Host Hotels & Resorts, Inc. Q2 FY2023 Earnings Call

Good afternoon, and welcome to the Host Hotels & Resorts Second Quarter 2023 Earnings Conference Call. Today's conference is being recorded. And at this time, I would like to turn the call over to Jaime Marcus, Senior Vice President of Investor Relations. You may go ahead.

Thank you, and good afternoon, 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.

Thank you, Jaime, and thanks to everyone for joining us this afternoon. During the second quarter, we delivered a comparable hotel RevPAR improvement of 2.7% compared to the second quarter of 2022. Our RevPAR performance for the quarter came in below our quarterly guidance primarily as a result of moderating transient demand in San Francisco and Seattle and at our resorts to a lesser extent. Comparable hotel RevPAR growth was 3.8% during the quarter, underscoring the continued strength of out-of-room spend. During the quarter, we delivered adjusted EBITDAre of $446 million and adjusted FFO per share of $0.53. For our second quarter comparable hotel EBITDA of $449 million was 9% below 2022; it was 9% above 2019. Second quarter comparable hotel EBITDA margin of 32.7% exceeded 2019. This marks the fifth consecutive quarter since the onset of the pandemic that we have achieved RevPAR and comparable hotel EBITDA and margins ahead of 2019 levels. Comparable hotel RevPAR for July is expected to be approximately $209, which is 2.5% above July of 2022. Our performance in the first half of the year, coupled with the macroeconomic backdrop in the second half, led us to tighten our full year RevPAR growth guidance range to 7% to 9%. Bringing the midpoint of our full year expected RevPAR growth to 8%. At the midpoint of our guidance for full year 2023, comparable hotel EBITDA is forecasted to be approximately 9% above 2019. As we look at the current macroeconomic picture, it is important to consider how our outlook has shifted over the past six months. As the second quarter progressed, we started to see a moderation in volume at our hotels in San Francisco and Seattle, which were already affected by softer demand. At the same time, many high-end leisure travelers took the opportunity to travel internationally, and we did not see a corresponding level of international inbound demand, which impacted volume at our resorts. Against this backdrop, we were pleased to deliver positive RevPAR and TRevPAR growth for the quarter, especially given the high watermark of the second quarter of 2022. We remain optimistic about the state of travel for several reasons. First, group business continues to improve. During the quarter, we booked over 310,000 group rooms for 2023, and total group revenue pace is now 4.2% ahead of the same time 2019, up from 2.5% as of March and 3.2% as of April. The group booking window is continuing to extend and groups continue to spend more than contracted. Second, business transient demand continued its gradual improvement during the second quarter. Rates were up 10% to both 2022 and 2019 and demand improved nearly 6% compared to the second quarter of 2022. While demand is still down 19% compared to 2019, it improved 190 basis points from the first quarter. Third, leisure rates at our resorts remain well above 2019 levels despite some expected moderation in the second quarter. For context, transient rates at our resorts were 61% above 2019 in the second quarter, an increase from 54% in the first quarter. Fourth, as evidenced by the airline and TSA data, we expect international demand to be a tailwind going forward. In June, U.S. international outbound air travel grew to 110% of pre-pandemic levels, while international inbound was only 80%. This aligns with U.S. outbound summer flight bookings, which are up 27% year-over-year, while corresponding inbound bookings were up only 3%, according to rate gain. It is the first summer since 2019 that U.S. travelers had enough lead time to plan an unrestricted international vacation, and we expect these trends will revert over time. Finally, and most importantly, we are not seeing evidence of a weakened consumer at our hotels. Comparable hotel food and beverage spend was up 6% to last year, driven fairly evenly by banquets and outlets indicating the strength of both group and transient customers. This is particularly encouraging as outlet revenue grew 5% despite flat portfolio-wide occupancy. In fact, our resort outlet revenue per occupied room grew 5% in the second quarter compared to 2022, and it was also the highest in Host's history at $196. Other revenue also continued to grow, with all line items up over last year, except for attrition and cancellation fees, which are moderating as expected. Golf and spa revenues remain robust with growth over the record highs of 2022, which we believe is further evidence of the leisure travelers' desire and ability to spend on experiences. In fact, we still had five resorts with transient rates of $1,000 or more. Notably, the top three resorts were recent acquisitions, underscoring the strength of our opportunistic capital allocation strategy. Leading the pack was Alila Ventana Big Sur at nearly $1,800 and the Four Seasons Resort Orlando at Walt Disney World Resort and Four Seasons