Earnings Call Transcript - HST Q2 2020

Operator, Operator

Greetings and welcome to the Host Hotels & Resorts Second Quarter 2020 Earnings Webcast. As a reminder, this conference is being recorded. I would like to turn the call over to your host Ms. Tejal Engman, Vice President of Investor Relations for Host Hotels & Resorts. Please go ahead.

Tejal Engman, Vice President of Investor Relations

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 Law. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed, and we are not obligated to publicly update or revise these forward-looking statements. In addition, on today's call, we will discuss certain non-GAAP financial information, such as FFO, adjusted EBITDAre, and comparable hotel results. You can find this information, together with reconciliations to the most directly comparable GAAP information, in today's earnings press release, in our 8-K filed with the SEC, and in the supplemental financial information on our website at hosthotels.com. Participating in today's call with me will be Jim Risoleo, President and Chief Executive Officer; Brian Macnamara, Principal Financial Officer and Controller; and Sourav Ghosh, Executive Vice President Strategy and Analytics. And now, I'd like to turn the call over to Jim.

Jim Risoleo, President and CEO

Thank you, Tejal, and thanks everyone for joining us this morning. We hope that all of you are staying safe and healthy during these extraordinary times. The lodging industry experienced a challenging second quarter with record revPAR declines in April followed by a slight improvement in lodging demand through May and June. Working with our operators, we responded swiftly to the changing demand landscape by reducing our second quarter hotel operating expenses by 72% year-over-year. As states and markets began to ease their lockdowns, our portfolio achieved over 100% hotel revenue growth from the lows of $24 million in April to $49 million in June. Toward the end of the second quarter, we successfully amended our credit agreement and achieved outstanding terms that preserve our liquidity and retain our flexibility to capitalize on value-enhancing investment opportunities. All in all, we emerged from the most challenging quarter on record for Host and the travel industry with significantly lower operating costs, greater balance sheet flexibility, and access to $2.5 billion of liquidity. Starting with operations, our second quarter expense reductions and revenue growth were driven by exceptionally agile asset management and the swift reaction of our world-class operators. As lodging demand plummeted to record lows in April, we worked with our operators to suspend operations at 35 hotels, reduce hotel fixed costs by approximately 50%, and reduce overall hotel operating costs by 72% year-over-year. Cost savings were primarily driven by steep reductions in wage and benefit expenses and the fixed portion of above-property allocated costs, as well as by suspending most brand standards and contributions to hotel FF&E reserve accounts. At operational hotels, our managers significantly scaled down operations by closing guest room floors and meeting spaces. When leisure demand began improving through May and June, we swiftly pivoted to reopen hotels and worked with our operators to drive 380 basis points of average occupancy gains and a 50% increase in average room rates across the portfolio from April to June. As of yesterday, 64 of our 80 consolidated hotels, representing 78% of our total room count, were operational. We prioritized reopening eight suspended hotels located in drive-to leisure markets including Florida, San Diego, Phoenix, San Antonio, and Orange County as these markets captured leisure demand and delivered higher second quarter revPAR than the rest of our portfolio. We currently expect another six hotels to reopen in August, with operational rooms representing nearly 90% of our total room count by month end. As a reminder, we work with our operators to reopen a property when it's expected to sustain approximately 10% to 15% occupancy levels. At those levels, we expect incremental revenues to exceed the incremental cost of being operational, resulting in marginally lower EBITDA losses. Our preference is for hotels to remain operational rather than suspended because an operational property is capable of capturing spontaneous, short-term demand and is better positioned to attract future demand when the market begins to recover. That said, we continually review our hotel's occupancy trends and won't hesitate to suspend a hotel's operations when the marginal benefit of remaining operational turns negative. For instance, we are currently reviewing the New York and San Francisco markets. New York has been slow to reopen with the recent pause on indoor dining and the cancellation of the 2020 United Nations General Assembly and New York Marathon events, while San Francisco has enacted an onerous, costly, and unnecessary operating ordinance. As we deliver both significant expense reductions and gradual revenue improvement, we reduced our hotel level operating loss by nearly 50% from $73 million in April to $37 million in June. Our hotel level monthly operating loss averaged $54 million while above-property corporate level monthly cash flows averaged $79 million in the second quarter, with the latter reflecting a concentration of CapEx which is expected to decrease by approximately $100 million in the second half of the year. We ended the second quarter with $2.5 billion of available liquidity which includes $750 million of available capacity under the revolver portion of the credit facility, as well as over $150 million of FF&E escrow reserves. Assuming operational performance remains at second quarter levels, we would expect approximately $100 million to $110 million of total monthly cash outflows, reflecting an average hotel level loss of approximately $50 million a month, as well as estimated capital expenditures, interest payments, and general corporate overhead. In this scenario, we would expect to end with approximately $1.8 billion to $1.9 billion of total available liquidity. If operational performance remains at second quarter 2020 levels beyond year-end, we would have ample liquidity until mid-2022 even with CapEx near 2020 levels subject to continued covenant waivers for our credit agreement. Moving on to our balance sheet, our quarter-end leverage ratio, as defined in our credit facility, was at 4.6x. Our interest coverage ratio was at 4.4x and our fixed charge coverage ratio was at 2.7x, all of which were within the limits specified in our prior credit facility covenants. With the amended credit agreement in place, our quarterly tested financial covenants were waived beginning July 1st, 2020, through the second quarter of 2021, with testing to resume for the third quarter of 2021. Although the duration of this pandemic-induced crisis remains unknown, we continue to expect our liquidity position and balance sheet capacity to remain key comparative strengths that differentiate Host as one of the few lodging REITs that is less likely to need to issue equity expressly to delever its balance sheet. Shifting to business performance, we saw clear signs of a recovery in consumer demand through May and June as state and market lockdowns began to ease. Our booking pace indicated a solid pickup in June and the trend leading into the third quarter has since decelerated since daily infection rates in certain markets have spiked. 