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Edited Transcript of HST earnings conference call or presentation 2-May-19 2:00pm GMT

Q1 2019 Host Hotels & Resorts Inc Earnings Call

BETHESDA May 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Host Hotels & Resorts Inc earnings conference call or presentation Thursday, May 2, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gee Lingberg

Host Hotels & Resorts, Inc. - Senior VP of IR & Treasurer

* James F. Risoleo

Host Hotels & Resorts, Inc. - President, CEO & Director

* Michael D. Bluhm

Host Hotels & Resorts, Inc. - Executive VP & CFO

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Conference Call Participants

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* Anthony Franklin Powell

Barclays Bank PLC, Research Division - Research Analyst

* Bennett Smedes Rose

Citigroup Inc, Research Division - Director & Analyst

* Charles Patrick Scholes

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Chris Jon Woronka

Deutsche Bank AG, Research Division - Research Analyst

* David Brian Katz

Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure

* Jared H. Shojaian

Wolfe Research, LLC - Director & Senior Analyst

* Jeffrey John Donnelly

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Michael Joseph Bellisario

Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst

* Richard Allen Hightower

Evercore ISI Institutional Equities, Research Division - MD & Research Analyst

* Robin Margaret Farley

UBS Investment Bank, Research Division - MD and Research Analyst

* Shaun Clisby Kelley

BofA Merrill Lynch, Research Division - MD

* Stephen White Grambling

Goldman Sachs Group Inc., Research Division - Equity Analyst

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Presentation

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Operator [1]

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Please stand by. Good day, and welcome to the Host Hotels & Resorts, Inc. First Quarter 2019 Earnings Conference. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Gee Lingberg, Senior Vice President. Please go ahead, ma'am.

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Gee Lingberg, Host Hotels & Resorts, Inc. - Senior VP of IR & Treasurer [2]

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Thanks, Ebony. Good morning, everyone. Welcome to the Host Hotels & Resorts First Quarter 2019 Earnings call. Before we begin, I'd like to remind everyone 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 results. You can find this information together with reconciliations to the most directly comparable GAAP information in today's earnings press release, in our 8-K filed with the SEC and the supplemental financial information on our website at hosthotels.com.

This morning, Jim Risoleo, our President and Chief Executive Officer, will provide an overview of our first quarter results, our capital allocation strategy and our outlook for 2019. Michael Bluhm, our Chief Financial Officer, will then provide commentary on our first quarter performance, our capital position and our guidance for 2019. Following their remarks, we will be available to respond to your questions.

And now I'd like to turn the call over to Jim.

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [3]

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Thank you, Gee, and thanks, everyone, for joining us this morning. We are pleased to report another strong beat and raise quarter. Our first quarter results exceeded our expectations and beat consensus estimates for adjusted EBITDAre and adjusted FFO per diluted share.

Adjusted EBITDAre increased 10% to $406 million for the quarter and adjusted FFO per diluted share grew 11.6% to $0.48, beating consensus estimates by $20 million and $0.04 respectively. While we do not provide quarterly guidance, we indicated in our prepared remarks last quarter that 25% to 26% of EBITDA would be earned in the first quarter. We beat that forecast by $11 million.

These strong results were primarily driven by an impressive EBITDA margin improvement of 50 basis points. Comparable hotel EBITDA margins improved for the sixth consecutive quarter and meaningfully exceeded our expectations, demonstrating the benefits of our scale and integrated platform, key elements underpinning our ability to deliver operation outperformance. We continue to benefit from our internal initiatives, the Marriott-Starwood merger synergies, the receipt of operating profit guarantees from the Marriott transformational capital program and increases in other ancillary revenues.

These bottom line results are remarkable, considering the comparable constant dollar RevPAR decline of 1%. The RevPAR results were driven by an occupancy decrease of 180 basis points, which was partially offset by a 1.3% increase in average rate.

The factors that affected RevPAR this quarter include an estimated 40 basis points of impact from the disruption related to the Marriott transformational capital program, an estimated 30 basis points impact from the government shutdown and a softer-than-expected March. Despite these headwinds, comparable total RevPAR, which includes all hotel-level revenues, including food and beverage and other revenues, increased 30 basis points to $274 million.

These strong results continue to underscore the advantages of our geographically diversified portfolio of iconic and irreplaceable hotels, our unprecedented scale and platform to drive internal and external growth, and the power and flexibility of our investment-grade balance sheet. Together, these key pillars form the foundation of Host, the premier lodging REIT.

Next, I would like to discuss our disciplined capital allocation, as Michael will provide additional color around the key segments of our business and provide further details around our margin expansion.

In addition to achieving industry-leading margin improvements, we advanced our long-term strategic vision through active portfolio management, which ensures that the company is stronger than ever and well positioned for continued profitable growth. Specifically, we will continue to evaluate potential acquisitions of properties in key markets with strong demand generators while divesting noncore assets, including international assets as well as profitability-challenged assets like those in New York. This capital recycling strategy has been highly effective, enhancing our strategically advantaged competitive position to continue outperforming our industry. Consistent with this approach, during the quarter, we closed on the previously announced acquisition of the 1 Hotel South Beach and the disposition of The Westin New York Grand Central.