Resort and Residences Jackson Hole, both at over $1,600. Moving to our reconstruction efforts following Hurricane Ian. In June, we completed the final phase of the restoration work at the Hyatt Regency Coconut Point, with the reopening of its water park and outdoor dining complex. Last month, we reopened the completely transformed Ritz-Carlton Naples, which combined a comprehensive renovation of the existing resort with the addition of a new 74-key tower. As part of the renovation, we expanded the guest room bathrooms to increase fixture counts, elevated the design and functionality of the rooms, and combined standard guestrooms to create multi-base suites. We also enhanced the arrival experience with a reimagined lobby and lobby bar. The development of the Vanderbilt Tower added a net 24 additional keys, increased the suite count to 92 from 35 and added new pools, cabanas, bungalows, a poolside F&B outlet with the bar and an expanded club lounge that eliminates the capacity constraint on upsells. In addition to the renovation and expansion, our reconstruction efforts allowed us to opportunistically enhance the resiliency of the property by elevating critical equipment, improving dry flood-proofing measures, accelerating future building envelope waterproofing, and replacing major equipment with more efficient machinery. The transformation of the Ritz-Carlton Naples has been extremely well received since the reopening, and we are optimistic that the resort is set up to exceed our underwriting expectations. As an example, pace for the 2023 festive season is well above historical levels with the expanded suite inventory and new club-level facilities and high demand. The new lobby champagne bar has quickly become the place to see and be seen in Naples for both guests and locals. We are extremely pleased with the transformation of this iconic resort, and we are excited to see the results it delivers over the years to come. In terms of insurance proceeds related to Hurricane Ian, to date, we have received $113 million of the expected potential insurance recovery of approximately $310 million for covered costs. The proceeds have all been allocated to property managed thus far. Turning to group, revenue exceeded 2022 by 4%, marking the fourth consecutive quarter group revenue exceeded 2019. Definite group room nights on the books for 2023 increased to $3.7 million in the second quarter, which represents approximately 103% of comparable full year 2022 actual group room nights, up from 94% as of the first quarter. For full year 2023, group rate on the books is up 7% to the same time last year, a 30 basis point increase since the first quarter. In addition, total group revenue pace is up approximately 19% to the same time last year and up 4.2% to the same time 2019. Looking ahead to 2024, we have 2.2 million definite group room nights on the books. Total group revenue pace is up 13.5% to the same time last year and up 1.5% to the same time 2019. We are encouraged by the ongoing strength of group as evidenced by accelerating booking activity, lengthening booking windows, and tentative room nights ahead of both last year and 2019. Moving to portfolio reinvestment. We completed comprehensive renovations at the final asset in the Marriott Transformational Capital Program, the Washington Marriott and Metro Center during the second quarter. The program, which began in 2018, included extensive guestroom and public area renovations at 16 assets and finished under budget. During the pandemic, we expanded our reinvestment strategy to include 8 additional assets that required near-term CapEx, where we believe significant upside could be realized with transformational renovations. To date, we have completed 7 of those 8 assets. We believe these comprehensive renovations will enable us to continue to capture incremental market share above our targeted range of 3 to 5 points of RevPAR index share gains, and that is shaping up to be the case so far. Looking at results to date. Of the 7 hotels that have stabilized post-renovation operations, the average RevPAR index share gain is 8.8 points. For the full year, our 2023 capital expenditure guidance range is $625 million to $725 million, which reflects approximately $240 million of investment for redevelopment, repositioning, and ROI projects as well as $125 million to $175 million for hurricane restoration work. Remaining projects include the completion of a transformational renovation of the Fairmont Kea Lani, a repositioning renovation of the Hilton Singer Island, and breaking ground on finishing Canyon Sweet villas and the luxury condominium development at Four Seasons Resort Orlando at Walt Disney World Resort. More broadly, we will continue to be strategic and opportunistic in our approach to driving EBITDA growth. We have an investment-grade balance sheet, independent analytic capabilities, a diversified portfolio, and the size, scale, and team to continue executing across economic cycles. We have created meaningful shareholder value over the past six years by improving the quality of our cash flow, and we believe Host is ideally positioned to outperform in the current macroeconomic environment. With that, I will turn the call over to Sourav.

