Host Hotels & Resorts, Inc. (NASDAQ:HST) Q4 2022 Earnings Call Transcript

Host Hotels & Resorts, Inc. (NASDAQ:HST) Q4 2022 Earnings Call Transcript February 16, 2023

Operator: 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.

Jamie Marcus: 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.

Jim Risoleo: 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 we were included in the DJSI North America for the sixth consecutive year. Additionally, we were once again included among the world’s most sustainable companies in S&P’s Global Sustainability Yearbook and named one of America’s most responsible companies by Newsweek. Subsequent to quarter-end, we amended and restated our existing $2.5 billion credit facility to further enhance the strength and flexibility of our balance sheet. The agreement reflects no increase in pricing and incorporates our industry leading commitment to ESG by adding incentives linked to portfolio sustainability initiatives, including Green Building Certifications and Renewable Energy Consumption.

On the capital allocation front, during the fourth quarter, we repurchased 1.7 billion shares at an average price of $15.93 per share through our common share repurchase program, bringing our total repurchases for the quarter to $27 million. We have approximately $973 million remaining capacity under the repurchase program. While macroeconomic headwinds continue to dominate the headlines, we remain optimistic about the state of travel for several reasons. First, although leisure rates are moderating, they remain well above 2019 levels. For context, transient rates at our resorts were 52% above 2019 in the fourth quarter, compared to 64% in the third quarter. Second, in the fourth quarter, we booked 400,000 group rooms for 2023. In total group revenue pace is down only 70 basis points to the same time 2019.

Third, while business transient demand has been uneven, revenue driven by this segment improved 440 basis points compared to 2019 on a quarterly sequential basis. Small and medium-sized businesses are driving the business transient recovery, and they represent a larger share of our corporate demand today. According to American Express Global Business Travel, transactions by this segment reached 80% of pre-pandemic levels in the third quarter. Our recent acquisitions continued to contribute to our outperformance and are substantially ahead of our underwriting expectations. Based on full year 2022 results, even up from the seven hotels we acquired in 2021 put us at the bottom-end of our targeted range of 10x to 12x EBITDA, well ahead of our plan stabilization period.

Looking back on our transaction activity since 2018, we have acquired $3.5 billion of assets at a 13.7x EBITDA multiple and dispose of $4.9 billion of assets at 17x EBITDA multiple, including $954 million of estimated foregone capital expenditures. It is worth noting that this quarter, we moved the 2017 comparison of our all owned hotel results from 2019 to 2022, as our 2022 results reflect more normalized operations. Comparing all owned hotel 2022 results for our current portfolio to 2017. We have increased the RevPAR of our assets by 9%, by 15%, the EBITDA per key by 31% and avoided considerable business disruption associated with capital projects. Moving back to fourth quarter operations and starting with the hurricane update, we estimate that Hurricane Ian impacted our fourth quarter RevPAR growth by 220 basis points, our adjusted EBITDAre by $15 million and our all owned hotel EBITDA margin by 40 basis points.

On a full year basis that translates to an all owned hotel RevPAR impact of 60 basis points and all owned hotel EBITDA impact of $18 million and an all owned hotel EBITDA margin impact of 10 basis points. As a reminder, the Hyatt Regency coconut point opened in November, and we expect to reopen the remaining pool facilities in Water Park in June. The Ritz-Carlton, Naples remains closed, and we are targeting a phased reopening strategy beginning this summer. Reconstruction at the Ritz-Carlton will enhance the resilience of the property by elevating critical equipment, introducing dry flood-proofing measures and replacing major equipment with more efficient machinery. In addition, while the hotel is closed, we are avoiding future disruption by executing planned capital projects that would have otherwise impacted operations.

While we are still evaluating the total financial impacts of the storm, we currently estimate the total property damage and remediation costs for all impacted properties in Florida to be between $200 million and $220 million. We are insured for $325 million per name windstorm with a $15 million deductible resulting in potential insurance recovery of approximately $310 million for covered costs. Based on our current reopening plans for Ritz-Carlton, Naples, we believe our insurance coverage is sufficient to cover substantially all the property damage as well as the near-term loss of business. Thus far this year, we have received approximately $50 million of insurance proceeds related to our plans. Continuing with fourth quarter results. Transient revenue was up 60 basis points compared to the fourth quarter of 2019 with strong rate increases making up for the volume shortfall resulting from lower business transient demand, light cancellations during the holidays, colder weather in Florida and hurricane displacement at Hyatt Coconut Point and Ritz-Carlton, Naples.

