Host Hotels & Resorts, Inc. (HST) Earnings Call Transcript & Summary

[Audio Gap] It's going to be a slow process, and it's going to take some time to get back to where we were in 2019.

Got it. So you mentioned some good numbers in -- when you reopened. There's been a lot of talk about growing new demand at beach and Sunbelt hotels. Besides those 2 hotels you mentioned, where are you seeing strength in that business? And what percent of your hotels do you think can take advantage of this kind of leisure demand growth [ in the recent weeks ]?

We have about 5,800 rooms or 12% of our room count in Florida alone. So we feel very positive about the business returning to those hotels. In addition, if you look at our hotels in Los Angeles, in Arizona, in San Diego, in San Antonio, Houston, Texas and Atlanta, we have 17,000 rooms in the Sunbelt region, which is about 36% of our total room count. So we are seeing the consumer in these drive-to markets. There is pent-up demand. They want to get out of their houses. People have had enough of quarantine. And we're optimistic that we will be able to continue to grow leisure demand in those drive-to markets.

Got it. Has there been any sign of the more traditional corporate midweek business coming back in any of those markets?

No, not really at this point in time. It's been really somewhat de minimis. But I will tell you, I mentioned the fact that we did get a group at Naples after Memorial Day -- on the Monday, Tuesday and Wednesday after Memorial Day weekend. And it turned out to be a very positive piece of business for us because they had signed a contract for 245 room nights, and they ended up taking 13% more nights when they arrived. They signed a contract on May 15. When they got there on May 25, they had 13% more room nights. So interestingly, it was an investment company out of Chicago. People arrived from around the country. 90% of the guests arrived from multiple cities by air, while 10% drove. Another interesting stat. I'm not commenting on whether this is good or bad, but no one wore masks during the meetings. We practiced proper social distancing with the breakout sessions and the banquets and made certain that we reduced the number of people sitting at the rounds and set the rounds up in such a way that we provided 6 feet between everybody. But as to the traditional corporate midweek business, I think 2 things. Given the fact that most of the lockdowns are just coming off, it's going to take some time for that business to recover. In general, we're working with our operators to drive business as hard as we can, but we're prepared for a slow recovery, particularly from business, transient and group customers. We think it's not going to recover until we have a vaccine or an effective therapeutic that's widely available to the public. So...

Got it. On the group business, I guess it's interesting because my thought has been [ you seem to recover ] last and late in corporate transient, but it seems like at least in Florida, there's the ability to have group meetings, and the demand was there. So do you think group in certain markets can come back a bit quicker than corporate transient? And what markets could those be?

I think one thing we're looking at, given the number of properties we have in Sunbelt cities like Florida, like Atlanta, like L.A., San Diego, Phoenix, the cities I mentioned before, we think there might be a desire on the part of meeting planners to set up group meetings in those markets as opposed to some of the cities in the Northeast where you still have issues surrounding COVID, and you have a much denser population area. And I think there's a lot of talk right now that heat does work to weaken the virus. I'm not sure that it kills the virus, but it weakens the virus. So the risks appear to be much less in warmer temperate climates. And I think we can see group coming back. Associations and the group -- association and corporate groups that have canceled are rebooking their business. Now -- I mean we're not banking that business because I do think, as I said, until we have a vaccine or a therapeutic, it's very difficult to put your arms around when group is going to actually come back. One other thing I'd add is that we are in a unique position given the size of our hotels. We can take group, and we can take group with proper social distancing. Obviously, it's not going to be as lucrative as it had been in the past when we could utilize every inch of space in ballrooms and for breakout rooms. But we do have the ability that others don't just given the footprint that we have.

Got it. And just stepping back, a lot of investors I talked to expect to get back to prior peak May 2019 RevPAR by 2023. Is that something that seems reasonable to you? I know it's a bit early, but that is...

That's how we're thinking about business returning, somewhere between late '22 and 2024 at this point in time. And we've looked at, as best as we can, the data that we have from past recoveries coming out of the Great Recession and coming out of 2001. And I think the 2023 time frame is a reasonable assumption at this point.

Got it. All right. So a lot of the industry has talked about COVID-19 being a catalyst for changing how hotels are run like implementing more technology, making hotels more efficient. Have you done more work on that over the past few months than you had previously? And when do you think you'll be able to implement some of those changes at the hotel level?