We have been very prudent and disciplined in our underwriting and balance sheet position, and as I stated last quarter, we intend to maintain our investment-grade balance sheet with the high end of our leverage target set at 3x. This provides us with a total investment capacity of $2 billion to $2.5 billion. We do not intend to move higher than our targeted leverage range nor do we intend to invest beyond that capacity. However, we will continue to be opportunistic in adding value-enhancing assets like the 1 Hotel South Beach and plan to use our current investment capacity to make similar, smart, targeted acquisitions. We will also continue to invest in our portfolio, as we are doing with the Marriott transformational capital program, and we will continue with our opportunistic approach to returning additional capital to shareholders through dividends and share repurchases.

Our capital allocation decisions over the last 2 years have improved the composition and performance of our portfolio. Since early 2017, we disposed of $2.8 billion of noncore and profitability-challenged assets, many of which required meaningful capital investment, and acquired $2 billion of high-RevPAR, high-quality, irreplaceable assets with no meaningful near-term capital requirements in markets we expect to outperform the industry.

As presented in our investor presentation on our website, on a trailing 12-month basis, since 2017, we sold 10 assets with a blended RevPAR of $186, total RevPAR of $266 and EBITDA per key of $24,000 at a cap rate of 4.9%. We recycled much of that capital into 6 assets with a blended 2018 RevPAR of $313, total RevPAR of $505 and EBITDA per key of $55,000 at a cap rate of 5.8%. The improvement of these transactions to the portfolio is impressive. You can see this transformation even more clearly by comparing our top 40 hotels today to where it was just 2 years ago.

Since 2016, as a result of our investment decisions, we turned over approximately 20% of our top 40 hotels, resulting in an increase in total RevPAR and EBITDA per key of $15 and $2,200, respectively. In addition, the case studies provided in our investor presentation show that our recent acquisitions have performed well. Our disciplined approach to capital allocation is yielding the desired results, and we intend to continue to pursue this strategy going forward.

Shifting to reinvesting in our existing portfolio. We anticipate spending between $235 million and $275 million on renewal and replacement capital expenditures and between $315 million and $350 million on redevelopment and ROI projects this year. The ROI projects include $225 million related to the Marriott transformational capital program, for which we are being well compensated. The program, which carries through 2021, began last year with the San Francisco Marriott Marquis. As we have described, these portfolio investments will position the targeted hotels, which are some of the most notable in our portfolio, as even stronger competitors in their respective markets with the goal of enhancing long-term performance and becoming #1 in their competitive sets. Notably, Marriott is providing operating profit guarantees as protection for the anticipated disruptions associated with the incremental spend.

In addition, we will receive increased priority returns on the agreed upon investments, which will result in reduced incentive management fees. We believe this is a great high-return use of shareholders' capital, as transformational capital projects had typically resulted in meaningful increases in RevPAR yield index, which translates to strong improvement in EBITDA. We anticipate the ROI on these investments to be in the low to mid-teens.

In 2019, as I have stated, we intend to spend approximately $225 million on 10 projects, with 4 to be completed during the year. Those 4 are the San Francisco Marriott Marquis, New York Marriott Downtown, Santa Clara Marriott and the Coronado Island Marriott, which is already complete. Only 3 of the 10 hotels, where we are allocating this capital, the San Francisco Marriott Marquis, the Minneapolis Marriott City Center, and the San Antonio Marriott Rivercenter, are excluded from our forecast comparable results.

The 7 that are still included in our comparable results have impacted RevPAR in the first quarter by an estimated 40 basis points, and we expect the impact -- we expect will impact full year comparable RevPAR by 45 basis points. However, the RevPAR impact is mitigated by the operating profit guarantee of $1.5 million and $10 million that has been included in comparable hotel EBITDA for the quarter and full year forecast, respectively.

For 2019, we expect to receive a total of $23 million of operating profit guarantee payments for both comp and noncomp transformational capital projects, which has been included in our guidance for EBITDA.

Turning now to our outlook for the remainder of 2019. Our bottom line results for the first quarter exceeded our expectations, and we expect improvement as the year continues. While I recognize that we are in the later part of the economic cycle, the U.S. economic outlook is healthy and appears supportive of industry growth. Importantly, the economic indicators we follow closely, including corporate profits and nonresidential fixed investment, while slightly lower than last year are still strong, and we anticipate that will continue.

We are monitoring the impact of a stronger U.S. dollar, the ongoing global trade dispute, including its impact on businesses' willingness to invest and the performance of the overall global economy. While modest 2019 GDP deceleration is widely anticipated as the benefits of the tax cut fade and the government shutdown gave the industry a slower start than we otherwise would have expected, we believe that overall, industry fundamentals are on solid ground. While the elongated spring break season impacted the demand in March for business travel, based on the solid nonresidential fixed investment and corporate profit outlooks, we expect business travel to improve as the year progresses. In addition, we expect leisure travel demand to remain steady, as this segment is supported by strong consumer income growth, solid employment and healthy sentiment.

Given our optimal group and transient mix, we are pleased with our position. As we mentioned last quarter, 2018 was a record year for group room nights with over 5 million group room nights booked for the year. Group revenue booking activity in the quarter for the remainder of the year was up 5% and up 20% for the second quarter. For 2019, total group revenue pace is up 70 basis points.