Revenue growth was driven by Orlando, Phoenix and Hawaii, which offset declines in San Francisco and the Florida Gulf Coast. Our resort properties continue to outperform with 13% transient rate growth over 2021. In the fourth quarter, we had 6 resorts with transient rates above $1,000 led by the Four Seasons Jackson Hole at over $2,200 and the Four Seasons Orlando at close to $2,000. Turning to Group. This is the second consecutive quarter group revenue exceeded 2019 driven by 10% rate growth. In the fourth quarter, our hotels sold 954,000 group rooms, bringing our total group room nights sold for 2022 to $3.8 million, which represents approximately 84% of 2019 actual group room nights. Total group revenue for 2022 was down just 11% to 2019 as 6% rate growth and contribution helped to offset lower demand.

In 2023, we currently have 2.9 million definite group room nights on the books which represents 80% of full year 2022 group room nights. This compares to 71% on the books at the same time last year for 2022, representing a 9-point improvement. Group rate on the books for 2023 is up nearly 6% to the same time last year, a 140-basis point increase since the third quarter. In addition, group revenue pace is up approximately 17% to the same time last year. We are very encouraged by the large group base we have on the books, particularly given short-term booking trends. Sourav will discuss more operational detail in our 2023 outlook in a few minutes. In addition to delivering operational improvements, we continue to execute on our three strategic objectives all of which are aimed at elevating the EBITDA growth profile of our portfolio.

Photo by Tholaal Mohamed on Unsplash

As a reminder, our objectives include redefining the hotel operating model with our managers, gaining market share at hotels through comprehensive innovations, and strategically allocating capital to development ROI projects. As it relates to our first strategic objective, it is important to note that we have achieved the bulk of the $100 million to $150 million of expense savings associated with redefining the operating model. In order to achieve the high-end of the range, we will need to get back to 2019 business volumes and as of the fourth quarter, occupancy was still 10 points below the fourth quarter of 2019. Turning to portfolio reinvestment. Our 2023 capital expenditure guidance range is $600 million to $725 million, which reflects approximately $275 million of investment for redevelopment, repositioning in ROI projects.

The projects include a transformational renovation of the Fairmont Kea Lani. The Phoenician Canyon Suites filler expansion and completing construction of the tower expansion, guestroom renovation and lobby transformation at Ritz-Carlton, Naples, which was delayed by Hurricane Ian. To-date, we have completed 14 out of 16 assets in our Marriott transformational capital program, and we will complete the San Diego Marriott Marquis by the end of this month. The final property, the Washington Marriott and Metro Center is underway, and we expect it to be completed in May. It is worth noting that actual 2022 capital expenditures came in at the low-end of our guidance range. As such, the midpoint of our 2023 range is $160 million higher than last year, which is driven by carryover capital and an estimated $100 million to $125 million of capital expenditures related to hurricane restoration work, which we expect to be reimbursed by insurance claims.

To conclude my remarks, we are extremely proud of the results we achieved in 2022, and we are confident that the quality of our portfolio, our ability to reinvest in our assets and our fortress balance sheet will allow us to continue our strong performance in 2023. With that, I will now turn the call over to Sourav.

Sourav Ghosh: 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 fourth quarter of 2019. The majority of the rooms booked were in Washington D.C., San Diego, San Francisco and New York. Corporate Group revenue was up 6% in the quarter, surpassing 2019 for the second quarter in a row, driven by a 14% rate increase. Our performance was driven by hotels in Orlando, Phoenix, Maui, New York and New Orleans. All 3 months in the quarter had corporate group revenue ahead of 2019 driven by rate and revenue was up substantially at both convention and resort properties. Association Group revenue was down 16% in the fourth quarter compared to 2019 despite rate growth of over 7%.

The revenue decline was driven by volume losses in San Francisco, Boston and New Orleans. However, San Diego, New York and Phoenix had association group demand ahead of 2019 levels. While association revenue was down in the fourth quarter, we saw meaningful pickup in booking activity for future years in the month of December. Additionally, rates compared to 2019 improved sequentially each month in the quarter from up 3% in October to up 15% in December. Wrapping up on groups with social, military, educational, religious and fraternal or SMERF groups, revenue was up 29% over 2019 driven equally by a 14% increase in rooms sold and a 13% increase in rate. Sports teams and weddings drove increases in Washington D.C., Los Angeles and New Orleans.

Shifting gears to margins and expenses, our fourth quarter all owned hotel EBITDA margin came in at 29.5%, which is 110 basis points better than the fourth quarter of 2019. We attribute the margin expansion to strong rates and increased out-of-room revenues, combined with operating model expense efficiencies despite the fact that Hurricane Ian negatively impacted margins by 40 basis points in the fourth quarter. As expected, the margin gap to 2019 narrowed relative to prior quarters due to continued inflationary pressures and more normalized staffing levels at our hotels. Our efforts to redefine the operating model continue to yield positive results even with occupancy still meaningfully below 2019 levels and elevated pressure on wage rates which ended the year up 5% on a year-over-year basis.

