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Edited Transcript of HST earnings conference call or presentation 7-Aug-19 2:00pm GMT

Q2 2019 Host Hotels & Resorts Inc Earnings Call

BETHESDA Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Host Hotels & Resorts Inc earnings conference call or presentation Wednesday, August 7, 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 & Senior Analyst

* Charles Patrick Scholes

SunTrust Robinson Humphrey, Inc., Research Division - MD of Lodging, Gaming and Leisure Equity Research and 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

* 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

* Thomas Glassbrooke Allen

Morgan Stanley, Research Division - Senior Analyst

* Wesley Keith Golladay

RBC Capital Markets, LLC, Research Division - Associate

* William Andrew Crow

Raymond James & Associates, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Host Hotels & Resorts, Inc. Second Quarter 2019 Earnings Conference Call. 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, Chantelle. Good morning, everyone. Welcome to the Host Hotels & Resorts Second 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 and 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 second quarter results, an update on our capital allocation activities and our outlook for 2019. Michael Bluhm, Chief Financial Officer, will then provide commentary on our second 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 to everyone for joining us this morning. I want to start by emphasizing how proud I am of all that we have and are accomplishing here at Host. Our successful execution continues 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. On the operations front, we delivered adjusted EBITDAre of $460 million and adjusted FFO per diluted share of $0.53, which was in line with the consensus estimates for the quarter.

Our performance this quarter was driven by 10 basis point increase in comparable total RevPAR to $305, which includes all hotel level revenues, including food and beverage and other revenues. We had strong comparable hotel EBITDA margins despite flat revenues and pressure on wages and benefits.

Our EBITDA margin declined 20 basis points, which included a 30 basis point negative impact related to the timing of the receipt of the New York Marriott Marquis tax rebate, which we received in the second quarter of 2018 and 6 basis points related to severance from a planned operational restructuring at 1 of our properties this year.

Excluding these onetime impacts, our EBITDA margin would have increased an impressive 16 basis points. We generated exceptional bottom line performance results despite the comparable hotel RevPAR decline of 1.5% in the second quarter. The second quarter RevPAR results was driven by an occupancy decrease of 140 basis points, which was partially offset by a slight increase in average rate.

The factors that affected RevPAR this quarter include an estimated 90 basis points impact from disruption related to the Marriott transformational capital program, weaker-than-expected transient demand in major markets like New York and supply growth in Seattle.

New York and Seattle had a meaningful impact on RevPAR for the quarter. Excluding those 2 markets, our comparable hotel RevPAR would have increased 20 basis points. This performance once again demonstrated the benefits of our scale and integrated platform, key elements underpinning our ability to deliver outsized results. 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 ancillary revenues.

Michael will provide additional commentary on our continued margin outperformance in his prepared remarks. In addition to our continued outperformance on our EBITDA margins, we have made significant progress on the capital allocation process. Year-to-date, we bought back $245 million of common stock, and we are opportunistically taking advantage of the current market conditions to divest some of our low RevPAR, high-capital expenditure assets amid a strong capital margin environment.

During the quarter, we closed on the previously announced sale of The Westin Mission Hills as well as 2 additional assets. Our leasehold interest in the Washington Dulles Airport Marriott and the Newport Beach Marriott Bayview. Subsequent to quarter end, we sold the Residence Inn Arlington Pentagon City, The Courtyard Chicago Downtown and Chicago Marriott Suites O’Hare, which we closed late yesterday.

Including the Westin Grand Central sold in the first quarter, year-to-date, we completed 7 asset sales for $609 million and have an additional 5 assets under contract for sale. For all assets sold year-to-date and those assets under contract after taking into consideration the estimated capital we would have spent on these assets, the combined EBITDA multiple and cap rate on the trailing 12-month results would be 15.3x and 5.7%, respectively.

We continue to focus on advancing our long-term strategic vision of owning iconic and irreplaceable properties in key markets, with strong demand generators and high barriers to entry, while divesting low RevPAR, high capital expenditure assets through active portfolio management, ensuring that the company is well positioned for continued growth.

As announced in our earnings press release, our Board authorized an increase in our share repurchase program to $1 billion. After taking into consideration the $245 million bought back to date, which includes amounts brought back in the second quarter and through the 10b5-1 program subsequent to quarter end, we have $755 million of capacity remaining. In addition, we further strengthened our balance sheet in the quarter by taking advantage of the strong bank debt markets. We refinanced our revolving credit facility in term loans, upsizing it from $2 billion to $2.5 billion. Michael will discuss this further in his prepared remarks.

The balance sheet has never been in better shape, and we are committed to maintaining our investment-grade rating. Shifting to reinvesting in our portfolio, we anticipate spending between $235 million and $265 million on renewal and replacement capital expenditures, and between $315 million and $345 million on redevelopment and ROI projects this year. The ROI projects include $225 million related to the Marriott transformational capital program, for which Marriott provides operating profit guarantees to cover the anticipated disruption and enhanced owners' priority returns on the incremental spend.