Our outlook for the full year has not changed, and we reaffirm our initial guidance of comparable constant dollar RevPAR growth of 0% to 2%. We believe RevPAR for the first quarter will be the weakest quarter of the year with the second half of the year expected to be stronger than the first. Based on our margin outperformance in the first quarter and our confidence that the increases are sustainable through the remainder of the year, which Michael will discuss further in his prepared remarks, we are meaningfully increasing our comparable EBITDA margin guidance to minus 25 to plus 35 basis points, lifting the midpoint by 25 basis points equating to an additional $13 million of comparable EBITDA for the year. We also expect an additional $7 million of EBITDA related to our noncomparable hotels, bringing the total increase from operations to $20 million.

In addition, we are now including the sale of The Westin Mission Hills and 2 additional unidentified assets, which decreases our EBITDA forecast by $7 million from our previous guidance. This is mitigated by an increase in forecasted interest income. In essence, our total full year raised is $27 million.

These assumptions result in full year adjusted EBITDAre of $1.535 billion to $1.6 billion and adjusted FFO per share of $1.76 to $1.84. At the midpoint, adjusted EBITDAre increases $20 million and adjusted FFO per share increases $0.03.

Before handing the call over to Michael, I would like to reiterate that we are very pleased with yet another beat and raise quarter, as it again underscores the strength and advantages of our premier lodging REIT. We are also pleased with our ability to continue to outperform our margins and note that this is our sixth consecutive quarter of margin expansion despite the fact we are in a lower RevPAR growth environment with record low unemployment. Our diversified portfolio of irreplaceable hotels, our unmatched scale and platform and our investment-grade balance sheet all position us to continue to outperform in the near, medium and long term. We will remain disciplined in our approach to capital allocation.

With that, I will turn the call over to Michael, who will discuss our operating performance and balance sheet in greater detail.

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Michael D. Bluhm, Host Hotels & Resorts, Inc. - Executive VP & CFO [4]

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Thank you, Jim, and good morning, everyone. Building on Jim's comments, all of us at Host are pleased with the strong results we delivered in the first quarter. Through active portfolio management, we have ensured that the company is stronger than ever and well positioned for continued profitable growth.

With that, let's discuss the details of our results. As expected, demand was impacted by the government shutdown earlier this year and some renovation disruption as part of our Marriott transformational capital program. As a result, on a constant currency basis, comparable RevPAR decreased 1%, driven by a 180 basis point decrease in occupancy, partially offset by 1.3% increase in average rate. Comparable total RevPAR, which includes all hotel revenues, including food and beverage and other revenues, however, exceeded our internal forecast and improved 30 basis points to $274.

Comparable hotel EBITDA margins, as Jim mentioned, improved for the sixth consecutive quarter, exceeding our expectations and improving an impressive 50 basis points. These margin enhancements, the details of which I will discuss in a moment, demonstrate the benefits of our scale and integrated platform, key elements underpinning our ability to deliver operational outperformance.

These results led to an increase of 10% in adjusted EBITDAre to $406 million and an 11.6% growth in adjusted FFO per share to $0.48 which exceeded both our internal and consensus estimates.

Let me provide some additional color around our margin outperformance. Our asset managers and enterprise analytics teams in collaboration with our managers continue to drive comparable hotel EBITDA margin growth and generate impressive profitability at our properties at this stage of the cycle. Our 50 basis points of margin expansion was 180 basis points greater than what we would have expected with the RevPAR decline of 1%.

Let me provide a quick high-level context to our margin outperformance. First, the timing of the tax rebate related to the New York Marriott Marquis benefited the quarter by approximately 25 basis points. As you may recall, we did not start receiving the tax rebates related to the Marquis until the second quarter of last year. The remaining improvements are divided roughly evenly between our internal initiatives and the benefits of our relationship with Marriott.

Let me give you a little bit more details about our internal initiatives, which are driving productivity improvement in rooms, and food and beverage, while decreasing operating expenses. Some of these initiatives include: working with our operators to reimagine operating models to more efficiently deliver services to guests when and where they want them. This could be as simple as messaging with guests prior to arrival to expedite the check-in process or more substantial like creating marketplace and grab-and-go food concepts in place of traditional restaurants and room service.

During a quarter with essentially flat comparable revenues and declining occupancy, we saw year-over-year productivity in rooms and F&B, lengthening the cancellation window and implementing technology to ensure consistent charging of cancellation fees. This has continued to help drive other revenue growth and has the added benefit of allowing for more reliable short-term revenue management at the property level. In addition to increases in other revenues from the improved collection of attrition and cancellation fees, ancillary revenues increased from the newly renovated golf and spa at the Phoenician.

Minimizing utility expense via investment in energy efficiency ROI projects. Over the past year, Host has completed 25 energy ROI projects, which are expected to generate not only utility savings, but also take advantage of rebates available on projects such as low-flow water fixtures, LED lighting and guestroom energy management systems. Utility cost in the quarter was down 2.7% to the same time last year.

Our enterprise analytics team along with our asset managers have done a fantastic job working with our operators to streamline food and beverage operations and improve the cost of goods for a number of years now. Properties continue to improve on pricing, menu design, waste and leveraging of major food purchasing programs. During the quarter, where F&B revenues were essentially flat, 2/3 of our properties had year-over-year reduction in food cost.

