Good morning, and welcome to the Host Hotels & Resorts First Quarter 2023 Earnings Conference Call. Today’s call 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 EBITDAre and comparable 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, Jaime, and thanks to everyone for joining us this morning. We kicked off the first quarter of 2023 with meaningful outperformance, delivering a RevPAR improvement of 31% compared to the first quarter of 2022, exceeding the top end of our first quarter RevPAR guidance by 4 percentage points. During the first quarter, we delivered adjusted EBITDAre of $444 million and adjusted FFO per share of $0.55. Our comparable hotel EBITDA of $439 million in the first quarter was 18% above 2019 and 44% above 2022, driven by both occupancy increases and continued rate strength, particularly in the group business segment at our downtown hotels. First quarter comparable hotel EBITDA margin of 32.5% was meaningfully ahead of 2022 and exceeded 2019 for the fourth consecutive quarter. Our strong performance in the first quarter, coupled with our improved outlook for the year, allowed us to substantially raise and tighten our full year RevPAR growth guidance range to 7.5% to 10.5%, nearly doubling the midpoint of our full year expected RevPAR growth to 9% from 5% last quarter. This marks the fourth consecutive quarter since the onset of the pandemic that we have achieved RevPAR, adjusted EBITDAre and EBITDA margins ahead of 2019. And at the midpoint, our full year 2023 RevPAR guidance is 7% above 2019. Our outperformance is a result of the capital allocation decisions made over the last 6 years and our unwavering focus on expense control and margin improvement. It is worth noting that at the 9% midpoint, we raised our adjusted EBITDA guidance by $125 million, which is significantly above our first quarter outperformance of over $40 million relative to consensus. Lastly, at the midpoint of our range, our full year 2023 EBITDA is forecasted to be 3% above 2019. We are also providing second quarter…

Thank you, Jim, and good morning, everyone. Building on Jim’s comments, I will go into detail on our first quarter operations, our updated 2023 guidance and our balance sheet and dividend. Starting with business mix, overall transient revenue was up 13% to the first quarter of 2022 driven by over 9 points of occupancy growth and continued strength in leisure rates. Our downtown hotels led revenue growth as strong demand fueled significant rate increases. Holiday performance in the first quarter was strong, particularly at our downtown hotels. Downtown hotels saw increased leisure demand over last year, gaining more than 10 points of occupancy for both Martin Luther King Jr. and President’s Day weekends. Downtown properties also drove overall portfolio spring break RevPAR growth of 7%, which is quite impressive when you consider the elevated resort comparisons from the "mother of all spring breaks" last year. Quickly looking forward to holidays in the second quarter, room revenue pace is up low single digits over last year for Memorial Day, Juneteenth and the fourth of July. Resorts in the first quarter saw an overall RevPAR increase of approximately 5% compared to 2022. As expected, the return of Caribbean tourism let consumer hesitancy to travel to downtown markets and lower repeat travel to Florida markets impacted performance at our resorts. However, the impact was not as significant as we expected. And it is notable that Miami, Jacksonville and the Florida Gulf Coast are still significantly outpacing 2019 RevPAR levels by an average of over 30%. Our resorts in Hawaii achieved 11% RevPAR growth over last year, entirely driven by rate. Business transient revenue was down 14% to the first quarter of 2019, which represents a 400 basis point sequential improvement to the fourth quarter. Downtown properties accounted for over 60% of the portfolio’s…

[Operator Instructions] Your first question for today is coming from Aryeh Klein at BMO Capital Markets. Aryeh, your line is live.

Hi, thanks and good morning. Sorry about that. Just maybe relative to the prior outlook what’s been the biggest surprise to the upside that’s giving you the confidence to increase the outlook particularly in the second half of the year?