The transformational capital program, which carries through 2021 will position the 17 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. We believe this is a great high return use of shareholders capital as transformational capital projects have typically resulted in meaningful increases in RevPAR yield index, which translates to strong improvement in EBITDA.

We expect the ROI on these investments to be in the 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. Thus far, both the Coronado Island Marriott and the New York Marriott Downtown have been completed. Two additional hotels, the San Francisco Marriott Marquis and Santa Clara Marriott, are expected to be completed in the fourth quarter.

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 second quarter by an estimated 90 basis points, and we expect will impact full year comparable RevPAR by 50 basis points.

However, the RevPAR impact is mitigated by the operating profit guarantee of approximately $5 million and $10 million that has been included in comparable hotel EBITDA for the second 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. This has been included in our guidance for EBITDA.

Turning now to our outlook for the remainder of 2019. The U.S. economy slowed, but still grew a solid 2.1% in the second quarter. Strong consumer spending offset a drop in business investment. Consumer confidence is at an all-time high, while employment is at a 50-year low. The consumer is in good shape and leisure demand remained strong.

Businesses were cautious in the quarter, likely driven by the global slowdown and the uncertainty surrounding the ongoing trade negotiations. Full year nonresidential fixed investment, while still healthy, declined 40 basis points since the first quarter to 3.6%. We believe this led to a decline in business transient demand, especially in major markets, such as New York and San Francisco.

All of these factors resulted in weaker result than we and the industry anticipated. Overall, as we look to the second half of the year and amid the growing uncertainty of a trade deal with China being concluded in the near term, we do not see any near-term catalyst to induce business transient demand.

As a result, we are revising our full year guidance to reflect a slightly softer operating environment. Our outlook for the full year for comparable constant dollar RevPAR growth is now flat to down 1%. Based on our continued margin outperformance in the second quarter and our confidence that the increases are sustainable through the remainder of the year, we are increasing our margin guidance.

We now expect comparable EBITDA margin to be down 25 basis points at the low end and up 25 basis points on the high end of our guidance. Michael will provide further details surrounding our second quarter margin outperformance as well as reasons for our confidence for the remainder of the year in his prepared remarks. These assumptions result in full year forecasted adjusted EBITDAre of $1.5 billion to $1.54 billion, and adjusted FFO per share of $1.73 to $1.78.

Keep in mind that our new guidance now includes a reduction of $21 million through our forecasted EBITDA for the sale of the Residence Inn Pentagon City, The Courtyard Chicago Downtown, Chicago Marriott Suites O’Hare and 5 additional anticipated asset sales. If we did not sell these assets at the midpoint, our guidance for adjusted EBITDAre would have been $1.541 billion and adjusted FFO per share would have been $1.79.

Before handing the call over to Michael, I would like to reiterate that we are very pleased with our ability to continue to outperform our margins and continue to execute on our disciplined capital allocation strategy. Our diversified portfolio of irreplaceable assets, our unmatched scale and platform and our investment-grade balance sheet all position us to deliver shareholder value in the near, medium and long term.

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 our strong continued bottom line performance this quarter. Our asset management and enterprise analytics teams continue to assist our managers with controlling costs to drive margins in a low total RevPAR environment. With that, let's discuss the details of our results for the quarter.

On a constant currency basis, comparable total RevPAR, which includes all hotel level revenues, including food and beverage and other revenues, improved 10 basis points to $305, representing an all-time high for the company. Strong food and beverage spend and ancillary revenues resulted in the record performance. Comparable room RevPAR decreased 1.5% on a constant currency basis, which was driven by a 140 basis points decrease in occupancy, partially offset by a 30 basis point increase in average rate.

As Jim mentioned, renovation disruption from the Marriott transformational capital program reduced our second quarter comparable RevPAR by 90 basis points. Consistent with STR data for the overall industry, we experienced weaker-than-anticipated RevPAR in the second quarter due to softness in business transient demand, especially in the top markets. Our relative overweighting in the U.S. in Seattle, which declined a combined 10%, also hindered portfolio performance. Excluding these 2 markets, comparable RevPAR increased 20 basis points.

Moving on to comparable hotel EBITDA margins, we continue to deliver impressive margins through our internal initiatives and the benefits from the Marriott-Starwood merger synergies, demonstrating the benefits of our scale and integrated platform to deliver continued operational outperformance.

As Jim mentioned, for the quarter, comparable hotel EBITDA margin declined by 20 basis points. However, after factoring in 30 basis point impact related to the timing of tax rebates for the New York Marriott Marquis and 6 basis points related to severance from a planned operational restructuring at 1 of our hotels, our comparable hotel EBITDA margins increased by 16 basis points (sic) [15 basis points]. This is remarkable given a 1.5% decline in RevPAR this quarter. These factors resulted in adjusted EBITDAre for the quarter of $460 million and adjusted FFO per share of $0.53.

Now let me provide some additional color around our margin outperformance. As we highlighted on the first quarter earnings call, a variety of internal initiatives are continuing to drive ancillary revenue growth, productivity improvement and decreased operating costs. These efforts are serving to offset increases in wages and benefits, which are accelerating in this low unemployment environment.