In addition to these initiatives, we continue to accrue benefits from the synergies of Marriott-Starwood merger. Marriott continues to use its increased scale to improve programs and combine systems to lower charge-out rates to its owners. This quarter, we've seen reduced fees related to the loyalty and rewards program, credit card commissions and group and travel agent commissions. And finally, the receipt of $1.5 million related to the operating profit guarantees from Marriott for the comparable hotels that are part of the Marriott transformational capital program is enhancing margins by 12 basis points this quarter and will continue through the remainder of the year and into 2021.

Let's move to the performance of the segments of our business. Starting with our Transient segment, overall first quarter transient revenues decreased 0.6%, as demand declined 1.6%. It was partially offset by a 1% increase in average rate. The decrease in demand was due to the partial government shutdown in January and the Easter holiday shift. Group revenues declined 1.5% as occupancy fell 3.9%, partially mitigated by a 2.5% increase in average rate. The decline in group occupancy was driven by a decrease in the association business predominantly due to a lack of citywide events in San Diego, Boston, and Chicago.

To partially mitigate this decline, our managers pursued corporate group business, which improved 4.1% this quarter. The increase in corporate group business, which represents the largest segment of all business this quarter, drove the banqueting, catering outperformance.

Overall, we are pleased with our optimal group mix for our portfolio. As you recall, 2018 was a record year for group nights with 5 million group rooms booked for the year. Consistent with last year, we have 85% of our group business booked for 2019, providing a strong base of business. In addition, as we think about our business for the rest of the year, activity in the quarter for the remainder of the year is up 5%.

Looking at individual markets. Our best performing domestic markets this quarter were Atlanta, Jacksonville, Phoenix, and San Francisco with RevPAR increases ranging from 6% to 16%. Atlanta's RevPAR improvement of 16% exceeded our expectations, primarily driven by the strong average rate growth of 17% due to the Super Bowl. In addition, we were able to capture stronger group demand the week following the Super Bowl and throughout March.

Our hotel in the Jacksonville market outperformed the STR upper-tier market by a wide margin with RevPAR growth of 14%. This growth was driven by a 7.3 percentage point increase in occupancy and 3.6% improvement in average rate. Exceptional group performance at the Ritz-Carlton, Amelia Island fueled the growth with volume up 32% over last year, which enabled the hotel to drive transient rate up 11%.

RevPAR for our Phoenix hotel outperformed our portfolio this quarter with RevPAR growth of 7.5%. This was primarily driven by 22% and 12% increases in RevPAR at The Phoenician and Scottsdale suites, respectively, both of which benefited from strong corporate demand. We also saw an increase in golf and spa revenues at The Phoenician from the redesigned golf course and the new spa, which was under construction in the first quarter last year.

In the San Francisco area, comparable RevPAR grew by 6%, which was driven by an increase in average rate of 12%, and partially offset by a decline in occupancy of 4.2 percentage points. This performance reflects the Santa Clara Marriott and the Marriott Marquis being under renovation. Additionally, the Grand Hyatt San Francisco, which remains noncomp, because it was acquired as part of the Hyatt portfolio last year, saw a double-digit RevPAR growth.

Now looking at the markets that were more challenged in the first quarter. Our hotels in New York, Chicago and Philadelphia saw RevPAR declines ranging from 7% to 13%. Our hotels in New York saw a RevPAR decline of 13.2%, which lagged the results for upper-tier hotels in the New York market. We performed in line with the market if we adjust for the renovations at the New York Marriott Marquis and the Marriott New York Downtown, both of which are part of the Marriott transformational capital program and remain comparable in our portfolio.

It was a tough quarter in New York for everyone, with first quarter demand declining for the first time since 2009. The magnitude of the impact the New York market has had on our portfolio was interesting. If we remove the New York hotels from our comparable results, comparable RevPAR would have increased 0.4%. Importantly, through reducing our exposure to profitability-challenged hotels in the market, which we've executed upon over the past year, strengthened the overall portfolio.

RevPAR at our Chicago hotels declined 11.5% due to weaker citywide activity impacting transient and group demand. Many of the conferences held in Chicago during the first quarter of last year rotated to other cities this year. Despite the hotels' ability to increase corporate group business, the softer market conditions hindered results.

While Philadelphia's RevPAR declined 7.5%, it still exceeded our expectations and achieved a 180 basis point improvement above the STR upper-tier market results. Last year, we benefited from the 2018 NFL playoffs and Super Bowl parade as well as a January 2018 citywide that did not repeat. Looking ahead to the full year, we expect RevPAR at our hotels in Atlanta, the Florida Gulf Coast, Jacksonville and Philadelphia to outperform the portfolio due to strength in corporate and leisure demand as well as strong citywide. Conversely, we expect RevPAR at our hotels in Seattle, New York and Chicago to underperform our portfolio due to weak citywide calendars and ongoing room renovations at our New York assets.

Moving to our balance sheet. In April, we paid a quarterly cash dividend of $0.20 per share, which represents a yield of approximately 4% on our current stock price. We continue to operate from a position of financial strength and flexibility.