Yes, Aryeh, I think the fact that all three segments, it’s not isolated to any one of our business segments, but all three segments are really firing on all cylinders. We haven’t seen any slowdown in the leisure segment, as Sourav mentioned, we’re up 5% in RevPAR growth in Q1 in the leisure segment of our business, and we had six resorts that had transient revenues of $1,000 or greater. So it’s apparent to us that the well-heeled leisure consumer continues to want experiences. They want experiential experiences. The shift from goods to travel and other experiences has occurred and it’s real and it’s very sticky. And that’s notwithstanding the fact that we anticipated that there was going to be a natural migration out of the resorts as people got more comfortable traveling internationally to the Caribbean, to Europe and to other places and going back to our downtown hotels. Which leads me to the next piece of the business. Our downtown hotels have really seen business return in a material way. And not only business transient but leisure business. So we feel really good about the way the recovery is unfolding and the way things are pacing for the leisure consumer. Group is really firing on all cylinders. Total group revenue pace is now up 2.5% to the same time in 2019. Group rate on the books for 2023 is up nearly 6.4% to the same time last year, and that’s a 90 basis point increase since the fourth quarter. We’re still seeing, as Sourav mentioned, a significant amount of bookings occurring in the quarter for the quarter. I think last quarter it was 28% compared to 2019. We’re up 3.4 million room nights definite on the books now. That’s 94% of 2022 actual relative to where we were in last quarter, I think it was about 80%, somewhere in that range. So we saw a significant pickup and business transient continues to evolve as well. We’re seeing the recovery in BT led by small and medium-sized businesses. As well as increased rate being driven by special corporate. So I think it’s all of the segments are really firing on all cylinders. And I’ll let Sourav add a little more color on BT.

Hey, Aryeh, I think specifically, when you look at the second half, what really gives us confidence is the group booking activity for the second half, we picked up 237,000 room nights. Just to put that into perspective, that’s 35% more than what we picked up in Q1 of ‘19 for the second half of ‘19. So real apart from just in the quarter for the quarter group pickup, it was really encouraging to see meaningful activity not only for Q2. Q2, we picked up about 180,000 room nights, that’s 13% above ‘19 but also for the second half of the year.

Thanks.

The last thing I would add is that as we thought about Q2 in connection with our fourth quarter call, we were looking at a scenario where we were anticipating flat RevPAR growth for Q2. Now we have given you RevPAR growth of 4% to 6%.

Thanks for that color. And if I could just ask on Orlando and the condo development there, if you could just give a little additional context on that decision, maybe what you expect the total cost to be and whether or not there are similar types of opportunities that you could potentially pursue?

Yes. The thought behind the condo development adjacent to our Four Seasons Resort was an ROI project that we anticipate is going to generate cash-on-cash returns in the mid- to high teens on the development and sell-out as a stand-alone venture, they are going to be Four Seasons branded units, which is a very, very attractive branding to have whenever you’re building and selling something of this nature. Additionally, what we have been taken into consideration is the uplift that the hotel is going to received from having these 40 additional units adjacent to it in terms of food and beverage spend, spa spend, golf spend, all the ancillary revenues that are going to be driven, which we believe are real and sustainable at the hotel property. So the total cost is going to be somewhere in the area in $150 million to $170 million. And with respect to whether or not we have other opportunities, as you know, we have an ongoing pipeline of ROI projects that Host. And we are constantly working on additional ways to enhance shareholder value through deploying capital in ROI projects. To remind you of some of the ones that we’ve done in the past, we built 19 villas at the Andaz Wailea on Maui. We built the AC Kierland on a parking lot at Westin Kierland Resort in Phoenix. We’re doing the expansion of the Phoenix of the Canyon Suites at the Phoenician. So we have other projects in the pipeline, but we have always been very thoughtful, I think, with respect to our messaging, and we do not message these projects until we’re confident that we have the entitlements and we’re confident that we’re going to move forward with them.

Thank you.

Your next question for today is coming from Anthony Powell at Barclays.

Hi, good morning. Question about, I guess, you’re growing a bridge loan book. I think you have two loans expiring later this year. Have you started to talk with the borrowers about extending those loans? And just generally, how much capital are you willing to have tied up in these loans going forward?