Thank you, Jim, and good afternoon, everyone. Building on Jim's comments, I will detail our second quarter operations, our updated 2023 guidance, and our balance sheet and dividends. Starting with business mix, overall transient revenue increased by 80 basis points compared to the second quarter of 2022, primarily due to rate growth that offset a slight decline in demand. The softening transient demand contributed to missing our RevPAR guidance, particularly in San Francisco and Seattle, with our resorts showing slightly lesser underperformance. In the second quarter, transient revenue was down 8% from the record high of the second quarter of 2022. Although transient rates at resorts decreased year-over-year, they remained 61% above 2019 levels after a 54% increase compared to 2019. In fact, transient revenue at our resorts rose in the second quarter compared to the first quarter, despite the slight decrease in demand. Business transient revenue was 16% higher than in the second quarter of 2022, driven by a 10% rate increase. Demand also rose nearly 6% above last year, with our hotels in New York, Boston, and Washington, D.C. leading this growth. Our downtown properties accounted for 65% of the business transient demand, consistent with pre-pandemic trends. Small and medium-sized businesses continue to play a significant role in the recovery, representing the majority of our current business transient demand. Regarding group performance, group room revenues rose 4% compared to the second quarter of 2022, entirely driven by rate growth. We sold 1.1 million group room nights in the quarter, slightly above both last year and the first quarter, aligning with seasonal trends from 2019. Washington, D.C., Chicago, and Boston were key contributors to the group's revenue growth compared to 2022. For group mix, corporate group room revenue increased by 9% in the second quarter, supported by nearly 6% rate growth. As expected, revenue from Association Groups declined nearly 3% in the second quarter compared to last year, given elevated volumes in the second quarter of 2022 resulting from rebookings of canceled events during the pandemic. Revenue from Social, Military, Educational, Villages, and Fraternal Groups grew by 3% in the second quarter, aided by 2.5% rate growth. Our total group revenue pace for 2024 is ahead of both 2022 and 2019, and we are encouraged by citywide booking momentum in New Orleans, San Diego, Seattle, and Washington, D.C., all showing significant growth compared to the same period last year. Moving on to margin performance, our second quarter comparable hotel EBITDA margin was 32.7%, which is 40 basis points higher than the second quarter of 2019, but lower than the peak of the second quarter of 2022, when staffing did not meet demand. Total comparable expenses increased by 7.5% compared to 2019, while total comparable revenues grew by 7.8%. As anticipated, attrition and cancellation revenue decreased from 2022 levels during the second quarter. We are encouraged that our comparable hotel EBITDA margin is still above 2019 levels, despite high inflation over the past four years and occupancy being 8 percentage points below 2019. As Jim mentioned, we have narrowed our full-year comparable hotel RevPAR growth range to 7% to 9%. The midpoint of 8% is 100 basis points lower than our previous midpoint but aligns with the upper end of the original guidance range shared in February. We estimate that about 60 basis points of the midpoint decrease is linked to the second quarter's results, while the remaining 40 basis points reflects our revised outlook for the year’s second half. Although there are no signs of a macroeconomic-driven slowdown yet, our guidance encompasses potential for varying degrees of moderate growth in the latter half of the year. Therefore, we anticipate year-over-year comparable hotel RevPAR percentage changes in the second half to be flat to up low single digits, mainly driven by occupancy. At the midpoint of our guidance, we expect a comparable hotel EBITDA margin of 29.9%, which is 40 basis points above 2019, with a full-year adjusted EBITDAre of $1.550 billion. It's worth noting that the midpoint of our revised adjusted EBITDAre guidance for 2023 remains $100 million higher than the initial guidance issued in February and only $25 million lower than what we provided in May. We anticipate our operational results will closely follow 2019's quarterly seasonal trends. As a reminder, the third quarter historically has been the weakest quarter in terms of both nominal dollars and margins due to seasonal market changes and business mix fluctuations. Our full-year 2023 adjusted EBITDAre guidance includes an expected $17 million contribution from Hyatt Regency Coconut Point and the Ritz-Carlton Naples, which are excluded from our comparable hotel results due to Hurricane Ian's impact. Year-over-year, we expect comparable hotel EBITDA margins to decline by 210 basis points at the low end of our guidance and by 170 basis points at the high end, driven by stable staffing levels, increased utility and insurance costs, alongside lower attrition and cancellation fees. We expect the most pronounced margin difference to occur in the second quarter, with a narrowing margin spread in the latter half of the year. For these reasons, we do not believe that 2022 will serve as an accurate stabilized comparison for margins. Compared to 2019, which provides a more appropriate basis for margin comparisons, we anticipate margins this year will be up 20 basis points at the low end of our guidance and up 60 basis points at the high end, despite the challenges of lower occupancy and high inflation over the last four years. Our efforts to revamp the portfolio and enhance the hotel operating model are driving this margin growth. It is particularly noteworthy considering our projected total hotel expense CAGR from 2019 to 2023 is only 1.6%, while the core CPI CAGR is forecasted at 4% over the same timeframe. Now turning to our balance sheet and liquidity position, our weighted average maturity stands at 4.7 years with a weighted average interest rate of 4.5%, and we face no significant maturities until April 2024. We concluded the second quarter at a leverage level of 2.2 times and possess $2.5 billion in total available liquidity, which includes $213 million in FF&E reserves and full access to our $1.5 billion credit facility. Additionally, we reached a significant milestone in our renewable energy initiative during the second quarter, resulting in a 2.5 basis point reduction in the interest rate on our outstanding term loans within our sustainability-linked credit facility. We declared a quarterly cash dividend of $0.15 per share, representing an increase of $0.03 or 25% over the previous quarter in July. While we aim to maintain our quarterly dividend at a sustainable level, we must consider potential macroeconomic factors, and all future dividends require approval from our Board of Directors. We remain optimistic about the future of our business and the travel industry as a whole. Regardless of the scenario, we believe our portfolio, balance sheet, and team are well-equipped to continue outperforming in the current macroeconomic environment. We are ready to take your questions.