We're the only lodging REIT with an investment-grade balance sheet, which we are committed to maintaining. We believe it is a prominent differentiator relative to our peers and provides flexibility to capitalize on value-creation opportunities throughout the cycle. At quarter-end, we had unrestricted cash of $1.1 billion, not including $191 million in the escrow reserve and $944 million of available capacity remaining under the revolver portion of our credit facility. Total debt was $3.9 billion with a weighted average maturity of 3.9 years and a weighted average interest rate of 4.3%.

In addition, we have no debt maturities until 2020. Our leverage ratio at the end of the first quarter is approximately 1.9x as calculated under the terms of our credit facility. As we've discussed before, our investment-grade balance sheet is a competitive advantage, and we intend to maintain that position.

And as Jim mentioned previously, with the high end of our leverage targeted at 3x provides us with a total investment capacity of $2.2 billion to $2.5 billion. We do not intend to move higher than our targeted leverage range nor do we intend to invest beyond that capacity. We will continue to be opportunistic to increase long-term shareholder value, through potential smart targeted acquisitions, reinvesting in our portfolio and through share repurchases.

Let me take a few minutes to discuss some assumptions included in our 2019 guidance. Our comparable RevPAR guidance for the year of 0% to 2% remains unchanged. As Jim stated, we believe RevPAR for the first quarter will be the weakest quarter of the year with second half of the year expected to be stronger than the first. We continue to estimate a 45 basis point impact to RevPAR due to renovation disruption related to the Marriott transformational capital projects. Without this impact, the midpoint of our RevPAR guidance would have been approximately 1.45%, which is mitigated by $10 million of the operating profit guarantee that has been included in our comparable hotel EBITDA.

For 2019, we continue to expect to receive a total of $23 million of Marriott's operating profit guarantees for both comp and noncomp transformational capital projects, which have been included in our guidance for EBITDA.

In addition, I hope the details I provided surrounding our outsized leverage to the Marriott-Starwood integration and the internal initiatives of our asset managed and enterprise analytics teams help you understand how we can continue to drive margin outperformance.

Based on the strong margin performance in the first quarter, we've increased the midpoint of our EBITDA margin outlook by 25 basis points to negative 25 to plus 35 basis points. These assumptions result in adjusted EBITDAre of $1.535 billion to $1.6 billion and adjusted FFO per share of $1.76 to $1.84. At the midpoint, adjusted EBITDAre has been raised by $20 million. This increase would've been higher by $7 million if we had not sold the Westin Mission Hills and included 2 additional unidentified dispositions. Therefore, the $20 million full increase in EBITDAre includes $13 million from our comparable hotels and additional $7 million related to our noncomparable hotels. The decrease in EBITDA from asset sales of $7 million is mitigated by our anticipated increase in interest income.

Lastly, keep in mind that we expect to earn 29% to 30% of our total EBITDA in the second quarter.

Overall, we are pleased with the strong bottom line operating results, which meaningfully beat guidance we provided in February. Our performance continues to demonstrate [condoning] a portfolio of iconic, irreplaceable and geographically diversified hotels, having the scale and platform to drive value and maintaining a powerful investment-grade balance sheet creates a strong strategic position to deliver superior value to our stockholders.

This concludes our prepared remarks. We will now be happy to take questions. To be sure that we have time to address questions from as many of you as possible, please limit yourself to one question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Anthony Powell with Barclays.

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Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [2]

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Wanted to focus on the Marriott-Starwood integration benefits. It seems like you're doing even better than the 50 basis points of improvement that Marriott itself identified for its managed portfolio this year. What's the price to the upside from that integration? What's next from Marriott later this year and next in terms of further benefit? And as a result of this, do you think that you can maintain the growing margins slightly at a 1% RevPAR growth level next year and the year after?

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [3]

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Anthony, I'll give you a little color on some of the benefits at a more granular level that we received this year. The -- we calculate the total benefit in the quarter of about 78 basis points from Marriott-Starwood integration. And roughly, let's call it, 40 to 50 basis points of that is a result of lower travel agent group intermediary commissions, loyalty program expenses and the establishment of the program services fund that is very helpful and our ability to control cost, charge-outs and the like.

The other piece of it is that we have, say, call it, 30 to 40 basis points, I'm giving you ranges here in savings that are related to the new credit card program and the operating profit guarantee. So we're confident that the margin performance is going to carry through for the rest of this year. And we would expect to see, I'm not going to say, a full point, but call it, another 50 basis points over the next couple years.

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Michael D. Bluhm, Host Hotels & Resorts, Inc. - Executive VP & CFO [4]

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Yes. I mean Anthony, I would say, to your question, there really wasn't any surprises. I mean much of this is what we've been enunciating to the market about what our expectations were around the benefits of these synergies. And to your question of kind of what's coming next, I mean, as you recall, there is a fair amount of things that really just started getting put in place over the past 6 months or so. In particular, things like the reservation and yield management systems really just integrated at the end of last year. And so we still really haven't seen the benefits of that particularly from revenue synergies.