Well, I think, Anthony, that we expect both of the loans on the share – both Sheratons to be repaid in the second half of the year. The loans are in compliance with the loan documents, payments are current. Both of the borrowers fully anticipate that they are going to be in a position to pay us back. So we have no concerns with respect to getting repaid on those loans. With respect to the Camby, it was a unique situation. We had acquired the Four Season Jackson Hole in 2022. And we made a decision that Camby wasn’t an asset that we needed to own or wanted to own for the long-term, given the amount of CapEx that needed to go into the property and our terrific exposure in the Phoenix metropolitan area with the Phoenician and the Westin Kierland we’ve got, I think the two best resorts in the market. There is some new supply coming into the Phoenix area. And we made a decision that at $110 million, it made sense to sell that hotel. We wanted to make certain that we could take advantage of the reverse like-kind exchange opportunity by investing by designating the proceeds from that asset as a reverse like-kind exchange into the Four Season Jackson Hole property because we had a very low basis in the asset. So that was one of the reasons that drove us to provide solid financing. I’ll just – I’ll make a broader comment. First of all, I don’t see us doing this on any broad scale. And it’s for a number of reasons. Number one, we don’t – we’re – the portfolio is in a really terrific position right now. Given the capital allocation decisions that we’ve made over the last 6 years, from 2018 forward, we have sold $5 billion plus of assets and really have called the assets that we dumped, but we didn’t want to own for the long-term out of the portfolio. So I don’t see us doing many more bridge loans, if any more bridge loans today. But the assets that we have sold, not greater than I think 65% to 70% loan to value. So we’ve gotten a nice slug of equity in connection with the sale. And if something were to go south, what we do for a living is on hotels. So I wouldn’t bother us at all if we had to take a property back.

Thank you for the detail

Your next question for today is coming from Smedes Rose at Citi.

Hi, thanks. I wanted to ask you just a little bit more on the group side as kind of what you’re seeing in terms of kind of the composition of demand? Is it mainly coming from smaller groups? Or are you seeing a return of kind of Fortune 500 bookings and kind of maybe you could talk about that a little bit? And then just with that, could you just touch on what you’re seeing in some of the larger relatively recently renovated marquee properties in San Diego, San Francisco and maybe New York.

Hi, Smedes. On the group front, it is certainly more so being driven by smaller corporate groups. One thing which came back meaningfully and I talked about this in my prepared remarks, was Association is now down only 2% in terms of group revenue to 2019. Corporate group revenue up 6% to 19% and 26% was driven by rate in the first quarter. So a meaningful pickup in corporate group revenue – the gap right now, I would say, is really on citywides. We are, for 2023, about 83% of where citywide room nights were back in on 2019. So there is still a long way to go in terms of citywide pickup. But overall, what really is picking up, we saw corporate group continuing in last year and multiple quarters, and we saw the same thing happen in Q1, but the big comeback has really been association, which we are seeing meaningful activity not only into Q2, but as well as the second half.

Okay, thanks. And then just quickly on your Four Seasons, the condo development, would you expect any disruption to the hotel? Or is it far enough away that it won’t impact your guests?

Not anticipating any disruption, Smedes.

Thank you, guys.

Your next question for today is coming from David Katz at Jefferies.

Hi, good morning, everyone. Thanks for taking my question. I just wanted to follow on to that commentary, which, Sourav, I know you repeated in terms of the makeup of the group business strength. Is there any commentary or any color with respect to large corporate groups and the citywides, meaning, have they just not gotten around to booking yet? Is there is some expectation or is there some trepidation to it? How should we look into that?