In addition to these initiatives, we continue to receive outsized benefits from the synergies with the 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, IT systems and group and travel agent commissions.

And finally, the receipt of approximately $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 approximately 40 basis points this quarter and will continue through the remainder of the year and into 2021.

Now let's discuss the performance of our business mix. Starting with our transient segment. Second quarter transient revenues were up 40 basis points and underperformed their expectations as an increase in demand was partially mitigated by an average rate decline of 50 basis points.

These results were lower than on our forecast due to weaker-than-expected business transient demand, especially in top markets such as New York and San Francisco. The weakening fundamentals around the global economy along with the uncertainties surrounding the resolution of the China trade issues, weighed on business transient demand this quarter. On a positive note, leisure travel continues to be strong and improved as expected, as revenues increased 4%, driven by an almost 8% growth at our resorts.

As expected, group revenues declined 4.7% in the quarter, driven by a lack of citywide events in San Diego, Seattle, Chicago, New Orleans and Washington, D.C. The late Easter resulted in the group volume decrease in April for us and the industry. Our managers were very successful in partially mitigating the group volume decline by pursuing corporate group business, which proved successful as this segment improved 6.4% this quarter. This increase in corporate business, which represents the largest segment of all business this quarter towards the banquet and catering outperformance.

Overall, we're pleased with our optimal group mix for our portfolio. As you recall, 2018 was a record year for group room nights, with 5 million group rooms booked for the year. Consistent with last year, we have over 90% of our group business booked for the remainder of '19, providing a strong base to business.

Looking at individual markets. Our best performing domestic markets this quarter were Philadelphia, the Florida Gulf Coast, Phoenix and Maui, with RevPAR increases ranging from 5% to 12%. Our hotels in Philadelphia outperformed STR's luxury and upper-upscale market by a wide margin with RevPAR growth of 11.5% versus STR luxury and upper-upscale RevPAR of 3.6%.

Strong group business at our properties in Philadelphia allowed the managers to drive average rate, which increased 10.6%. Florida Gulf Coast RevPAR increased 7.7%, outperforming STR luxury and upper-upscale due to stronger business, which was up 18.5% this quarter.

The strong group business resulted in increased food and beverage revenues by 9%, and increased banquet and catering sales by almost 13%. In addition, weather-related events in the Southeast benefited the Tampa Airport Marriott.

RevPAR for our Phoenix hotels outperformed our portfolio this quarter with RevPAR growth of 6.6%. This was primarily driven by strong leisure demand as transient revenues grew 10.7%.

The Phoenician was the exception to this trend, in which displaced transient occupancy due to stronger group performance and was able to grow transient ADR over 23%. Now moving on to the markets that were more challenged in the second quarter. Our hotels in Seattle, Orlando and New York saw RevPAR declines ranging from 10% to 11%.

The Seattle hotels saw RevPAR decline of 11.2%, which was in line with STR market luxury and upper-upscale hotels. The RevPAR decline was related to the lack of citywide demand in the quarter, putting downward pressure on group and transient pricing. The entire market was down 5% in group room nights in the quarter. This, coupled with new supply, especially the new 1,300 room Hyatt Regency in Downtown Seattle has put pressure on pricing in the market.

RevPAR at our Orlando World Center Marriott declined 10.6% in the second quarter, underperforming our internal forecast. Weaker-than-expected group business drove this decline paired with transient rate softness from lack of compression.

In addition, the rooms renovation is part of the Marriott transformational capital expenditure program began in the second quarter. New York hotels RevPAR declined 9.8% as softer demand experienced in the first quarter continued into the second quarter and demand for the Times Square submarket was worse than the overall New York market.

STR's luxury and upper-upscale RevPAR was down 1.9% for New York, while the Times Square submarket was down 4.2%. In addition, major disruption from the renovations at our New York Marriott Marquis and New York Marriott Downtown contributed to the RevPAR decline.

However, as these are part of the Marriott transformational capital program, EBITDA related to the disruption was protected through the Marriott operating profit guarantees. Lease demand was also down and there was a large cancellation at the Sheraton New York, for which we received cancellation fees.

The New York market continues to experience weakness from both business and leisure customers and new supply. Reducing our exposure to profitability, challenged hotels in this market over the past year has strengthened the overall portfolio.

Looking ahead to the full year, we continue to expect RevPAR at our hotels in the Florida Gulf Coast, Jacksonville and Philadelphia to outperform the portfolio due to strength in corporate and leisure demand as well as strong citywides.

Conversely, we expect RevPAR at our hotels in Seattle, New York and Chicago to underperform our portfolio due to continued weakness in business transient demand, weak citywide calendars or additional supply.

Moving to our balance sheet. We continue to operate from a position of financial strength and flexibility. We are the only lodging REIT with an investment-grade balance sheet, which we are committed to maintaining. At quarter end, we had unrestricted cash of $1.1 billion, not including $203 million FF&E escrow reserve and $943 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 3.7 years and a weighted average interest rate of 4.3%. Our leverage ratio at the end of the second quarter was approximately 1.8x as calculated under the terms of our credit facility.

