Host Hotels & Resorts, Inc. (NASDAQ:HST) Q4 2023 Earnings Call Transcript
Host Hotels & Resorts, Inc. (NASDAQ:HST) Q4 2023 Earnings Call Transcript February 22, 2024
Host Hotels & Resorts, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the Host Hotels & Resorts Fourth Quarter 2023 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Jaime Marcus, Senior Vice President of Investor Relations.
Jaime Marcus: Thank you, and good morning, everyone. Before we begin, please note that many of the comments made today are considered to be forward-looking statements under federal securities laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed, and we are not obligated to publicly update or revise these forward-looking statements. In addition, on today's call, we will discuss certain non-GAAP financial information, such as FFO, adjusted EBITDAre and comparable hotel level results. You can find this information together with reconciliations to the most directly comparable GAAP information in yesterday's earnings press release and our 8-K filed with the SEC and in the supplemental financial information on our website at hosthotels.com.
With me on today's call are Jim Risoleo, President and Chief Executive Officer; and Sourav Ghosh, Executive Vice President and Chief Financial Officer. With that, I would like to turn the call over to Jim.
Jim Risoleo: Thank you, Jaime, and thanks to everyone for joining us this morning. 2023 was a terrific year for Host on several fronts. First, we delivered strong operational improvements, driven largely by occupancy increases and continued rate growth. Second, we completed the work on the three strategic objectives we established in 2021 and we will continue to realize the benefits of our ongoing efforts well into the future. Third, we returned significant capital to stockholders in the form of dividends and share repurchases, continue to successfully allocate capital through reinvestment in our portfolio and announced an agreement with Hyatt to complete transformational renovations at six properties in our portfolio. Lastly, we maintained an investment grade balance sheet and continue to position Host to capitalize on the significant growth opportunities we see in the lodging space including potential acquisition opportunities.
Turning to our results. We finished 2023 above the midpoint of our full year guidance range. We delivered adjusted EBITDAre of $1.629 billion and adjusted FFO per share of $1.92. Comparable hotel total RevPAR grew 8.3% and comparable hotel RevPAR grew 8.1% compared to 2022. Notably, comparable hotel EBITDA margin was 60 basis points ahead of 2019 due in large part to our efforts to redefine the hotel operating model with our managers. During the fourth quarter, we delivered adjusted EBITDAre of $378 million and adjusted FFO per share of $0.44, which includes $26 million of business interruption proceeds from Hurricane Ian. Comparable hotel RevPAR improved 1.5% compared to the fourth quarter of 2022. Our RevPAR performance for the quarter was driven by an increase in both occupancy and rate.
Despite an estimated 30 basis point impact from the wildfires in Maui, our fourth quarter comparable hotel EBITDA margin of 28.1% was flat to 2019. This marks the seventh consecutive quarter since the onset of the pandemic that we have achieved total RevPAR, RevPAR comparable hotel EBITDA and margins at or above 2019 levels. I will say that one more time. We have delivered operating metrics at or above 2019 levels for nearly two years. As a reminder, the operational results discussed today refer to our comparable hotel portfolio in 2023, which excludes Hyatt Coconut Point and Ritz-Carlton, Naples. In 2024, our comparable hotel portfolio only excludes Ritz-Carlton Naples. During the fourth quarter, our portfolio results were once again impacted by the evolving nature of demand at our three resorts on Maui.
We estimate that the Maui wildfires impacted fourth quarter comparable hotel RevPAR by 130 basis points, comparable hotel total RevPAR by 150 basis points, comparable hotel EBITDA by $9 million and comparable hotel EBITDA margin by 30 basis points. For the full year, we estimate that Maui impacted our comparable hotel RevPAR by 50 basis points, comparable hotel total RevPAR by 70 basis points, comparable hotel EBITDA by $13 million and comparable hotel EBITDA margin by 10 basis points. Including our joint venture timeshare, we estimate that Maui impacted adjusted EBITDAre by $15 million in the fourth quarter and $22 million for the full year. Our risk management team is continuing to engage with our insurers about potential business interruption coverage at Maui and the timing and amounts of any potential proceeds are not yet known.