Our first question is from Duane Pfennigwerth with Evercore ISI. Your line is now live.

Thank you. I appreciate the macro stats that you shared. But do you have any way to track international inbound as a percent of your own portfolio? Where does that stand now versus pre-pandemic levels as a percentage of the mix?

Yes, it's Jim. Pre-pandemic, international inbound accounted for roughly 10% of our room nights. In quarter 2 of 2022, it was 7.8%. And that is compared to 7.4% in 2022 in the second quarter. So we feel that international inbound is a tailwind to our portfolio performance going forward. In particular, if you saw in the month of June, international inbound was only 80% of where it was in June of 2019. Outbound, as we've talked about, was 110% where it was in June of 2019. So as the world starts to normalize and hopefully, as we can right sort out the Visa wait times in the U.S., which are 400 days now on average, and it's a real drag on international inbound. As an example, Canada, you can get a visa from a country that they require Visa for travel to Canada in 55 days. So that's a big issue that we, as an industry, are dealing with through U.S. travel and through AHLA as well. The other impediment at this point in time with respect to international inbound in our West Coast markets, in particular, is travel from China. Pre-pandemic, we had 350 direct flights a week between the U.S. and China. As it sits today, we have 24. So we're optimistic that over time, things are going to normalize and that we're going to see the return of international travel, which will further bolster our performance.

And then just for my follow-up on BI on the business interruption. As you think about growth into 2024, you'll have a natural recovery in Naples from the Ritz being back online. My guess is that would begin to contribute year-on-year in the fourth quarter. But from a growth perspective, what would be the ideal timing for BI reimbursement to hit?

Well, I'll let Sourav jump in on this, but let me just kind of set the table with respect to how our insurance program works. We collected $113 million, all related to restoration and physical damage repair. We have a $130 million receivable outstanding, and we won't start recognizing business interruption proceeds until we collect the $130 million at a minimum.

Yes, Duane, on the timing, honestly, that's why we don't have it in our forecast. It's very difficult to say. We are working with the insurance carriers right now in terms of determining how much that BI amount is. So the collection of it could be certainly some amount in Q3 led into Q4 as well as into the following year. We actually got from Hurricane Ida, if you recall, which impacted New Orleans last year, we just got a $2.7 million BI payment this quarter. So the timing is very difficult to gauge. We fully expect, as we said, that we would be paid out. And it's certainly going to be a meaningful amount. The exact timing is very difficult to predict at this point in time.

Our next question is coming from Aryeh Klein with BMO Capital Markets. Your line is live.

Thanks. Good afternoon. Within the second quarter, was it June where you saw things not really play out as you expected? And then the magnitude of the implied impact to second half RevPAR in guidance is, I guess, less of the impact in Q2. Can you add some color on the underlying assumptions? And is there something in there that may be better than you originally expected?