Subsequent to quarter end, we completed $2.5 billion of bank financing, capitalizing on one of the lowest borrowing costs in the company's history. To this end, we financed -- refinanced our 2 term loans totaling $1 billion and expanded our revolving credit facility by $500 million to $1.5 billion. As a result, we enhanced our liquidity, extended our weighted average maturity to 4.6 years, pushed out our nearest maturity to 2021 and reduced our borrowing cost by 10 basis points across the grid.

Turning to our return of capital discussion. In July, we paid a quarterly cash dividend of $0.20 per share, which represents a yield of approximately 4.8% on our current stock price. In addition, as mentioned in the press release, we repurchased 10.9 million shares during the second quarter at an average price of $18.32 for a total purchase price of $200 million.

Subsequent to quarter end, we bought back an additional 2.7 million shares at an average price of $16.83, for a total purchase price of $45 million under a 10b5-1 program. Finally, we recently received authorization from our Board to increase our buyback capacity up to $1 billion, providing us incremental capacity of $755 million. Notably, year-to-date, we have returned $725 million of capital to our stockholders.

Let me take a few minutes to discuss some assumptions included in our 2019 guidance. As Jim described, we revised the comparable RevPAR guidance for the year to negative 1% to flat, indicating that we expect RevPAR for the second half of the year to be stronger than the first, albeit at a lower level than we forecasted last quarter.

Included in this range is our estimate of a 50 basis point impact to our full year RevPAR from the renovation disruption related to the Marriott transformational capital project. Without this impact, the midpoint of our RevPAR guidance would have been approximately flat.

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 programs, 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 management and enterprise analytics teams help you understand how we can continue to drive market outperformance. Despite our downward revision of the RevPAR guidance, our outlook for our EBITDA margins has improved. Several factors give us confidence in our margins. First, all hotels that have experienced a softening in top line expectations relative to budgets have put in place profit improvement plans to mitigate the impact to EBITDA and maintain margin.

Additionally, the savings associated with the Marriott integration have exceeded our expectations, mainly travel agency commissions, loyalty cost and allocated expenses for programs and services. The actualized savings are now fully reflected in our outlook.

Ancillary revenues have also continued to come in stronger-than-expected. The focus on capture of transient cancellation fees is positively impacting margins. Further, the Phoenician and its world-class spa and golf facilities are earning rave guest reviews and surpassing our expectations on both the top and bottom line.

Finally, the operational profit guarantees we're receiving on properties under the Marriott transformational capital program are also providing a boost to our margins.

The reduction in our comparable RevPAR and margin assumption results in a $27 million decrease to our forecasted adjusted EBITDAre for the second half of the year. In addition, we reduced our 2019 adjusted EBITDAre guidance by $21 million to remove the EBITDA related to the sale of Pentagon City Residence Inn and the Courtyard Chicago Marriott Suites -- I'm sorry, the Courtyard Chicago and the Chicago Marriott Suites O’Hare and 5 additional anticipated asset sale.

The combination of these items results in our new guidance ranges for 2019, adjusted EBITDAre of $1.5 billion to $1.54 billion and adjusted FFO per share of $1.73 to $1.78.

Lastly, keep in mind that we expect to earn 19% to 20% of our total EBITDA in the third quarter and the third quarter is projected to be the stronger of the 2 remaining quarters driven by the Jewish holiday shift.

Overall, we are pleased with our strong bottom line operating results. Our performance continues to demonstrate that owning 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. (Operator Instructions)

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Smedes Rose, Citi.

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Bennett Smedes Rose, Citigroup Inc, Research Division - Director & Senior Analyst [2]

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I guess I wanted to ask you really, I think in the past you said about $2 billion to $2.5 billion of total investment capacity, including share repurchases. So now that you've resumed the repurchase activity, is that kind of the priority going forward, particularly given that shares obviously are lower now than where you've been buying them back at?

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

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Yes, Smedes, as with any time we deploy capital, we will assess the underlying fundamentals and our view of likely future performance and value when we are making a decision to invest in our portfolio to buy an asset or to buy back stock. So I just point you to the fact that we had a $1 billion authorization. We had $755 million remaining for the year. We will take a pulse of underlying operating trends, and a view of our NAV, given current facts and circumstances and act accordingly.

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Operator [4]

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(Operator Instructions) Our next question will come from Anthony Powell, Barclays.

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Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [5]

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In terms of the asset sales, could you remind us how many assets and even number or percent of EBITDA fit into kind of the low profitability bucket? And how quickly could you sell these assets over the next few quarters?