Shifting to another market that remains top of mind. San Francisco results showed meaningful year-over-year improvement in the fourth quarter. RevPAR was up 10%, driven by both rate and occupancy and F&B revenue was up 15%. Group business is driving the strong results with group room revenue up 36% for the fourth quarter compared to last year as our properties have shifted their focus to in-house groups until the citywide calendar improves in 2025. We have seen positive trends from 2023 continuing in the first quarter of 2024 with conventions driving weekday demand. In fact, January was the best month in the history of the San Francisco Marriott Marquis, with total revenue and EBITDA setting all time records. Briefly looking at out-of-room spend in the fourth quarter, comparable hotel, food and beverage and other revenues were down slightly due to impacts from Maui.
We estimate that Maui impacted fourth quarter F&B and other revenues by 60 basis points and 540 basis points, respectively. Encouragingly, the out-of-room revenue trends we have seen post-pandemic remain elevated for the rest of our portfolio. In addition to driving strong RevPAR growth and operating improvements across the business, we continue to be recognized as a global leader in corporate responsibility over the course of 2023. We introduced new 2030 environmental and social targets, which are aligned with our vision of becoming a net positive company by 2050, incorporate the progress made toward our prior goals, and are more reflective of our current portfolio by updating our baseline to 2019. These environmental and social targets will enable our team to focus on and measure our progress over the long-term.
Our 2030 environmental targets are in their third generation and put hosts on a linear path to net zero operations by 2040, leaving 10 years to get to net positive by 2050. We now have 14 properties with lead certification and projects in the pipeline at 19 properties. In addition, we are the only lodging REIT to have green building certifications linked to our sustainable financings. In this year’s corporate responsibility report, we highlighted our asset level climate risk assessment across three near-term climate perils including flood, wind and wildfire, and three long-term perils including heat, cold and water stress. Based on the results, we have identified assets with elevated climate risk and their corresponding EBITDA contributions, which allows us to prioritize capital investments in resilience and better underwrite potential acquisitions.
Our 2030 social targets are in their second generation and now include two responsible supply chain targets around supplier diversity and responsible sourcing and one new community impact target. As an employer of choice, we aim to lead our industry by integrating diversity, equity, inclusion and belonging best practices into all aspects of our culture. Turning to capital allocation, we repurchased 1.9 million shares at an average price of $16.50 per share in the fourth quarter. For the full year, we repurchased 11.4 million shares at an average price of $15.93 per share for a total of $181 million. We have approximately $792 million of remaining capacity under the repurchase program. In the fourth quarter, we declared a quarterly cash dividend of $0.20 per share, an 11% increase over the prior quarter.
We also announced a special dividend of $0.25 per share bringing the total dividends declared for the year to $0.90 per share. In total, we returned over $700 million of capital to shareholders in 2023. Additionally, in the fourth quarter, the buyer of the Sheraton New York repaid the $250 million seller financing loan, we provided to effectuate the disposition. Our size, scale and balance sheet have allowed us to provide seller financing on three recent dispositions at a time when debt capital was scarce. Further demonstrating that our fortress balance sheet and unparalleled access to capital creates unique opportunities and substantial value for shareholders. Turning back to fourth quarter operations, our overall business mix results were skewed by Maui as leisure transient demand decreased and group demand increased, driven by recovery and relief groups.
Outside of this temporary demand shift, business mix results were as expected. Group led to growth with nearly 1 million group room nights sold in the fourth quarter, bringing our total group nights sold for 2023 to 4.1 million, or 112% of comparable 2022 actual group room nights. Business transient continued its gradual improvement with 7% revenue growth for the quarter and leisure remaining strong with transient rates at our resorts up 58% to 2019, including our three Maui resorts. As we look at the current backdrop for our business, we are optimistic about 2024 for several reasons. First, macroeconomic sentiment is incrementally more positive with consensus expectations of a soft landing. Second, supply levels and anticipated growth in supply is at historically low levels in our markets and chain scales.
Third, we expect tailwinds from increased airline capacity, continued improvement in the international inbound demand imbalance, and lastly, the transactions market is expected to pick up as improved macroeconomic sentiment allows for more visibility on operating performance and the market is expecting that we will see rate cuts later this year. As we consider these factors, we believe host is best positioned to capitalize on acquisition opportunities with $2.9 billion of total available liquidity and net leverage of 1.9 times. In addition, we have completed 24 transformational renovations and four development ROI projects, which we believe provide meaningful tailwinds for our portfolio. Looking at results to date, of the 10 hotels that have stabilized post renovation operations, the average RevPAR index share gain is 8.2 points, which is well in excess of our targeted gain of 3 to 5 points.