All right. Can you clarify that? Are you referring to our assumptions with respect to the second half of the year?

Yes. When did you first notice the weakness in the second quarter? I believe the RevPAR impact was 60 basis points below expectations in the second quarter and another 40 basis points in the second half of the year. Could you provide more insight into the second half and the underlying assumptions, and how you anticipate this will unfold? Is there anything that might turn out better or worse than your initial expectations?

Sure. So as we saw performance weaken in the month of June. That's really when we saw the vast majority of the weakness occur. We went back at the property level and really looked at the assumptions that were in the forecast with respect to transient pickup in the quarter for the quarter. You may recall that we had transient pickup as high as 28% in the quarter for the quarter and another quarter with 20%. While that didn't materialize for the second quarter. So as we have talked about trends normalizing, we think that is a trend that is normalizing at this point in time. And we were very thoughtful and deliberate about how we expected the second half of the year to play out. We really washed out a meaningful amount of the transient pickup in the quarter for the quarter, and that led to our revised forecast. Is that helpful?

Yes, I appreciate the color. And then just a quick other question. I think you have some seller financing coming up later this year. Any update there on how you expect that to play out?

Yes. Sure. Well, we had the loan on the Sheraton Boston matured. The maturity date was August 1, a few days ago. And the borrower was in the process of refinancing us out, and they need a little more time to do it. So we entered into an agreement with that borrower to provide for a 60-day extension. It also involved the receipt of a 10% principal pay down on our loan, which was $16.1 million, and we have received that money. We restated the interest rate from 6.5% to 12%. So that loan is now due at the end of September, but we materially improved our position on it, and I am very confident that the borrower is going to be able to get the financing done. The nuance was a condo regime that they were pursuing on the property to effectuate their business plan. They were going to convert one tower to student housing and leave the other tower as a hotel, and it was just taking a bit longer to effectuate the condo documents and the like to get it done. With respect to the loan on the Marquis, we have been in contact with the borrower, and they are actively in the market pursuing a refinance. So we feel good that they're going to be able to get that deal done.

Great. Thanks for all the color.

Thank you. Our next question is coming from Anthony Powell with Barclays. Your line is live.

Hi, good afternoon. Just one for me. And I guess on the other side of the refinancing activity, you saw that an owner of a resort in May was able to get a hotel refinance with a cash-out refi at a high rate, but good proceeds. So do you think that kind of ability limits the number of deals that come to market in terms of your ability to maybe do some larger acquisitions here?

I believe it's very specific to the sponsor, the market, and the hotel. The property in Maui you've mentioned has been for sale multiple times. We considered it due to our presence in Maui, but we weren’t particularly enthusiastic about it. They managed to finalize the deal after failing to sell at their desired price. This location is unique because the resort market is quite robust, and it has a strong cash flow and performance, along with recent renovations and solid equity backing. There will be instances like this Maui property where sellers can secure a favorable refinance, but there will also be situations where, despite having all the right attributes, the asset may not perform well or hasn't been reinvested, or it might be in a location that lenders find unattractive. Given the many assets that haven’t seen reinvestment during the pandemic and the financial strain on owners, who need to inject capital back into their hotels, I anticipate opportunities may arise later this year and into 2024.

Thank you.

Thank you. Our next question is coming from Smedes Rose with Citi. Your line is live.

Hi, thanks. I just wanted to ask you a little more about the weaker-than-expected transient business in San Francisco and Seattle. And I think in San Francisco, maybe it's not all that surprising given kind of continued delays in their recovery and a lot of sort of ugly headline issues around quality of life. But in Seattle, do you attribute the weakness to just kind of more of local economic issues, maybe to do with the tech industry? Or are you also starting to see a pullback in because of sort of issues that that city might be having as well? And is that going to become a drag longer term on the portfolio?

Hey, Smedes, we saw an improvement in business transient in Seattle, so that wasn't an issue. It was really about our expectations for both the quarter and month. We noticed a shift in trends starting at the end of May into June. Seattle has always been a relatively weaker market this year, but there are encouraging signs for 2024 in terms of citywide trends and pace. We believe this improvement is primarily due to short-term transient growth. Overall, Seattle's business transient revenue increased about 5% year-over-year, driven mainly by rate increases from Amazon. Group room nights and total revenue also surpassed our internal projections, illustrating that the performance was primarily driven by business transient rather than groups or leisure.