Group commissions for the large group intermediaries didn't go into -- that reduction in group commissions didn't go into place until the end of last year. Last March was the smaller intermediaries where they changed it. The integration of the loyalty program just occurred towards the end of last year. The program services fund went into place at the beginning of this year. So there's still a fair amount of things that we sort of expect to continue to help drive the 40 to 50 basis points of improvement for the next couple years that we've consistently talked about.

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [5]

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The other thing I'd add, Anthony, is that a big driver for us in the quarter was the transient cancellation fee pickup. The fees are now being automatically charged. So it's not like where -- I'm not suggesting for a moment that we have higher cancellations, but the cancellations do occur -- that do occur are being charged to the customer.

Lastly, too early to quantify, but we're very confident that over time, as a result of the integration, when it's done, and we look back that we will see significant topline impact going forward. I mentioned this a couple calls ago, our Starwood legacy hotels gained access to 30,000 business-to-business accounts that were in the Marriott pipeline that Starwood didn't have. So I don't even think we've seen the tip of that going forward.

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Operator [6]

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And our next question will come from Smedes Rose with Citi.

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Bennett Smedes Rose, Citigroup Inc, Research Division - Director & Analyst [7]

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I wanted to ask you just about, as a large owner of Marriott hotels, your thoughts on Marriott entering the home-sharing business here in the U.S.? Do you see that as a totally separate business, or what are your thoughts around that?

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [8]

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Yes, Smedes, we view the business as really complementary to our business. It's a different business. We actually view it positively, because it's going to give our existing guests another place to go and to earn points or redeem points as part of the loyalty program. It will take some pressure off some of our hotels from that perspective. And it should also, over time, reduce the charge-out cost associated with loyalty. We spent a fair amount of time looking at this and talking to Marriott about it. And the -- the test program that they ran in London, Tribute Homes by Marriott, generated 7,000 room nights from customers who went on the Marriott website to look at a Tribute home, but ended up booking a standard hotel room. So we think that more traffic through the system is good. These -- the properties that they are contemplating putting into this program are not going to be competitive with us. There is going to be a minimum of a 3-night stay, whereas our average stay is 2 nights. And it's really geared toward the leisure customer.

Lastly, I would tell you that it's going to be initially heavily weighted internationally in markets that Marriott doesn't have a presence today. And in the U.S. it's for the most part going to be rolled out in markets where they don't have a presence today. So complementary, not competitive, and we're excited for it going forward.

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Operator [9]

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Moving next now to Jeff Donnelly with Wells Fargo.

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Jeffrey John Donnelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [10]

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Yes, just circling back on the synergies of the Marriott and thinking about what's transpired since Marriott and Starwood got together. Do you guys know offhand how your RevPAR index, of your hotels has performed in the past year? Ideally those hotels not affected by renovations. I'm just curious if you've also seen revenue share gains as well as expense savings as a result of the combination?

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Michael D. Bluhm, Host Hotels & Resorts, Inc. - Executive VP & CFO [11]

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Can I say -- yes, that's a good question, Jeff. No, we've actually seen a slight uptick in our index from our Starwood hotels.

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Operator [12]

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Our next question will come from Chris Woronka with Deutsche Bank.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [13]

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Wanted to ask about some of the internal initiatives that are driving the margin performance. You guys have been working on those for a lot of years and you're getting really strong results right now and you did last year too. I guess the question is kind of, a, how sustainable? But more than that, it's really -- I think it would be a strong term to say you're redefining the cost structure of hotels. But some of these things related to food and beverage seem like they still have legs. So maybe give us a big picture view of what you still want to do in the hotels on the -- on the -- on some of these cost initiatives?

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [14]

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Sure. Our outperformance on margins is directly tied to our scale and our integrated platform, which we think distinguishes us from other lodging REITs in the space today. The amount of data that we have available to mine throughout the portfolio is quite extensive, and we receive monthly data feeds from all of our properties that allow us to identify best practices from property-to-property and as we wrap our arms around something that property A might be doing and beside it has the ability to be rolled out to the entire portfolio, that's something we take up with the brand. So we think that puts us in a very unique position.

And if you want to get a little more granular about it, we're going to continue to think about consolidating kitchens and reducing costs from that perspective to be more efficient. New marketplaces, grab-and-gos, we're doing them in New Orleans and the Logan and the Sheraton in Boston. And where we can, we will consolidate wage codes and combine jobs, but being very thoughtful about our associates and making sure that they are well taken care of.

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Operator [15]

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Our next question will come from Michael Bellisario with Baird.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [16]

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Could you maybe talk about your disposition outlook a little bit? How are you thinking about some of the noncore properties that still might be in your portfolio? And then also New York City too, with what remains there to potentially sell, just kind of buyer interest, pricing trends and kind of how you're thinking about the potential sources and uses of that capital, that might be coming in the door, that'd be helpful?

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Michael D. Bluhm, Host Hotels & Resorts, Inc. - Executive VP & CFO [17]

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Yes, as you know, Mike, it's a hypothetical question, but I'll give you some color around it as I can. As we think about continuing to prune the portfolio, we will be opportunistic in taking assets to market or responding to unsolicited offers, where we feel that we can achieve a value that's in excess of our internal hold value. And we continue to be very disciplined with respect to our underwriting for new investment opportunities as well as for assets we might want to sell by looking at the near-term RevPAR performance of an asset in a particular market, the capital needs and what we think is a fair and reasonable residual cap rate. So if market opportunities present themselves, we'll continue to prune. If they don't, we're very comfortable with the portfolio we have today. We're not in any rush to grow the portfolio or shrink the portfolio. I want to make that really clear. We're very comfortable with the assets that we own today.