Well, I think that we are clearly -- we're working very closely with our operators to redefine the operating model with the hotels. I think this is a very good opportunity to do that. We have never seen such a precipitous decline in revenues and the resulting unfortunate furloughing of associates. But we're rethinking everything. Our technology adoption has been ongoing. We do believe that COVID-19 is going to accelerate technology adoption, and it's for 2 reasons. Number one, I think customers are going to -- wants to see less interaction. And we're looking at it really in 2 ways: front of the house and back of the house. With respect to the front of the house, there's an impetus to change the front desk experience. Customers want to minimize at this point in time human interactions. So we're adopting digital keys at a more accelerated pace as an example. And a digital key can either be on a customer's mobile phone or then displayed via kiosk, where somebody scans a code from your phone. We're adopting technology that will enable mobile-based ordering at the poolside or in-room as well as the ability to control in-room systems with a phone. We're adopting interactive voice automation to automatically answer the most frequently asked questions. Other things that we're thinking about are having guests wear RFID bracelets that could provide thermal scanning. I mean there are obviously privacy issues here. Facility usage monitoring, contact tracing. So there are a lot of initiatives underway with respect to the front-of-the-house operation. Back of the house, innovations to support property staff. As an example, autonomous vacuum cleaners that can shave 5 minutes off a housekeeper's cleaning time, robotic arms that can help with food preparation in the kitchen and delivery as well. So I think there -- we are sitting today with about 80% of our hotels that already have mobile key active or available for use. We expect the rollout of 5G to further propel implementation. 5G is significantly faster than 4G from a download speed perspective, and it's going to be able to much better pool all of the network capacity and connect all of the various systems that are out there. So the short answer is yes, we've got a lot going on.

Got it. Seems like the cost of cleaning a single room will go up with the new brand standards versus with cleanness and all the brand initiatives. Where else in the hotels can you offer that cost increase in the near term as you reopen the properties?

Yes. With respect to cleaning, we have participated in customer-focused groups, and our managers have run some of those groups. AHLA has also provided access to research that's been done. I would tell you that cleaning and sanitation is the #1 desire of the traveling consumer today. So we are going to make certain that our properties are effectively sanitized during and after each day. Marriott right now, as an example, is conducting time and motion studies to evaluate the incremental cost of greater in-room cleaning and public area cleaning. So we're wrapping our arms around it. We're looking at new cleaning and disinfecting practices, including the use of electrostatic sprays. And those costs, we think, are going to be offset by 3 broad categories: above-property hotel expenses, brand standards and as I mentioned just a minute ago, using technology to adapt to changing customer preferences. So while there's going to be incremental costs associated with cleaning, we think that by redefining the operating model, that we can offset those incremental costs through improvements in productivity and give the customer what they want, which is assurance that they are going to be staying at a hotel that's been properly sanitized and cleaned going forward. We clearly believe that our operating expenses post COVID-19 are going to be less than they were pre COVID-19.

Got it. Let me go to my next question. Some of the biggest challenges that the REIT spaces face in the hotel space has been cost inflation and supply growth. It sounds like you're going to see at least some cost inflation, but how do you see supply growth impacting the portfolio over the next few years?

Well, cost inflation, I think, unfortunately, this pandemic has created a lot of slack in what was a very tight labor market. There's no question about it that from that perspective, we think there'll be less pressure on wages going forward. And we think that we will continue to become more efficient when it comes to cost inflation. Coming out of the 2009 downturn, we made improvements in several operating expense line items that were significantly reduced, and they continued to improve through the cycle. So I think we're going to be okay on that front. With respect to supply, CBRE has already put out a projection that shows less than 1% supply growth in 2020 to 2022 in our top 20 markets. So I think we are going to get a -- going to see a meaningful reduction in not only new supply, but we may see, in certain markets, a number of hotels that just are not going to open. And that will be converted to alternative use going forward. So I think if there is a silver lining here, it's that the supply picture is going to improve meaningfully for the next several years as we work our way through this.

Got it. One of the biggest differentiators of Host right now is its CapEx program. You're still going to see some of your major renovations this year with the Marriott Capital Program. Why did you decide to press on with those renovations even given the uncertain capital environment? And do you think they can generate returns in this period given the overall demand environment being so uncertain?