Okay. Can I follow up on that? Regarding the reintroduction of the Ritz-Carlton and the $71 million loss due to disruption, when do you expect to recoup that amount? Will it all happen in 2023, or how are you approaching this?

Well, I think this goes to the earlier question regarding the receipt of timing of business interruption proceeds. And we haven't put the BI in our forecast because we just don't know when we're going to receive it. But I'm hopeful that certainly through the course of 2024, we should be able to close out most, if not all, of the claim associated with Hurricane Ian, and we do anticipate very strong performance from both the Ritz and the Hyatt Regency next year as well.

Okay. I was asking about the business interruption and how we can recoup the lost EBITDA to return to that $71 million from operations. Do you think that will happen in 2024?

Barring a major economic downturn, we expect this to occur throughout 2024. It's a seasonal property, and we're very pleased with the progress we're witnessing during the festive season, which includes December, January, and February. The property really thrives during this period in the first quarter. There is tremendous excitement for the new offerings at the hotel and resort in Naples. It is a truly unique property, and we are very optimistic about its performance. We anticipate being able to recover the $71 million we lost this year from those two assets over the course of 2024.

Smedes, just want to clarify here for you to understand, we are actually picking up combined for non-comparable hotels, which includes Coconut Point and Ritz Naples $17 million in the adjusted EBITDA number. So it's not in our hotel EBITDAre, but it is in our adjusted EBITDAre. That's for 2023. So the 2024, $71 million, which we're saying, that's incremental to that $17 million. None of that $71 million is really in the '23 number, if that makes sense.

Thank you. Our next question is coming from David Katz with Jefferies. Your line is live.

Hi, good afternoon, everyone. Thanks for taking my question. I wanted to go back to the expense side because it's come up a handful of times around the cost of labor. One, as a function of just being fully staffed on a comparable basis versus last year, but two, the actual per person cost of it and whether that's going up. And secondarily, we've talked before about the cost of insurance, and I just wanted to get an update there as well, please.

Sure. I think we had messaged before that our wage rate growth for this year, we expect it to be around 5%. And that we are still holding to that. And thus far, when you look through our expenses, we have actually performed pretty well on our expenses, and you can see that in our margin expansion relative to 2019. For the second quarter as well as what we are expecting for the full year to the midpoint being 40 basis points. So labor-wise, we still expect a 5% rate growth. We are seeing all the productivity improvements we made as a result of redefining our operating model, still holding and certainly something that is sustainable, which is driving the margin expansion to 2019. As far as insurance goes, we had baked into the forecast approximately 50% premium increase. Our renewal was on June 1. We maintained our coverage and the limits that we had previously. So no change to that. The overall rate increase was about 38%, and the premium increase, like I said, was close to 50%. So for the full year, which is already in our forecast and was in our forecast, insurance expense is expected to go up about 40% year-over-year, which equates to approximately $61 million for 2023.

Thank you very much.

Thank you. Our next question is coming from Michael Bellisario with Baird. Your line is live.

Thanks. Good afternoon everyone. Just one question for me on the group booking front. Can you provide some color just on what markets you're seeing pick-up momentum? And are there also any markets in the portfolio that were either softer or you see softening or maybe just leveling off as you look out to the back half of the year in '24? Thank you.

For 2024, our total group revenue pace is currently 1.5% ahead of 2019. Last year at this time, we were down in total revenue pace by double digits, but that improved to a decline of about 4.4% compared to 2019 in the first quarter, and now we are experiencing a positive trend. We are seeing strong performance, particularly in Atlanta, Chicago, New Orleans, New York, Phoenix, San Diego, Seattle, and Washington, D.C. Overall, citywide pace improvements are also encouraging, with positive trends compared to 2019 in New Orleans, San Diego, Seattle, and D.C.

Thank you. Our next question is coming from Bill Crow with Raymond James. Your line is live.

Thanks, good afternoon. Jim, help me understand this leisure normalization that we're all talking about. Because implicit in your remarks, at least I took it that maybe rate is staying strong, but demand is off. We heard from a peer this morning that said, rate is down 10% in one of their markets, but demand is strong. I guess I'm trying to figure out what you're seeing out there. Is it on the demand side? Is it on the rate side? Is it both on leisure normalization?