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [6]

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Anthony, we haven't really sat back and said that this is the portfolio of hotels we want to dispose of. We look at sales on an opportunistic basis, whether we see a need for high capital expenditure investments in properties, markets that we don't have a favorable view of for the long term. On every asset that we evaluate, whether or not to sell, we start with doing a whole value, which is a 10-year pro forma, including 10 years of CapEx over and above the FF&E reserve. And if we feel that we're able to transact in the market at a price that's greater than a whole value and the market dynamics are such that we think the buyer can perform as today with strong financing markets. Financing markets have never been stronger, quite frankly, both from a proceeds perspective and an interest rate perspective then we'll move forward. But we have no programmatic plan in place to sell assets.

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Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [7]

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Okay. Are you marketing more assets currently?

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

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I think that what we will point you to is the assets that we've discussed on the call.

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Operator [9]

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Our next question will come from David Katz, Jefferies.

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [10]

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Listening to your commentary as well as the commentary of others, and then looking at the capacity that you have, I'd love to hear your commentary around the availability of assets to acquire, right as well as what the tolerance for loan to values and valuations has done over the past couple of weeks as best as you can assess it. And just I'd love to hear your thoughts about how you're thinking about that? And whether having the capacity and just sitting tight for a period of time is not maybe a very solid choice.

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [11]

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Sure. David, I'll take the first part of the question and Michael can talk about the financing market. With respect to the acquisition marketplace, we always have a pipeline of assets that we are evaluating and underwriting. We've been very disciplined, in our view towards performance of these assets, going forward. And we have taken into consideration the current economic times that we live in today and we'll look at buying an asset relative to, as an example, buying back our stock. It's not to say that if a very attractive opportunity presented itself that we wouldn't pursue it, but to date, we just haven't seen a lot out there that make sense for us.

There is a gap between buyer/seller expectations. And I think part of that is being driven still by the flush financing market that's available to buyers today -- to sellers today to refinance our assets. So I don't know if you want to talk about the...

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Michael D. Bluhm, Host Hotels & Resorts, Inc. - Executive VP & CFO [12]

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Yes, I think that's a great point. I mean look, David, the financing markets remain white hot. And you've seen from a lot of our peers selling assets into it. It really has given the ability to drive pricing. I mean, today in the CMBS market, you can still sort of get 75% LTV financing at really record low borrowing rate. And that's both from the single borrower as well as in the conduit market. And when you look in terms of the bank financing you saw we just did one of the biggest branch in the company has done $2.5 billion of bank credit, that market, right, in a low and longer environment, we continue to -- that will continue to expect and be a big catalyst for the -- for borrowers. And again, also an environment where you're seeing record low borrowing rates.

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Operator [13]

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Our next question will come from Michael Bellisario, Baird.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [14]

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Just on the capital allocation front, maybe ask it a little bit differently. Maybe could you tell us how much of your buyback activity is being driven by the absolute returns you're seeing in your stock today versus the relative returns compared to where you're selling assets at net, that valuation arbitrage. That would be helpful.

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Michael D. Bluhm, Host Hotels & Resorts, Inc. - Executive VP & CFO [15]

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Michael, a couple of things in there. So look, first of all, I would say that relates on -- we don't know necessarily what type of IRRs buyers think they're buying at. We certainly have, as Jim had pointed out, we have whole values that discount back the cash flows of properties as well as the capital requirements at our cost to capital. And when someone's paying a higher price in that, then presumably they're getting a higher return and/or expect to get a higher return than what we think it's going to get. Look, as it relates to the capital allocation, we took you through kind of what we bought in the open market as well as in the 10b5, and collectively sort of fair to say is kind of the weighted average price at sort of $18.04, which works out to about a 20% discount to consensus NAV, which look in today's environment, I think when you think about some of the return profiles of a lot of the assets we've looked at in the past as well as the stuff that we're selling, we think that's a pretty good use of capital.

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Operator [16]

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Our next question will come from Rich Hightower, Evercore ISI.

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Richard Allen Hightower, Evercore ISI Institutional Equities, Research Division - MD & Research Analyst [17]

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Maybe just to shift gears a little bit, so with all of the moving parts in the portfolio in terms of asset sales and what's in the comp pool, out of the comp pool, and so forth, wondering if you guys could help us bridge to a number for pro forma historical RevPAR so that we're comping against the right number as we model going forward? Or maybe you could cash it in terms of the assets we sold where X percent below sort of our average RevPAR for the portfolio. Just something to help us with the numbers there?

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [18]

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Yes. Rich, the assets that we've discussed and sold year-to-date, going back to the Westin Grand Central and the assets that have recently closed and the ones that are under contract, the combined RevPAR for that portfolio I think is around $136, that's about 27% below our company RevPAR. Is that the direction you're going with the question, Rich?

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Richard Allen Hightower, Evercore ISI Institutional Equities, Research Division - MD & Research Analyst [19]

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Yes. That's very helpful. And then maybe translating that number into an overall sort of impact on what exists today that we should be comping against in forward periods, right? So that could be a 3% or 4%, whatever sort of number that is, almost on a weighted basis? We can talk off-line if I'm not maybe being clear.

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [20]

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Yes. We should probably talk off-line. I think that -- I think based on the assets that we've sold, we've probably seeing a tick-up in our total company RevPAR from, call it, $180 to $183.