Yes, we do. We think we are uniquely positioned given the way the company was -- given the balance sheet that we had coming into this year. 60% of our capital expenditures in 2020 are related to the Marriott Transformational Capital Program. That's roughly $180 million to $200 million. And as you may recall, we are receiving operating profit guarantees that were designed to offset the disruption that was associated with the enhanced renovations associated with the program. So we'll get around $20 million this year, which is more than we've even gotten in the past because Marriott would have been an incentive management fee on the properties that we're renovating. Obviously, that's changed. The other thing that's changed is we're not going to suffer the disruption. So that $20 million is a net plus to us right out of the chute, right out of the box. And it -- if you want to think about it in a current 1-year cash-on-cash return, it's going to be somewhere between 9% and 11%. Additionally, we will get enhanced owner priority returns on the monies we're investing. So when the markets start to return to normal, we will benefit before our operator does with respect to how incentive management fees are calculated. Our returns will come first. We feel that by continuing this renovation program, it's going to put us in a very strong position relative to others in the industry who have had to suspend operation, suspend CapEx programs because they didn't have the liquidity to do so. And this is a long ball game. This is not a 1-year look. These renovations will last 7 to 10 years. So we feel that we're going to be very well positioned through the cycle that will occur, and we should see a lot of meaningful RevPAR index gains. I would expect we'll see more than we underwrote initially, which was 3 to 5 points. And we'll continue to see yield index improvements as others have to renovate, whether that's in 2023 or 2024 as things get back to normal. So we're very comfortable with the decision we made. We did suspend about 50% of the CapEx that wasn't otherwise meaningfully committed or associated with the CapEx program. So we suspended between $100 million to $125 million this year, and we don't feel that, that suspension is in any way going to negatively impact our properties. They were more standard replacement reserve projects that we felt we could defer for a year, some ROI projects that we thought we could defer until next year or even beyond. So we did take some action with respect to preserving some capital, but we are excited to be in a position where we can renovate our hotels through this pandemic.

You mentioned you came into the year with a very strong cash position. However, given it's a very -- with COVID-19, you still had to cut your dividend, and you had to pause share buybacks. You are working on a credit facility amendment with the lenders. Do you think you'll be able to get some flexibility under that agreement to play some offense maybe later this year given your strong cash position?

Yes. I think we will get some flexibility, but I don't think that we're going to be seeing many acquisitions in the balance of 2020. What we're seeing happen in 2020 are distressed properties in the CMBS market that -- where you have CMBS loans moving into special servicing. That's going to take some time to work through. We are seeing borrowers are working with their lenders to achieve some forbearance as we see how things work out. So I think that you're not going to start seeing an active transaction market until 2021, and it may not even be the beginning of 2021. With respect to the banks, we were in a unique position coming into the year with the lowest leverage in the company's history at 1.6x with $1.6 billion of cash in the bank and structured in such a way that we will be in compliance -- are in compliance with our covenants through the second quarter, if not longer. That said, we took the opportunity to allow the banks to work with others who needed more immediate covenant relief. We have a tremendous relationship, a great relationship with our bank group. Many of them have been with us since the formation of the company, and they are working very productively with myself and our team to put a covenant waiver package in place that I think is going to give us some flexibility to go on offense when the time is right and when the opportunities present themselves.

Got it. The investment-grade debt market has been wide open, and of course, you're investment grade. I know you don't need to raise capital, but does it make sense to maybe access the market given the uncertainty? And maybe it would give you some additional flexibility going forward.

Yes. We look at it on a daily basis. We look at all sources of capital to us. A couple of things. Number one, our earliest maturity is not until 2023. So there's no need at this point in time to refinance those bonds. We have 2 series of bonds coming due. I think it's about $800 million in 2023. Our revolving credit facility of $1.5 billion, which we drew down in mid-March, doesn't mature until 2024. So we have, at this point in time, all the liquidity that we need. We have stress tested this in a "effectively all-closed scenario." And in that scenario, we have the liquidity in the bank today to take us through year-end 2021. So we feel very good about where we are. If we were to borrow money in the investment-grade market today, the only thing we would do is pay down our credit facility. And I don't know if you looked. Our bonds are trading still sub-5% the last issue that we did, which was priced at, I think, 3.375. We're about 4.9% now. Our credit facility -- revolving credit facility pricing is sub-2%. So we don't feel that there's a need to borrow in the investment-grade market today to repay that revolver.

Got it. I want to go back to something you mentioned about supply maybe coming out of some markets. We've seen a lot of stress in the New York market. You still have 3 large hotels in this market. [Audio Gap] permanently. Do you think the hotel market here will eventually rightsize itself and allow a better performance for some deals [Audio Gap] probably survive with it?