Sure, Bill. We had always expected that the rate would decline a bit. We never thought the rate would remain as high as it was in 2019. The second quarter of 2022 was an unusual situation, especially with Omicron affecting the first quarter. We assumed the rate would decrease, and it did, with our leisure rate going down about 7%. However, it was still 61% higher than in Q2 2019. What we didn't foresee, and I don't think anyone did, was the U.S. consumers' strong desire to travel internationally, which contributed to the softness in our leisure business as we did not achieve the expected volume. Our total leisure occupancy was down by just one percentage point, which isn't significant. Rates remain at record levels, and as you saw in our release, TRevPAR increased by 3.8%. We're still experiencing very strong out-of-room spending, including record outlet spending per occupied room of about $193 or $196 this quarter. It’s hard to predict if people will continue traveling to Europe every quarter or if it will be more concentrated in the second quarter of next year. Clearly, this trend was something that caught everyone off guard, but we are very satisfied with the overall performance of our resorts. From a rate perspective, the main issue was a decline in volume.

If I could dig a little deeper into the topic you mentioned about the normalization and the international travel imbalance, I believe we've experienced about three years of pent-up demand. It seems likely that this trend could last for some time. I'm curious to hear your thoughts, and while you may not have a definitive answer, yours would still be more insightful than mine. Will we continue to discuss normalization next year?

I hope we can move past discussing 2019 and focus on 2022, recognizing that 2023 will set a new standard as our base year moving forward. I believe normalization will take place in 2024, which I think will provide us with a beneficial momentum. This is particularly relevant because we did not see international inbound travel perform well in the second quarter. We encountered challenges related to flights from China and visa wait times, and we did not experience any improvement in our resort properties or other areas from international inbound travel. In 2019, we had 10% of our room nights, and now we are at 7.8%. Therefore, I see this as a positive outlook for us and the industry as a whole moving forward. We are not observing any change in consumer behavior, as spending remains strong.

Great, thanks. Jim, appreciated.

Sure, Bill.

Thank you. Our next question is coming from Tyler Batory with Oppenheimer. Your line is live.

Good afternoon. Thank you. I just want to stick on the leisure topic for a minute here. And just a multipart question. I mean a lot of the commentary relates to your resort properties. I'm also interested in what you're seeing in urban leisure, specifically on the weekends, that's following a similar trajectory in terms of a softness that you're experiencing on the resort side. And then just kind of a follow-up, thinking about revenue management. If demand slows further from here at your resort properties? Would you look to hold on to occupancy and lower rates, or maybe you want to hold on to rate and you're okay sacrificing some occupancy? Just trying to think through some of the scenarios there.

Yeah. I will answer the second part of your question first, and I'll let Sourav talk to the first part regarding urban leisure. That's a tricky question to answer about really looking at the proper yield management strategies. You flow a much greater percentage of ADR to the bottom line than you do a plan occupancy. I think one of the things that has been really encouraging over the course of the last several years is the fact that, generally, across the board, properties have held rates, and rate integrity has remained intact. And there would have to be a really meaningful trade-off, i.e., significant pickup in occupancy before we would consider cutting rate. Because once you cut rate, it's difficult to go back in the other direction. And as I said, we saw a 1% reduction in occupancy in Q2, and the rate was still 60% above where it was in the second quarter of 2019. And it really just flows to the bottom line and has a meaningful impact on margin performance.

Yeah. And on the leisure front, when you're looking at the urban hotels, they actually were pretty consistent overall. We didn't see the same level of drop-off, if you will, in terms of the demand. And we saw a little more consistent short-term in the quarter-for-the-quarter pickup, with the exception, obviously, of San Francisco and Seattle, as we mentioned. But overall, when you look at sort of our overall other market performance, we were actually up in rate 6.3% and for a convention portfolio, about 5.1% overall for that. And while resort was actually down by about 12%. So definitely had a more stable performance even when we looked at the holiday performance during the quarter.

Okay. I appreciate that detail. Thank you.

Thank you. Our next question is coming from Chris Woronka with Deutsche Bank. Your line is live.

Good afternoon, everyone. Thank you for the detailed information you've shared. I have a question regarding the benefits you anticipate from the capital transformation program. I believe you mentioned that eight of the hotels are fully stabilized and achieving the 9 points. How long do you expect that to continue? What about the other eight or nine hotels? Also, does the situation with the two additional hotels you renovated, which were not part of the original program, make you consider exploring more hotels, especially as other owners are facing challenges and may not be fully maintaining their capital?