We are also continuing to reinvest in our portfolio with additional comprehensive renovations and resiliency investments underway, and we do not expect meaningful disruption this year. And most importantly, we believe that diverse demand drivers in our portfolio leave us well positioned for top line growth. Sourav will discuss more operational detail in our 2024 outlook in a few minutes. Turning to portfolio reinvestment in 2023, we invested nearly $650 million in capital expenditures at our properties, completing renovations to approximately 3,500 guest rooms, 111,000 square feet of meeting space and approximately 110,000 square feetof public space. In addition, we substantially completed property restorations following Hurricane Ian. In 2024, our capital expenditure guidance range is $500 million to $605 million, which reflects approximately $225 million to $280 million of investment for redevelopment, repositioning and ROI projects.
Within the Hyatt Transformational Capital program, we have already started renovations at the Grand Hyatt Atlanta and the Grand Hyatt Washington, which we expect to complete in the first half of 2025. We will also start transformational renovations at the Hyatt Regency Reston in the fourth quarter of this year. Other major ROI projects include the completion of renovations at the Hilton Singer Island Resort and the construction of the Finishing Canyon Suites Villa expansion. In addition to our capital expenditure investment, we expect to spend $50 million to $70 million on the luxury condominium development at Four Seasons Resort Orlando at Walt Disney World Resort this year. We expect to benefit from approximately $9 million of operating profit guarantees related to the Hyatt Transformational Capital program, which will offset the expected revenue disruption at those properties for 2024.
We are extremely proud of our operational and financial performance in 2023 and the iconic portfolio and balance sheet we have built and maintained. Our people, our platform and our portfolio have allowed us to create meaningful shareholder value and we are confident in the significant opportunities ahead for continued growth and value creation in 2024. With that, I will now turn the call over to Sourav.
Sourav Ghosh: Thank you, Jim, and good morning, everyone. Building on Jim's comments, I will go into detail on our fourth quarter operations full year 2024 guidance and our balance sheet. Starting with business mix, overall transient revenue was down 5% compared to the fourth quarter of 2022, driven by the evolving nature of demand in Maui. We estimate that Maui had a 590 basis point impact to transient revenue, which was evenly split between demand and rate. We were encouraged that transient rate at our resorts grew 2% above last year's tough comparisons despite the demand impact from Maui and renovation disruption. Looking ahead to spring break, transient revenue pace is up for our portfolio compared to the same time last year, driven by occupancy and rate growth at our resorts.
Outside of Maui, resort transient revenue pace for spring breakis up 20%. Business transient revenue was up over 7% to the fourth quarter of 2022, driven by both rate and demand growth at our downtown properties. Business transient demand continued its slow and steady recovery. Room nights at our downtown properties were down 15% in the fourth quarter compared to 2019, which is the smallest gap to the 2019post-pandemic. For the full year, business transient demand grew 12% over 2022. In 2024, we expect further demand growth driven by large corporates alongside rate growth in the mid-single-digits. Turning to group. 2023 was the year of group and convention hotel recovery. For the full year, group room revenues increased 21% over last year and room night volume recovered to 95% of 2019 levels.
It is worth noting that our group results were positively skewed by disaster and recovery bookings in Maui. Excluding Maui, group room night volume recovered to 94% of 2019 levels. Group room revenue exceeded 2022 by 13% in the fourth quarter, driven by an increase in both rate and room nights, and we estimate roughly half of that growth can be attributed to recovery and relief groups on Maui. Outside of Maui, hotels in San Francisco, Boston, DC and Seattle contributed to the group room night increase. Notably, November's APAC Conference in San Francisco drove results with an estimated 41,000 citywide group room nights. Looking ahead to 2024, we have 3.1 million definite group room nights on the books, representing a 16% increase since the third quarter, putting us ahead of where we were this time last year.