Yes. I think New York is -- don't count New York out. I mean New York has got a lot of challenges, but it is still an international destination. And as the world evolves and as we move beyond COVID-19, I think New York will come back. It's going to take some time. I think there are around 111 hotels now, which is about 75% of the supply in New York City that are closed, that have suspended operations. I don't know how many of those hotels are going to go away on a permanent basis, but I am hearing tangentially of properties every week where ownership has indicated they have no intent to reopen. So I think you're going to see a lot of the hotel supply in New York converted to alternative use. And we -- as you know, we sold 3 hotels in New York fortuitously at the time. Who knew? But we felt that we should lighten up our exposure to that market. So we sold the 2 Ws, the one in Union Square, the original W on Lex as well as the Westin Grand Central. So the properties that we're left with, the Marriott Marquis, the Sheraton and the Marriott Financial Center, I think, are well positioned. We're in the midst that Marriott Marquis is part of the Marriott Transformational Capital Program, and we are in the midst of renovating that hotel. Both the Marquis and the Sheraton actually performed quite well, and we're very pleased that we kept those properties open. We suspended operations at Financial Center. But they performed quite well up until mid-May, third week in May with business from medical responders, from visiting doctors and nurses and others. So I think New York is going to evolve. The one thing I don't think you're going to see in New York, Anthony, is new supply. I mean that's what really hurt the market. And there was -- it just seemed like supply was never ending coming into that market. So I think you'll see not only new supply but existing hotel supply right itself over time.

Got it. And maybe just one on pricing and how you approach filling rooms in this environment. How are you approaching pricing in your leisure hotels as they reopen? And how do you view OTAs as a tool to drive revenue in this environment?

Yes. Look, I think that we had some very good numbers come out of the properties over Memorial Day weekend. Let me get the exact number for you. But we had -- I'll just give you the differential between where we were last year and where we are this year. So as an example, at the Ritz in Naples, we ran about 50% occupancy and a $563 rate. Last year, the rate was $625, same time. So that's down about 10%. At the Ritz, Amelia Island, we ran -- where is that? Let's see. We ran 61% occupancy at $597, which is plus 2% over where we ran last year. So we're doing our best to hold rate. The Don CeSar in St. Petersburg ran 98% at $356. That rate was down almost 20% over last year. But we're doing our best to hold rate. We think that the fact that we are 90% affiliated with the major brands, and the bulk of that being Marriott, is going to put us in a very strong, competitive advantage as we start to reopen, I think, for 2 reasons. I referenced before the desire -- the top desire of the customers being cleanliness, sanitation, knowing that they can trust a hotel whenever they book their room. And between Marriott and Hyatt, 2 powerful companies that have long-established reputations, they're going to give the customer the degree of comfort that they need, that it's safe to come stay at one of our hotels. And additionally, with a very powerful loyalty program at both companies, I mean Bonvoy -- Marriott's Bonvoy program has over 140 million members right now. And we think that's going to be a key differentiator for us going forward given the amount of Bonvoy business that we get and knowing that I think roughly 50% of the business transient traveler who stays at our hotels is a Bonvoy member. So we'll use OTAs as need be. But brand direct, we feel, is the way to go. And we're working closely with the brands to make certain that we have the right levels of salespeople on property. It's a delicate balancing act, but we want to make certain that we're not missing opportunities but keeping cost in mind. And as the economy starts to open up as we get beyond COVID, I think you'll see some pretty significant marketing programs to bring people back into hotels going forward. That has -- obviously, there's been no marketing since this all started, rightly so. So we're balancing everything. I think the revenue management models had to be reinvented. We're working closely with the brands on that. I think revenue management today is more important than it's ever been. We want to do the best we can to not see rate degradation. I'm sure it's going to happen until we get occupancies back to the levels that we saw in 2019.

Got it. Stepping back, this is the last question. What do you think is the single biggest opportunity for Host [ during the year ] that the cycle just run its downturn and how to recover?

Well, I think -- can I only give you one -- can I give you a few?

A few works.

Well, number one, our balance sheet is going to put us, I think, in a unique position to really acquire hotels when the opportunity is right. I think we will be able to utilize the strength of our balance sheet going forward. I couldn't be more pleased that the actions we took, basically putting us at a $1.7 billion net seller of assets over the last 2 to 3 years, set us well as we were coming to the end of the cycle. No one can predict a pandemic. No one can predict COVID. But we did feel that the cycle was getting a little long in the tooth. So that is going to be the biggest advantage for us. The second, and it really all ties into our financial strength, the fact that we are continuing to renovate our hotels is going to allow us to drive market share gains, yield index gains. And that's going to put us in a unique position relative to others. And lastly, the unsurpassed talent of our enterprise analytics team and our asset managers working with world-class operators is going to allow us to redefine the operating model to make our hotels more efficient going forward.

Okay. Great. That's all I have. Jim, thanks for your time. Appreciate it.

Thank you, Anthony. Talk to you soon.

Talk to you soon. Hope we see each other in a meeting as soon as possible.

Yes. I think you and I both agreed at the beginning of this that this works, but this is why we need to have in-person meetings and why the future of the hotel business remains positive for the long term.

Right. Great. Thanks a lot. Goodbye.

Thanks.