So you asked specifically about New York, you can look at what we've done in New York over the last year and the fact that we've sold 3 hotels, which we deemed profitability challenged. We're very happy with the execution that we were able to achieve. And much like the commentary I just gave you around how we view value, that's how we view value on all assets regardless of what market we might be in.

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Operator [18]

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We'll take our next question from Robin Farley with UBS.

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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [19]

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The margin improvement in the quarter was strong, I wonder if you can help us think about how much the reduction in occupancy just since losing occupancy is kind of a better piece of RevPAR to lose than losing the rate, kind of all the variable expenses. Just maybe help us think about how to quantify how much margin is helped by losing 100 basis points of occupancy rather than losing 100 basis points of rate?

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Michael D. Bluhm, Host Hotels & Resorts, Inc. - Executive VP & CFO [20]

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Robin, I don't know that I can quantify that to the detail today. But I will tell you that we are very, very happy with the fact that we were able to increase productivity, both at the rooms level and at the food and beverage level, with a decrease in occupancy.

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Operator [21]

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Our next question will come from Jared Shojaian with Wolfe Research.

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Jared H. Shojaian, Wolfe Research, LLC - Director & Senior Analyst [22]

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So I want to ask you about your RevPAR in the quarter, which was down 1%. And I appreciate all the color you've given us on the call so far. But you're also keeping the guidance unchanged for the full year at flat to plus 2. Is there anything you're seeing in bookings rather than some of the macro data that you talked about that's giving you the confidence you'll see accelerating RevPAR growth throughout the year? And I guess, a different way to ask this is, do you need demand to accelerate, or does the current booking environment support flat to 2% growth as some of the noncomp hotels and other noise rolls off?

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [23]

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Sure. If you look at the 1% down for the quarter and you take into consideration the disruption from the Marriott capital program of 40 basis points and the effects of the government shutdown of 30 basis points, that left us with, call it, another 30 to get back to even. A lot of that was a result of a slowdown in business travel in the month of March that we saw as a result of -- and we've thought about this a lot and talked to a lot of people about it, including our operators and others, the spring break season this year, given the late Easter, was elongated. And that really put a crimp in business travel. So as we look at the remainder of the year, I mentioned in my comments and Michael did as well that we saw strong booking activity in the quarter for the second quarter of 20% and 5% for the year. We have 85% of our group business on the books, which is exactly where we were last year. We were very encouraged in the quarter with the pickup in corporate group bookings, which is -- which was up 4.1%; and higher food and beverage spend, which was quite profitable business. And we would hope we would continue to see that over the course of the year.

And then lastly, we saw a pickup in business transient pace -- revenue pace for the year up about 1.3% in the quarter. So all the factors we look at make us -- put us in a very comfortable position to maintain our RevPAR guidance of 0% to 2%. The other thing I would add is that we always anticipated that our first quarter was going to be the worst quarter of the year. And as we look out, I've said that the second half of the year is going to be stronger. And it gives us confidence to hold the course.

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Operator [24]

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We'll take our next question from Rich Hightower with Evercore ISI.

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Richard Allen Hightower, Evercore ISI Institutional Equities, Research Division - MD & Research Analyst [25]

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Jim, I want to ask, I guess, one question about out-of-room spend, but it's a 2-parter question. First of all, are you guys able to quantify the margin benefit from some of those spend categories, whether it's on the F&B or the catering side? And just help us understand the margin and flow-through profile of that segment. And then secondly, it's not the first quarter or the first company where we've seen nonroom spend outpace room revenues. And I'm just wondering, is there anything structurally related to that in terms of the ability to price one segment of the business versus the room segment and anything we should be paying attention to there.

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Michael D. Bluhm, Host Hotels & Resorts, Inc. - Executive VP & CFO [26]

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Yes, there's a lot in that question. I just want to make sure I heard it clearly. So the question is give a little bit more background on the margins in different departments as well as sort of understand kind of what's happening with trends in out-of-room spend?

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Richard Allen Hightower, Evercore ISI Institutional Equities, Research Division - MD & Research Analyst [27]

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Yes, that's right. And then on the second part, is there anything structural that we need to focus on between room revenue and out-of-room revenue in terms of pricing power overall?

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [28]

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Rich, I don't know that there's anything structural that we're seeing in the business per se, but as we think about our absolute margin performance and really break it down a little more granularly, food and beverage operations contributed 19 basis points, rooms productivity contributed 8 basis points. So utilities was another 9 basis points. Undistributed operating expenses was 5 basis points. So -- and I mentioned earlier today that the pickup in cancellation fees of 20 basis points. So it's a number of different areas of the P&L that are being touched. And our intention going forward is to continue to be focused on this and look for other opportunities to improve our margin performance, whether it's -- we'll have continued lower charge-out rates for the loyalty program where we're receiving benefit from lower travel agent commissions from Marriott's book direct campaign, and we saw a pickup of that of 2.3% in the quarter. I don't think there's anything really that structurally has changed.