David, if you think about sort of where the big citywide come from? And just to put into perspective for Host for our portfolio, we have about 20% to 25% of our overall group room nights that really come from citywide. We have done a really good job across the board, bringing in in-house groups which are self-contained. And with a lot of our hotels where we’ve expanded meeting space, we now have the ability to actually house the groups completely in-house and are less dependent on city-wides. But in general, if you think about a lot of the convention centers that were actually closed during the pandemic just in terms of sales staff gearing up and selling those cities, there is more of a ramp-up time, and we were talking about this last year, how you were expecting that citywides would be sort of the last ones to come back in a meaningful way. It certainly is very, very market specific. As you well know, like when you look at San Francisco, that’s pretty meaningfully relative to pre-pandemic levels. But other places where we are seeing actually group bookings, which are being driven by citywide and have a good citywide pickup into future years are cities like Boston, like San Antonio, like Chicago. So, it is coming back, but it’s just a matter of the entire sales staff getting all geared up and selling those cities. But so we do expect that to further ramp up with time.

I see. So, we should take it as further upside. And if I can sort of follow-up to the strong results and the guidance that you have already given us, by the way. If I can just follow-on with respect to San Francisco, because it is a city is a matter of debate. My sense is that you have done reasonably well there. Can you just talk about what’s going on there for you and sort of how you are differentiated than what we have seen in other areas?

Sure. I will share our broader thoughts, and then Sourav can get into a little more detail on what happened in San Fran in the first quarter and how we are thinking about it for the balance of the year. So, the city clearly has its challenges. There is no question about it. I will tell you, we are not writing San Francisco off. I think we have a Mayor in that city that is committed to fixing the actual problems and then dealing with the perception as well. From our perspective, we feel very good about the assets we own there. Given their location and many of you on the call have recently visited our Moscone, Marriott Marquis in connection with NAREIT. So, you know what type of asset it is. It’s in great shape. It’s been fully renovated and repositioned and it is Main in Main for any business that is going to book through the Moscone Convention Center. And it is an asset that is extremely well set up to go after and bring in in-house group. So, we have that hotel and then we have the Grand Hyatt on Union Square another terrific property. So, as we think about the assets we own in that market generally and then the third material asset is the Marriott Fisherman’s Wharf, which is a leisure hotel as opposed to group and citywide property. We like the assets we have. We like the condition that they are in. So, we are in a pull position to really take market share and be the first to fill as business returns. And we have seen some good results, and I will let Sourav get into that with you in a moment. Now, I don’t want you to think that we don’t have concerns about San Francisco because we do absolutely have concern about how the market is performing relative to 2019 and what happened with the layoffs in the world of tech and the like, and return to office in that market is really lagging the rest of the country. But it is the center of tech and it’s going to be the center of artificial intelligence as the world returns. So with that, I will let Sourav give you some specifics on how our hotels performed in the market.

For the San Francisco market, we were around 61% occupancy or so at about $291. While RevPAR overall relative to ‘19 is down 27.5%, we did actually exceed our expectations by about 1.5% or so. And that was driven by strength of group, but in particular, with the return of the JPMorgan Group. Food and beverage did really well. We were actually up almost 10% compared to our forecast. And this is due to just the increase in contracted banquet minimums, which frankly, we have been seeing across the board, but really did help San Francisco quite a bit. We do see a lot of in the quarter for the quarter pickup in San Francisco, a lot of the rooms that were actually booked a big piece of it was San Francisco that we picked up in the quarter. Overall, when we are looking out for the rest of the year, there are a few citywides that are there. I think for 2023, the total number of citywides is about 34. And then another 20 citywides confirmed for 2024. So, there is certainly – I would be cautious and say somewhat of a positive trend. And while it’s a lot of it is short-term and not necessarily long-term pickup. There is certainly some green shoots in San Francisco.

Really appreciate it. Good quarter. Well done. Thanks.

Your next question is coming from Michael Bellisario with Baird.

Thanks. Good morning. Probably for Sourav here on the expense side of the P&L, are you seeing any easing of the cost pressures or the hiring challenges that you have mentioned previously? And then do you have any updated forecast where you see wages and benefits tracking for the remainder of the year? Thanks.