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Richard Allen Hightower, Evercore ISI Institutional Equities, Research Division - MD & Research Analyst [21]

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Okay. Yes. And that's exactly what I'm after there. And then maybe secondly, while I've got you, you did throw out some group pace numbers last quarter for 2020. I think maybe in the low single digit area. If you don't mind, reprising those numbers where we sit today? And then maybe describe any changes in the 2020 group pace numbers versus 90 days ago?

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [22]

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Yes. The group pace for 2020, it's holding -- it's hanging in there. Total group revenue pace at this point is at 5.4% for 2020.

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Operator [23]

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Our next question will come from Bill Crow, Raymond James.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [24]

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A question for Michael on a housekeeping front and 1 for Jim. Michael, can you just kind of build us a bridge based on asset sales? And what the impact will be on 2020 EBITDA?

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Michael D. Bluhm, Host Hotels & Resorts, Inc. - Executive VP & CFO [25]

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On 2020, yes...

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [26]

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Everything that's either -- that's been incorporated in your guidance to date for this year, if we could just get a full year number for next year?

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Michael D. Bluhm, Host Hotels & Resorts, Inc. - Executive VP & CFO [27]

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Yes. If we go all the way back to the Westin Grand, right, that's a full year impact of $50 million.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [28]

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Okay. For all of the assets relative to what this year's guidance is. Okay, got it. And Jim, I guess my question is, when we think about what you...

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Michael D. Bluhm, Host Hotels & Resorts, Inc. - Executive VP & CFO [29]

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I want to make 1 adjustment -- hey, Bill, I just want to make 1 adjustment because I'm working off a sheet here that it's net $27 million.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [30]

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Okay. All right. And maybe we'll follow up just to make sure I'm clear. But Jim, on the auxiliary revenues that you call them and I'm thinking about parking. I'm thinking about fees the guest may pay, et cetera. What is the ability to push those again next year? I mean we can project RevPAR growth. We can think about food and beverage based on group and RevPAR, et cetera, but the auxiliary, it feels like we're playing catch-up to some extent this year, and I'm just wondering whether the growth goes out of the balloon next year?

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

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I think it's going to be an ongoing process, first, Bill. I don't have hard numbers to talk about, but we're being thoughtful with respect to making certain that our customers are understanding day 1 what they're being asked to pay and they're achieving real value for any fees that they might be asked to pay. I would expect that we will continue to see increased capture on cancellation fees, just from some automated systems that have been put in place, not that we're seeing a tick-up in cancellations. I don't want to call anybody with that thought because we're not seeing a pickup in cancellations. And we are continuing to see a strong out-of-room spend, at the Phoenician in particular with respect to golf and spa. So it's an area that we continue to be focused on going forward.

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Operator [32]

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Our next question will come from Wes Golladay, RBC Capital Markets.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [33]

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I just want to go back to that comment about the business travel, being a little bit softer and the consumer hanging in there. How is this translating into the resorts? It sounds like the Phoenician is doing quite well. Is the corporates still spending there?

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [34]

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Yes. Actually, I think in Michael's prepared remarks, I'll let him talk about a little more, but we saw a very strong group performance at the Phoenician to the point where some of the transient business was yielded out in favor of group, allowing us to really compress transient rate with respect to what collects. The leisure travel continues to be strong overall. Revenues increased 12% in the quarter and that was driven by almost an 8% increase in our resorts.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [35]

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And you're modeling this divergence to continue throughout for the guidance. Is that what we should expect?

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [36]

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Our guidance is granular. I mean, this is property by property forecast to arrive at our guidance for the full year.

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Operator [37]

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Our next question will come from Patrick Scholes, SunTrust.

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Charles Patrick Scholes, SunTrust Robinson Humphrey, Inc., Research Division - MD of Lodging, Gaming and Leisure Equity Research and Analyst [38]

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Just another way of asking the capital allocation question here. Is it fair to assume that all the proceeds from this next round of asset sales will be used for repurchases? And then, it looks like in 2Q your repurchases were from asset sales. Would you also consider dipping in at this point, dipping into the balance sheet to do repurchases?

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Michael D. Bluhm, Host Hotels & Resorts, Inc. - Executive VP & CFO [39]

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Patrick, to Jim's point, I mean, I think how much cash is tangible. And we're thinking about in the context of whether we're investing externally, investing in our portfolio, or buying back stock. We just talked about where we brought back or close to $0.25 billion of stock, certainly, don't like that price, but like being a buyer at that price. But again, we have to take that into consideration, there are other -- all of our other capital investment opportunities.

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [40]

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The only thing I'd add to that Patrick is that acquisitions carry a very high volume there.

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Operator [41]

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Our next question will come from Shaun Kelley, Bank of America.

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Shaun Clisby Kelley, BofA Merrill Lynch, Research Division - MD [42]

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I was just wondering if you could speak a little bit more about the operating profit guarantees for Marriott are going to play through once the renovations start to roll-off, right? So you're in the middle of the process now and obviously they've been creating a lot of cushion. What happens as the renovations are completed? Do you get made whole up until you return to a certain level of profitability? Or do they roll-off as soon as sort of the CapEx is done and you've kind of have to fight for yourself while you're stabilizing?