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Operator [29]

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Our next question comes from Patrick Scholes with SunTrust.

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Charles Patrick Scholes, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [30]

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Two questions for you. How do you think the quarterly trajectory of RevPAR growth looks for the rest of this year? That's my first question. And how are you pacing overall for your company for group in 2020 and in 2021?

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [31]

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Yes. For us, for the balance of the year, and it may be different for others in the industry and for the broader industry, we would expect that our third quarter will be our strongest quarter, our fourth quarter will be the second strongest; the second quarter, third, and the first, the weakest. So it's in line with what we anticipated at beginning of the year. For 2020, Patrick, our group revenues -- group revenue pace -- total revenue pace is up 3.5% and we have about 50% of the room nights on the books for the year compared to 34% last year.

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Operator [32]

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Our next question comes from David Katz with Jefferies.

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [33]

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You've covered a lot of ground and a lot of detail and I appreciate that. Jim, you made some comments earlier about some of the detail that's available to you in the operating model from the plethora of data that's available to you. And I found some of those examples to be interesting. Can you elaborate a bit more on those and what inning you're in? How much more of that there is for you to do? And to the degree that we can maybe process that into some earnings power over time, that would be helpful.

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Michael D. Bluhm, Host Hotels & Resorts, Inc. - Executive VP & CFO [34]

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Yes. Look, I think, there's a couple things to talk about here. I mean if you sort of kind of think about how operationally we have been able to really (inaudible) we talked about it in our prepared remarks, it was very broad, right? It was -- sort of top line right, strong other revenues, we had strong F&B capture particularly from our corporate group business. Rooms and F&B productivity, we continue to find ways to eke out savings. And as Jim pointed out, in a declining occupancy environment is pretty spectacular. We did point out utility expenses and how much we saved there. But in aggregate, undistributed operating expenses in total were sub-inflationary, which is very impressive when you sort of think about the environment that we're in today. The Marriott-Starwood synergies we continue to really hold tight on sort of the 40 to 50 basis points a year. So as we sort of think about the duration of our ability to really eke out savings as compared to our peers, we feel pretty good that we've got a nice setup going into the year to continue.

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Operator [35]

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Moving next to Stephen Grambling with Goldman Sachs.

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [36]

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Coming at the M&A environment from a slightly different angle. What are you seeing in the supply of iconic assets coming to market and where are seller expectations? And perhaps as a follow-up, as we think about the $2 billion to $2.5 billion in liquidity, did I hear you correctly that you're more focused on individual assets versus portfolios? And where do buybacks fit into that equation?

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [37]

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Yes, I'll take the part on the M&A landscape today and how we're thinking about the market. I've been very clear that our investment capacity is $2 billion to $2.5 billion, assuming we go to 3x leverage. And we don't intend to invest beyond that level. I would tell you that we're rather agnostic with respect to whether it's a one property deal or a multiple property deal. It all starts with the assets, the markets, seller expectations, our underwriting, and that's how we're approaching the business.

So with respect to the landscape today, we always have an ebb and flow of assets in our pipeline and -- that exists today. We have a fairly healthy pipeline of assets that we're underwriting. It is very difficult to opine on hypothetical situations of what seller expectations are until you get to the table and see if you can make a deal. So it really is all over the board. Sellers are motivated by different reasons.

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Michael D. Bluhm, Host Hotels & Resorts, Inc. - Executive VP & CFO [38]

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Yes. Let me just -- just a quick comment on buybacks. I mean it remains obviously, one of our key investment opportunities and we think about it in the context that we think about any investment opportunity, whether it's investing in our own assets, whether it's buying, growing externally. And so as we sort of think about different opportunities, it absolutely sort of factors into our thinking about sort of where we think we can generate the highest rate of return for our shareholders. This quarter, we did not buy back any shares, but that again is more of a function of just sort of our investment opportunities.

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Operator [39]

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Our next question comes from Shaun Kelley with Bank of America.

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Shaun Clisby Kelley, BofA Merrill Lynch, Research Division - MD [40]

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A lot of the ground has been covered. So just a quick one on, could you just elaborate on the program services fund savings and the charge-out ratios, just maybe a little bit more of the mechanic of how that works when that has gone into effect and what kind of magnitude that drives -- of savings that drives for Host?

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [41]

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Sure. Why don't I start off with the program services fund, because -- and I'd say the majority of what the -- that entails is potential reservation system. Where we expect we're probably going to save somewhere around 8 basis points in costs associated with that. And really that's a function of -- and good on Marriott, really sort of rewarding the largest contributors to their system overall. And when they sort of think about fair sharing of costs, it's all taken into consideration. And so certainly a decent margin benefit that we expect to get and continue for the year.

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Operator [42]

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And this does conclude today's question-and-answer session at this time. I would like to turn the conference back over to Jim Risoleo for additional or closing remarks.

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [43]

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Thank you for joining us on the call today. We really appreciate the opportunity to discuss our first quarter results and 2019 outlook with you. We look forward to talking with you in a few months to discuss our second quarter results as well as provide you with more insight into how 2019 is progressing. Have a great day.

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Operator [44]

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And this does conclude today's conference. Thank you for your participation. You may now disconnect.