Yes. Our outlook in terms of wage and benefit for the year, year-over-year increase is still at the 5%-ish. Don’t expect that to change for the year. We are tracking well on that. In terms of just overall staffing, given where our business volumes are right now, we feel pretty good. I would say we are fully staffed across the portfolio and are not seeing any major challenges. I mean it still is in certain markets, difficult to hire a line cook. But apart from that, we are lucky where we are predisposed to primarily Marriott managed and Hyatt managed hotels, brand-managed hotels, which they do a really good job of acquiring talent and retaining talent and really are pushing for hospitality as a career, which has made it much easier to staff-up, not only staff-up, but really get quality talent into our hotels.

Thank you.

Your next question is coming from Bill Crow at Raymond James.

Hey. Good morning everybody. Jim, or maybe this is more of a Sourav question. When you look at BT travel specifically, and you take out the higher rates that we have seen. Where is occupancy or demand depending on how you want to look at it relative to ‘19? How big is that gap?

Yes. That gap from a volume perspective, depending on the market, Bill, is still down anywhere from 15% to 20%. We obviously had a meaningful rate pick up, which – so if you look at sort of March, I said in my prepared remarks, our overall BT revenue is now down only 7% to 2019. But it is really market dependent. Certain markets are ahead. New York, for example, is meaningfully ahead almost close to where we were back in 2019. But I would say, in general somewhere between down 15% to down 20% in terms of volume.

Thank you for that. And then do you expect that, that gap can be narrowed further this year, or do you think that given the overall cost of travel, the macro headlines and tech layoffs, all that other stuff that we read about. Is that something maybe is it next year or even 2025?

It’s a little difficult to tell how that ramp is going to occur just given the macroeconomic uncertainty overall. But we are seeing a positive trend and sequential month-to-month improvement. One other thing to keep in mind, as we sort of talked about in our prepared remarks is, we are getting a lot of demand from small and medium-sized of business transient versus the larger companies. And some of that comes in through retail, which is difficult to classify exactly as business transient. So, some of the gap or one could argue is being made up by selling more directly through retail as opposed to being classified business. But in general, we still expect some improvement to occur, but probably plateauing until there is more macroeconomic certainty.

Great. Jim, if I could just ask you a quick one. You noted that you are in the hotel ownership business, which I agree, but you are also in the shareholder returns business. I am wondering if the prospects for acquisitions can be appealing enough to use capital in lieu of share repurchases?

Yes. Bill, we are actively evaluating potential investment opportunities. I think the gating factor that really distinguish his Host is the fortress balance sheet that we have. Finishing the quarter now back down to 2.2x leverage, after all the activity that has occurred over the last several years, in particular, including the eight acquisitions that were completed over the course of ‘21 and ‘22 as well as the $1.5 billion that we put in our portfolio, all of that is leading as well as the capital allocation decisions that happened from ‘18 forward, that’s what’s leading to our outperformance today. So, I just – I want to set the table and the transformation of the portfolio with our RevPAR up 9% on a comparable hotel basis to 2017, TRevPAR up 15% and EBITDA per key up 31% and our un-blenching and unyielding focus on expenses and margins is a big reason why we were able to flow through our 24% to 27% RevPAR guidance in first quarter and deliver 31% and put in a substantial beat and raise for the entire year. So, we will continue to look for acquisitions that will elevate the EBITDA growth profile of the company. Right now, what we are seeing out there is a fairly wide bid-ask spread between sellers, what sellers want and what we are prepared to pay today. Now that can change, and it can change for a number of different reasons on. I am talking about non-distressed assets right now. But it can change as we see a clearer picture of the macro as we and everyone else draw some conclusions about how the economy is going to perform going forward. And when I say it can change on both sides, right, I mean we can get more bullish on…

Very good. Thanks Jim. Look forward to seeing you next week.

Likewise.

Your next question for today is coming from Chris Woronka at Deutsche Bank.

Hey guys. Good morning. Thanks for all the details so far. So, my question will be on kind of group rate. It seems like you are really starting to benefit from some of the rate increases you got on stuff booked post-COVID. Where do you think you are if we want to use the baseball analogy of innings in terms of recapturing or maybe the answer is pushing group rate? I mean how long of a tail do you think that has? What kind of increases are people agreeing to now for business – group business out in, say, ‘24 to ‘25? Thanks.