Total group revenue pace is up 10% over the same time last year, driven by rate room nights and banquets. We continue to be encouraged by the ongoing strength of group business as evidenced by strong pace, lengthening booking windows and double digit citywide room night pace in key markets such as New Orleans, San Diego, Seattle and D.C. Shifting gears to margins. As expected, margin declines year-over-year were driven by increases in wages and benefits, fixed expenses as well as moderating attrition and cancellation revenues and impacts from Maui. Despite these headwinds, full year 2023 comparable hotel EBITDA margin was 30.1%, representing a 60 basis point increase over 2019. Our ability to achieve this margin expansion is a result of our efforts to redefine the operating model and is indicative of our strong execution, particularly when considering that total comparable hotel expenses have only grown 7% in the last four years and occupancy is still 8 points below 2019.
Turning to our outlook for 2024. The midpoint of our guidance contemplates a stable operating environment with continued improvement in group business, a continued gradual recovery in business transient, steady leisure transient demand and a continued evolution of demand on Maui as the island recovers from the recent wildfires. At the low end, we have assumed slower group pickup and softer leisure transient, and at the high end, we have assumed a faster recovery at our Maui Resort and increased group pickup. For full year 2024, we anticipate comparable hotel RevPAR growth of between 2.5% and 5.5% over 2023. We expect comparable hotel EBITDA margins to be down 120 basis points year-over-year at the low end of our guidance to down 40 basis points at the high end.
Notably, we expect margins to be down only 20 basis points at the midpoint versus 2019 despite a 50 basis point margin impact from Maui. In terms of RevPAR growth cadence for the year, we expect comparable hotel RevPAR growth to be in the low single digits in the first half of the year due to tough comparisons to 2023, which saw a surge in recovery of downtown markets driven by improving group business and elevated leisure demand. We expect mid-single digit comparable hotel RevPAR growth in the second half of the year as a result of strong group booking pace, less renovation disruption compared to the second half of 2023 and the diminishing impact of the Maui wildfires. For January, we expect comparable hotel RevPAR to be approximately $187, a 1.4% improvement over 2023.
At the midpoint of our guidance range, we anticipate comparable hotel RevPAR growth of 4% compared to 2023 and a comparable hotel EBITDA margin of 29.3%, which is 80 basis points below 2023. As we think about bridging our 2023 results to 2024, we estimate that Maui is impacting comparable hotel RevPAR by 100 basis points and comparable hotel EBITDA margin by 50 basis points. We also expect a 15 basis point impact to margins from moderating attrition and cancellation revenues and a 45 basis point impact from property taxes and insurance. In 2024, we expect wage rates to increase approximately 5%. For context, in 2023, wages and benefits comprised approximately 50% of our total comparable hotel expenses and attrition and cancellation revenues were $75 million, which is approximately 50% higher than 2019.
Our 2024 full year adjusted EBITDAre midpoint is $1,635 million, this includes an expected additional $10 million from business interruption proceeds related to Hurricane Ian and an estimated $60 million contribution from operations at the Ritz-Carlton, Naples, which is excluded from our comparable hotel set in 2024. It is important to note that we have not included any assumption for business interruption proceeds from the Maui wildfires in our 2024 guidance. Turning to our balance sheet and liquidity position, our weighted average maturity is 4.2 years at a weighted average interest rate of 4.5%. We have a balanced maturity schedule with our next maturity of $400 million coming due in April 2024. We are closely monitoring the debt capital markets and we believe our balance sheet provides us with optionality and flexibility.
As Jim noted, we have $2.9 billion in total available liquidity, which includes $217 million of FF&E reserves and full availability of our $1.5 billion credit facility. We ended 2023 at 1.9x net leverage, and since our last call, Fitch upgraded the company’s issuer rating from BBB- to BBB with a stable outlook, returning Host to its pre-pandemic rating level. Wrapping up. In January we paid a quarterly cash dividend of $0.20 per share and a special dividend of $0.25, returning to our pre-pandemic quarterly payout level. The Board of Directors authorized a quarterly cash dividend of $0.20 on our common stock to be paid on April 15, 2024 to stockholders of record on March 28, 2024. As always, future dividends are subject to approval by the company’s Board of Directors.
To conclude, we are proud of our achievements in 2023 and we believe our best-in-class portfolio and balance sheet leave us uniquely positioned to capitalize on opportunities for growth in the future. With that, we would be happy to take your questions. To ensure we have time to address as many questions as possible, please limit yourself to one question.
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