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

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We're hopeful and we believe that the fight for yourself is going to put us in a very good place, Shaun, because as these properties are fully renovated, we do expect meaningful increases in yield index, which should translate into strong improvements in EBITDA. The way the operating performance guarantees were calculated is really based on the anticipated disruption at each property, based on the scope of the renovation and based on our 20-plus years of data related to renovations and our ability to really forecast displacement of business, whether you're doing rooms, whether you're doing rooms and bathrooms or a lobby or food and beverage or a reading space.

So it's a property by property analysis. We have some ability to adjust those based on timing of the renovation and the like. But it's at a set amount. I think that the set amount was $83 million in the aggregate. And as we stated earlier today, between comp/noncomp for this year, we will receive $23 million.

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Shaun Clisby Kelley, BofA Merrill Lynch, Research Division - MD [44]

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Got it. Yes, it is. Sorry, I don't think I framed -- phrased that very well. But that's what I was looking for. And then secondarily, Jim or Michael, can you just mention what you're seeing on group bookings for 2020 and beyond, just the all future periods type level of interest or demand on the really leading or really far out group side would be helpful.

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [45]

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Yes. I would tell you -- I mentioned the number for 2020. We're seeing total group revenue pace up 5.4% for 2020. For '20 and '23, the numbers are up approximately 2%, but it's really a little bit early to start thinking about any years beyond 2020.

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Michael D. Bluhm, Host Hotels & Resorts, Inc. - Executive VP & CFO [46]

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And Shaun, the only thing I would add there is that for how the year shapes up in 2020, we've got almost 60% of the room rents on the books already.

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Operator [47]

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

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [48]

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I wanted to ask about margins and you've got through a lot of color on some of the things that were impacting you this year between the renovations and the out-of-room spend. But as we look forward and in consideration to the fact that the performance guarantees ultimately burn off, is there anything secular that has changed in terms of the margin structure at the hotels? In other words, if we enter a softer patch, do you think margins hold up better this time? Or is there something tangible you can point to that tells now that maybe wasn't there last time?

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Michael D. Bluhm, Host Hotels & Resorts, Inc. - Executive VP & CFO [49]

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Look, I think as far with -- I think we've all learned a lot to the last recession about sort of really deploying resources quickly to adapt to changing fundamentals. I mean, I think you saw that this quarter. We talked about it. I mean, as soon as we started seeing things slow down we were very front footed and putting together action plans, particularly around employee management. And as a result, I think we were able to adapt quickly. And when we think about going -- to the extent that things are going to continue slowing down we're going to be very quick twitch to adapt. I'll give you a fair amount of -- a fair amount of how you came out of this quarter. I mean, when you get a little bit more granular, we saw really interesting productivity gains in both rooms and food and beverage, which was, again -- very much of it prescribed by our managers and our asset managers working with our managers to work around scheduling and sort of employee management better.

I'm also very quick on inventory control, around F&B and that reflects really well in our cost of goods sold, cost structure and how that improved from last quarter. And look, as we talked about last quarter, we did have a fair amount of gives and takes on the undistributed operating expense column whether it was any (inaudible) related things or a lot coming out of the Starwood Marriott synergies that helped us enable to keep that below inflationary growth. And so what I think -- I think you're getting a feel for the way that we are approaching slowdowns and as you can expect a similar proceeds until we slowdown any further.

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [50]

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Yes. The only thing I would add Chris, that's changed, and I think we're going to continue to see change in a positive way is technology. And our -- we embrace technology. We think we're on the forefront of technology working with our operators. That will allow us to continue to improve productivity going forward.

So I think that's only going to get better. And I do believe that it's a new paradigm for the operating expense model in the world of hotels. Additionally, we are keenly focused on cost creep. It's so easy when times are good for the extra body here or the extra controllable, whether it'd be in rooms or F&B to come back into the system. So we're keeping a keen eye on all of that.

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Operator [51]

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Our next question will come from Robin Farley, UBS.

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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [52]

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My question is actually along similar lines to what you were talking about. Just that you've done such a solid job of incremental things to offset the margin pressure that, I'm just wondering what there might be sort of incremental in 2020. And I know you're talking about sort of further productivity but thinking specifically, are there Starwood synergies that will be incremental in 2020 that aren't contributing in 2019 yet? Anything that doesn't start to contribute till next year? And then, can you remind us the Marriott, I think you said it was $23 million of profit guarantees in 2019. And is that -- I'm sorry, if I missed if you said that up or down next year if there's an incremental amount of that in 2020? And then anything else sort of incremental to -- I realize the costs saved this year will continue into next year, but just thinking about anything incremental?