Yes. We continue working with our managers to make sure that rate is certainly a priority. And those conversations, frankly, in a high inflation environment are much easier to have than otherwise. And if you look at sort of where we were in terms of our group rate, just for 2023 at the end of the fourth quarter, we were around 5% higher year-over-year, and we improved 90 basis points already by the end of the first quarter. So, wherever possible, we keep on pushing those rates, and we feel pretty confident that as their availability starts becoming more challenging as we go out into the future, and we have been seeing lead times really expand. So, once those specific date start getting booked up into the future, that leads to real yield management and be able to drive rates even further. So, all-in-all, a really good trend from a rate perspective, and we are seeing continuously rate strength not only into ‘23, but ‘24 and beyond.

Okay. Thanks Sourav.

Your next question for today is coming from Stephen Grambling at Morgan Stanley.

Hi. Thanks. This is perhaps a longer term question. But with some of your brand partners in the midst of large tech investments, how would you characterize the opportunity from a tech overhaul coming from some of your partners? And then zooming out, what are your general thoughts on artificial intelligence on how that could not only approach how you bring or what you bring to the business, but also what are your brand partners fit in?

Given that Sourav was the father of our relationship with IBM Watson, Stephen as much as I would like the answer to this question, I am going to let him answer it.

Thanks Jim. In terms of what our brand partners are doing with technology, I mean we have had always been at the forefront of trying out new technology, whether it’s proof of concept of piloting new technology to drive not only productivity improvement and just looking at overall sort of expenses, but also what is really going to drive customer satisfaction and what I like to refer to as sort of reduced transaction friction. And those are conversations that we have with our managers is when you think about sort of the front desk of the future, does there really needs to be a front desk period, if you are going to give – provide the optionality and flexibility to the guests of having access to your room, whether it’s through your phone or whether it’s through getting a physical key card to a kiosk and then being able to – if nothing else is there, you can approach a host or hostess to check you in. So, those are the kind of conversations we are having is how do you really leverage technology change the long-term sort of operating model that we have had and drive not only efficiencies, but improved customer satisfaction. As it relates to artificial intelligence, as Jim briefly mentioned there, we entered into this partnership with IBM Watson, back in 2018. And it really – there was – it was really IBM Research to develop a proprietary model for us that will help us identify markets that outperform or underperform and rank them, so we can make much better capital allocation decisions, whether that’s acquisitions, dispositions or frankly, even investing capital in our existing assets. And I will say this is while certainly IBM Watson couldn’t predict the pandemic, it was most accurate in terms of predicting what RevPAR would do relative to every other third-party predictor out there and including our internal predictive analytics. So, it’s been a really good partnership and it really is a tool that we utilize to help us make capital allocation decisions. But certainly on the forefront of it, we use natural language processing as well as multiple data points that are churned through IBM’s computing system to come up with those rankings.

Helpful. Thank you.

Our final question for today is coming from Duane Pfennigwerth at Evercore ISI.

Hey. Thanks. Most of my questions have been asked. Just on BI, and I apologize if you have said this, your guidance does not include any business interruption, insurance or reimbursement there. But what do you anticipate that to be this year?

Frankly, it’s difficult to tell right now because it is something that we agree upon with our insurers. So, from a timing perspective and the amount perspective, exactly how much we will get this year is difficult. And that’s frankly why we have not put it in our forecast, and it’s not in our guidance. But the moment we do collect BI, we will obviously let you all know and it would flow through down to EBITDA.

Okay. Thanks.

Sure.

We have reached the end of the question-and-answer session, and I will now turn the call over to Jim for closing remarks.

I would like to thank everyone for joining us today on our first quarter call. We are really excited about the way the year is setting up for us, and we appreciated the opportunity to discuss our results with you and talk about guidance for the balance of the year. As a reminder, we will be hosting an Investor Day on May 22nd and 23rd in Orlando, Florida. We hope many of you can join us, and we look forward to seeing you there. Thanks again.

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