revenue pace being down about 70 bps in 2018, I guess rate, it sounds like it's up high single digits. So a number of group nights -- are you anticipating being down around that sort of high single-digit rate relative to '19? In other words, just curious what you're factoring into guidance in terms of when group you think might make a full recovery in terms of room nights and transient nights as well. Thanks.

Sure, Robin. I'll take the part of your question related to the investment market. I think as you think about how we have been deploying capital over the last six years or so, everything we've done has been to elevate the EBITDA growth profile of the company. And when I say that we're going to be open-minded and look at other markets, it's really transaction dependent and whether or not we think we can create value and what we can do with the underlying EBITDA growth of that asset going forward. So I said differently, I don't think there's a market in the country that has a red line through it, subject to all of the underwriting criteria that we employ when we evaluate a particular hotel. Sourav, do you want to touch base on the group?

Sure. Robin, on the group side, yes, you're right. It's effectively on the group room nights. We are pacing in sort of the high single digits below 2019. The expectation right now at the midpoint, again, we would get to about around 90% of our group room night levels relative to '19. But of course, remember, like I said, that assumes that we only pick up effectively half the amount of group room nights in the year for the year for the second half.

[Operator Instructions]. Our next question is coming from Jay Kornreich with SMBC.

As it looks like the 2023 outlook you provided excludes any contribution from the Hurricane Ian impacted hotels. I believe you mentioned a $71 million EBITDA shortfall I'm curious, as we see those assets coming back online throughout 2023, if that provides an upside opportunity to the guidance range. And if there's anything else you have your eye on besides the possible recession that get surprised to the upside or I guess the downside.

Well, Jay, I think it's important to really highlight that the assets affected by Hurricane Ian were anticipated to generate $82 million in EBITDA in 2023. We have $11 million in our guidance to the midpoint. So there's a $71 million gap that is purely related to hurricane disruption. We have not assumed any business interruption proceeds hitting our guidance. So if we were to get business interruption proceeds over the course of 2023, that is upside going forward. So we think that is likely to occur later in 2023 and into 2024. But I do want to point out that the $71 million is a significant amount of EBITDA that is going to impact one year. It's just this year because we're very excited about the performance of the Ritz-Carlton for full year 2024. The property will be completely transformed. The new tower will be open. We've added 24 rooms [indiscernible] increased the suite count of that asset and made a number of other enhancements. So one year of disruption from Hurricane Ian has cost us a significant amount for 2023.

Thanks. Maybe just to clarify that the $11 million that you expect in 2023, could that be looked at as a conservative estimate? Or is that what you expect even as both hotels open up during the year?

I think it's what we expect at this point in time.

Our next question is coming from Floris van Dijkum with Compass Point.

A little bit of a mixed message here. Obviously, you've got group pace ahead, very strong results the last quarter. If I look RevPAR expectations in the first quarter are up, call it, 24% to 27%, call it, 25%, pretty strong yet. If we were to include your business interruption insurance, which, again, you have that insurance presumably, you're going to get that $71 million of missing EBITDA from Naples. You're looking at flat EBITDA growth based on your consensus. Can you maybe provide any sort of historical context where occupancy in your portfolio is trending higher on a longer-term basis and your rate, and your margins are down, or your EBITDA is going down.

Sorry, are you asking historically? If you've seen occupancy go up and margins go down, I think the way to think about it, Floris, as sort of I have said, relative to '19, right? Actually, if we see occupancy go up, we would actually expect margin performance to improve from where the occupancy stands as of today. I think that's where the upside is. The reality is, we don't have visibility into the second half of the year. Therefore, our assumptions are I think, reasonable at this time with the data that we have available right now. And when you look at the top-end of the guidance, actually, the margins are up relative to '19. So it really depends on where things shape up for the second half and what kind of in the year for the year pickup we see in group. And then, you have to remember, business investment sort of non-residential fixed investment, you're looking at only a 70-basis points growth for the year. So what we can expect, it's very difficult to predict at this point for the second half. It's our guidance range is based on the best available data we have today.

Yes, Floris. The one thing I would add is, over the course of 2022, for the second and third quarter call, we were very clear that the margin performance we were seeing was not sustainable. And it wasn't sustainable for a lot of reasons. We were not at optimal staffing levels. We had a number of hotels where full services were not being offered to customers. Restaurants were closed, club lounges were closed, and we feel that the proper comparison for margins is 2019. And in 2019 levels, even down 10 basis points we're only down 57 basis points in margin. And just to reiterate, we have seen a 4.1% inflation in CAGR, a CPI CAGR, and our expenses have only gone up 1.1%. So we actually feel that we're positioned very well. And as Sourav pointed out, every point of occupancy that we get is going to equate to 30 to 40 basis points of margin improvement.

At this time, I will hand it back to Mr. Risoleo for any closing comments you wish to make.

Thank you very much. I would like to thank everyone for joining us on our fourth quarter call today. We appreciate the opportunity to discuss our quarterly results with you, and we look forward to meeting with many of you in the coming weeks and months. Thank you for your continued support and have a great day.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day. And we thank you for your participation.