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [53]

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Yes. Robin, I'll start with our forecasted operating profit guarantee payments based on our anticipated construction spend next year for the transformational capital program. It's likely at this point that we're going to be circa $200 million plus or minus. We won't know until we get through the capital budgeting process, which is starting in earnest in the next week or 2 actually, but we won't be done with this until the end of the year. Right now, we would be looking at operating profit guarantees of $16 million, again, plus or minus. I don't want to give you a hard number because both of those numbers are subject to change, but just directionally, that's kind of how we are seeing things.

I think that as the Starwood acquisition gets fully integrated into the Marriott system, that the focus is likely to change. Believe me, we're not going to take our eye off the cost side of it, but the focus is likely to change to yield index and improvements in the top line we bought. We also see we think incremental benefits from the rollout of Marriott's enhanced reservation system going forward, that's very early stages. So we are constantly looking at the next initiative that we can to drive top line as well as bottom line.

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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [54]

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And just to clarify, the operating profit guarantee, $16 million plus or minus obviously, not a firm number yet, compares to the $23 million in 2019, but not all of that goes into the comp hotels. So is it possible that the amount that's applied or attributed to the comp hotel base is actually up next year or will it be...

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [55]

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We can get back to you on that one. I don't have the comp/noncomp numbers in front of me right now for next year.

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Operator [56]

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Our next question will come from Thomas Allen, Morgan Stanley.

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Thomas Glassbrooke Allen, Morgan Stanley, Research Division - Senior Analyst [57]

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So couple of questions on RevPAR. First, your -- what stood out to me was that ADR is still growing and occupancy is down a lot. I think there are a lot of dynamics at play. So can you just talk about why that's happening?

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Michael D. Bluhm, Host Hotels & Resorts, Inc. - Executive VP & CFO [58]

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I'm sorry, Thomas, could you repeat the question? Why...

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Thomas Glassbrooke Allen, Morgan Stanley, Research Division - Senior Analyst [59]

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When we look at first half RevPAR, right, your occupancy is down a lot, but your ADR is up. I think there are a lot of dynamics that's driving that. But I just want to kind of hear from you why occupancy will be down and rate will be up?

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [60]

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Well, I think what has happened -- so let's take New York for a minute and just focus on that market. And then we can also talk about Seattle to say, it's the same dynamic, but it's slightly different. Both of those markets have a lot of new supply. New York's new supply is I think it will be -- forecast 28,000 rooms coming online this year, 28,000, 29,000 rooms. Seattle, just had a 1,300-room hotel opened in downtown Seattle. Seattle had less citywides over the course of the year. So some of the lower-rated transient business did not show up in Seattle as well. And the same thing in New York, we saw lower-rated transient business not show up in New York. Both of those markets are driven by international inbound travel. We have seen a decline in international inbound travel from -- in particular, from Canada and Mexico. And I think that's why you're seeing occupancy decline, but rates go up.

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Thomas Glassbrooke Allen, Morgan Stanley, Research Division - Senior Analyst [61]

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That's helpful. So 2 follow-up questions actually on the same topic. So first is, can you quantify what international inbound travel is declining? And then second, just when you think about guidance, and Michael in your prepared remarks you said that the midpoint of guidance implies that second half is in line with the first half, like, it feels like things have deteriorated in the past few months. And so are there things that are supporting and that's adjusting for the Marriott renovation guarantees? Are there things that are supporting the second half from like a comparability standpoint or anything else that should kind of stabilize RevPAR versus continue to deteriorate?

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [62]

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With respect to international inbound, Thomas, it varies by market obviously, but year-over-year, according to the data from U.S. Travel, it's flat.

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Michael D. Bluhm, Host Hotels & Resorts, Inc. - Executive VP & CFO [63]

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And then, look, Thomas, as it relates to the forecast, I'll point you to a couple of things. I mean, look, first of all, start with, last year we had record group room nights and we get 90% of our -- we will give you the update on kind of how we're looking for '19 and we get 90% of the business on the books start there. And second, we spend a lot of time with our properties in the past -- over the past month or so really understanding what they're seeing in the individual markets. What they're seeing within their comp set. And how they're competitively positioned. What they're -- and certainly what those markets individually are experiencing. As we talked about New York and Seattle were big drivers of the quarter, New York, in particular, where I think you get into May, I think everyone was almost surprised by that market, in particular. And so as we thought about forecasting, it was very much and sort of detailed bottoms-up analysis with our properties. Very thoughtful about the direction that things have been heading in the past couple of months. We carried that direction forward, and -- but certainly did not bring it down further assuming a further decline beyond the type of -- the type we've been experiencing over the past few months. Again, I think what you've seen from a lot of other companies as well is getting the information we have in front of us today and the outlook based on what we've seen over the past couple of months and we shared that forward and we think we were pretty conservative in our outlook.

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Operator [64]

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Ladies and gentlemen, at this time, we have no further questions in the queue. So I'd like to turn this conference back to Mr. Risoleo for any closing remarks.

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James F. Risoleo, Host Hotels & Resorts, Inc. - President, CEO & Director [65]

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

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Operator [66]

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Thank you very much. Ladies and gentlemen, at this time, we'll now conclude today's conference. You may disconnect your phone lines, and have a great rest of the week. Thank you.