As detailed in our earnings release, moving forward, we will cease presentation of all owned hotel results and return to a comparable presentation for our hotel level results. We believe this will provide investors with better understanding of underlying growth trends for our current portfolio without impacts from properties that experienced closures lasting one-month or longer due to renovations or property damage. We have removed Hyatt Regency Coconut Point and the Ritz-Carlton, Naples from our comparable operations in our full year 2023 forecast due to closures caused by Hurricane Ian. Turning to our outlook for 2023. Current macroeconomic headwinds and the potential for an economic slowdown are competing with the margin recovery. That said, we continue to be optimistic about the future of travel.

Our performance this year will depend on our ability to maintain high rated business at our resorts and the continued improvement of group, business transient and international inbound travel. Given the significant macroeconomic uncertainty in the second half of 2023, we have provided a wider guidance range than normal, which assumes a slowdown in the second half of the year. The low-end contemplates a severe slowdown, while the high-end assumes a mild one. For the first quarter, we expect RevPAR growth to be between 24% and 27% as a result of easier comparisons due to Omicron, which is expected to bolster full year growth. For the remaining three quarters, we expect year-over-year RevPAR changes to be down low-single digits at the low-end of our guidance range to up low-single digits at the high-end of our range.

Looking ahead to recent trends, preliminary January comparable hotel RevPAR is expected to be approximately $184, a 67% increase over January 2022 and a 3.5% increase over January 2019. Taken together, for the full year, we anticipate comparable RevPAR growth of between 2% and 8% over 2022. Additionally, staffing levels are closer to stable and hotel operating costs are expected to increase in comparison to 2022. As a result, we expect comparable EBITDA margins to be down 360 basis points year-over-year at the low-end of our guidance to down 210 basis points at the high-end. Though, we expect comparable hotel EBITDA margins to be down year-over-year, we expect margins in 2023 to be only slightly down to 2019 despite lagging occupancy and four years of inflationary pressures.

This reflects our efforts to transform the portfolio and evolve the hotel operating model. It is particularly impressive when you consider that our total expense CAGR since 2019 is only 1.1% versus the core CPI CAGR of 4.1%. The margin decline year-over-year is driven by closer to stable, staffing levels at our hotels, higher utility and insurance expenses, lower attrition and cancellation fees, which totaled approximately $100 million in 2022 and occupancy below 2019 levels. As we noted throughout last year, 2022 margins were not sustainable, particularly when you consider the limited services provided at many of our hotels in the first half of the year, the staffing lag and the elevated inflationary pressures. At the midpoint of our guidance range, we anticipate comparable RevPAR growth of 5% compared to 2022, a comparable hotel EBITDA margin of 29% and full year adjusted EBITDAre of $1.460 billion.

Our 2023 full year adjusted EBITDAre includes an expected $11 million contribution from Hyatt Coconut Point and the Ritz-Carlton, Naples which are excluded from our comparable hotel set. The pre-hurricane estimated contribution from these two hotels, including the New Tower at Naples was expected to be an additional $71 million in 2023. It is important to note that we have not included the business interruption proceeds from Hurricane Ian in our 2023 guidance. In 2023, we expect wage rates to increase 5%. In the aggregate, from 2019 through 2023, we expect wage rates and utilities to increase 20% and insurance to increase approximately 100%. In 2023, we also expect attrition and cancellation fees to revert to historical levels. For context, in 2019, region and benefits comprise approximately 50% of our total comparable expenses, utilities and insurance comprised approximately 5%, attrition and cancellation fees were $50 million, and occupancy is still 10 points below 2019 as of the fourth quarter of 2022.

Turning to our balance sheet and liquidity position. Our weighted average maturity is 5.2 years at a weighted average interest rate of 4.4%, and we have no significant maturities until April 2024. As of today’s call, we have $2.4 billion in total available liquidity, which includes $200 million of FF&E reserves and full availability of our $1.5 billion credit facility. We ended 2022 at 2.4x net leverage. And since our last call, both S&P and Fitch have revised our issuer outlooks to positive from stable. Wrapping up, in January, we paid a quarterly cash dividend of $0.32 per share, which included a $0.20 special dividend. The Board of Directors authorized a regular quarterly cash dividend of $0.12 on our common stock to be paid on April 17, 2023, to stockholders of record as of March 31, 2023.

All future dividends are subject to approval by the company’s Board of Directors though we expect to be able to maintain our quarterly dividend at a sustainable level, taking into consideration potential macroeconomic factors. To conclude, we believe our portfolio, our balance sheet and our team are well positioned to continue outperforming, and we will continue to be strategic in the current macroeconomic environment. With that, we would be happy to take your questions. To ensure we have time to address as many questions as possible, please limit yourself to one question.

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Q&A Session

Operator: . Our first question is coming from Smedes Rose with Citigroup. Please go ahead.

SmedesRose: 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?

Jim Risoleo: 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.

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

Anthony Powell: 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.