The short answer to the second part of your question, Chris, is we will continue to be opportunistic, and where we see an opportunity to do a transformational renovation, I want to underline the word transformational because I think that is why we are seeing the outperformance that we are achieving in the recently renovated and stabilized properties. We have the balance sheet. We have the capital. We have the team internally to execute on those types of opportunities, and we will certainly look to deploy capital where we think we can achieve better than 3 to 5 points in yield index. To answer your question with respect to how long does it last? Well, I suppose I could tell you that it would last until the property looks hard, and we have to renovate it again. And that's probably you're talking a seven-year cycle generally for a rooms renovation seven to eight years, roughly. So we are really optimistic that we were able to deploy the type of capital that we did into our properties over the course of the pandemic, and we expect to see future strong outperformance going forward.

Okay, very helpful. Thanks, Jim.

Thank you. Our next question is coming from Robin Farley with UBS. Your line is live.

I would like to gain a clearer understanding of your guidance for the margin in the second half. While you anticipate a moderation in declines from the second quarter, it seems that RevPAR isn't expected to improve significantly. I'm curious about your level of confidence in this projection, especially considering the factors you've mentioned, which could still face challenging comparisons related to labor costs and cancellations, along with fewer cancellation fees. Could you provide some additional insights?

Yeah, Robin. I mean, when you look at sort of our guidance from a dollar perspective, we basically took it down by about $25 million, as you mentioned in our prepared remarks. We would attribute about $17 million really to the second quarter and about $8 million for the second half. The way you look at sort of the RevPAR growth that we're assuming, we effectively looked at the short-term pickup market by market, and we expected in the quarter for the quarter pickup and really scrubbed that to get to the RevPAR growth of low single-digit growth for the second half. On the expense side, the expense drivers that we effectively flowed through were all revenue-driven. So when you look at the second quarter as well, the relative drop in terms of margin to what we had guided to was more than 80% all revenue-driven. So we feel very comfortable with all the expense growth that we have in there. The only thing we did moderate is also food and beverage revenue, which obviously just given Q2 ends, we moderated that. That flows through the food and beverage department line as well as impact margins. So we feel very comfortable in terms of our expense forecast for the second half relative to the revenue growth that we have.

Okay, great. Thank you. And I don't know if I heard you guys mention an expectation for corporate negotiated rate for next year?

No, we did not. That will not start until really later in August. So we'll have more color as to what that will be shaping up like probably on our third-quarter call as we typically do.

Okay, great. Thank you.

Thank you so much. Our final question will be coming from Dori Kesten of Wells Fargo. Your line is live.

You mentioned a few times washing out the short-term transient pickup in the second half of the year. What would your guidance look like if the pickup was comparable to 2019?

What it would look like if it was in terms of the transient pickup being comparable to 2019 because we're obviously off from a BT perspective, meaningfully we are off by 20%. The group for night on also off. So it's kind of difficult to say relative to '19 in terms of room night because are up in rate, right? So I don't have exactly what that number would be if our rate was held exactly at '19, and we had the same amount of resin.

I have another question. You've mentioned the strong out-of-room spending. Year-to-date, the growth in RevPAR compared to TRevPAR is around 200 basis points. I'm curious about what you anticipate for the second half of the year that gives you confidence that by the end of the year, growth in room and out-of-room spending will align.

When we analyze the food and beverage performance for the second quarter compared to 2019, we see a decrease. This decline was largely due to the types of groups we hosted in the second quarter and many rebookings that occurred during the pandemic during this time. Looking ahead to the third and fourth quarters, as we mentioned earlier, the third quarter tends to be our weakest for group bookings. Consequently, food and beverage and Banco will also see lower performance in Q3. However, Q4 is anticipated to be a strong group quarter for us, and we expect food and beverage to perform well then based on our catering pace. Just as a reminder, catering contributions have shown strong growth, increasing by 20% in Q1 and over 6% in Q2. We are continuing to build on the strength of our banquet and audiovisual services in the second half, alongside the expected performance of our resorts, which, per occupied room, was 46% above 2019 levels.

Okay, thanks.

Thank you. We have reached the end of our question-and-answer session. So I will now turn the call back over to Mr. Jim Risoleo for any closing comments you may have.

I'd like to thank everybody for joining us on our second quarter call today. We appreciate the opportunity to discuss our quarterly results with you. We hope you enjoy the rest of your summer, and we look forward to seeing many of you in person this fall. Thanks again.

Thank you. This concludes today's call, and you may disconnect your lines at this time. We thank you for your participation.