13 of our Top 20 markets have regressed in their reopening phases in the last three to four weeks while the other seven remain in their existing phase. Needless to say, this trend has impacted our reopening plans. When Hawaii announced that on August 1st, they would lift the 14-day quarantine requirement for travelers who test negative for COVID-19 up to 72 hours prior to arrival, the on-the-books occupancy for our Maui resorts quickly reached the mid-teens. We therefore expected to reopen Andaz Maui and the Fairmont Kilani in August but have now delayed our reopening plans as Hawaii has extended the quarantine through at least the end of August. Surprisingly, we saw some group business in the second quarter despite the absence of a vaccine or an effective therapeutic. Excluding New York, which benefitted from COVID-19 related emergency services group business, traditional group business showed signs of improvement as it grew from 1,700 room nights sold in April to 12,855 sold in June. For the whole portfolio, business transient room nights grew 150% to 12,459 room nights in June after bottoming at 4,850 room nights in April. While business transient demand has primarily been driven by defense contractors, we have begun to see consulting-related business travel in July. Government transient room nights also improved from 650 room nights in April to 6,450 room nights in June. Finally, contract business held up relatively well in the second quarter, with 43,000 contract room nights sold in the quarter. Our San Antonio hotels increased airline crew volume year-over-year, while New York Airport, Hyatt Place, Waikiki, and Grand Hyatt Buckhead all saw production improvement throughout the quarter. As of June, our properties have 1.8 million group rooms on the books for the full year 2020, down nearly 62% from 4.6 million group rooms the same time last year. Our total group revenue pace is down 81% in the third quarter and 49% in the fourth quarter, and we continue to expect group cancellations in the second half of the year. We have rebooked approximately $120 million of canceled total group revenues with an additional $96 million in the pipeline that collectively represent nearly 21% of the total group revenue that canceled this year. We are also working with our operators to find creative ways to fill the demand gap, with long-term group walks from schools, sports associations, and corporates. For example, Houston Airport Marriott received a large corporate group booking of 175 rooms per night from July to December, in addition to another corporate group booking of 100 per night on a month-to-month basis. The rooms are being used to quarantine COVID-19 negative employees for 14 days prior to international deployment. Looking at next year, we are experiencing a high single-digit deceleration in our total group revenue booking pace for 2021, as measured by definite revenues on the books. With most of the deficit concentrated in the first half of next year and minimal impact to the second half. Our tentative revenues, however, are tracking nearly 30% ahead of the same time last year, reflecting robust pent-up demand that's waiting for the current health and safety risks to subside. Our business outlook depends upon how quickly we as a nation can flatten the rate of new COVID-19 infections, while we await a more effective solution, which we expect will take the form of a vaccine. In the interim, increasing consumer confidence in our industry has never been more important. The major hotel brands have been proactive in creating, implementing, and communicating new cleanliness and health and safety standards, including corporate requirements for face coverings to be worn within indoor public spaces. These safety protocols help address the risk of contagion and establish trust with consumers specifically at Marriott, long known for consistency and reliability. We expect their commitment to their clean program to resonate with both business and leisure customers alike. Encouragingly, as a percentage of second quarter revenues, our direct sales through Marriott.com increased 400 basis points over last year, compared with sales through OTAs increasing by 200 basis points. As we have consistently said, Host benefits from our strong affiliation with world-class hotel brands. We continue to believe that beyond strong loyalty programs, brand trust and reliability will be differentiators that will help us outperform during the recovery. We remain deeply committed to redefining our operating model with the immediate goal of achieving breakeven as soon as possible and the longer-term goal of generating higher profitability and lower levels of occupancy. In the 2009 recession, several operating expense line items were significantly reduced and continued to improve through the cycle downturns compelled owners and operators to re-evaluate brand standards, programs, and above-property expenses. An exercise that can result in long-term savings and a healthier hotel operating model that better serves customers' changing needs. To that end, we are working with our operators to deliver permanent cost savings at the hotel level through the following three key initiatives. First, to achieve a long-term reduction in the fixed component of above-property charges. Second, to adopt productivity-enhancing technology, such as the use of mobile keys. And third, to drive efficiencies through the cost utilization of management functions. While achieving these long-term permanent cost savings is conditional upon reaching an agreement with our operators, we have analyzed the potential benefit they could have on our operating model. Based on 2019 revenues, we believe these measures have the potential to reduce annual hotel level expenses for our current portfolio by an aggregate $100 million to $150 million, which represents approximately 3% to 4% pro forma 2019 hotel-level expenses. Turning to our supply outlook, although there has been little evidence of a material decline in supply so far, there is a historical pattern of supply rationalization after large demand shocks. When we look at the historical supply trajectory for the top 60 to 70 markets, rooms under construction and major markets fell by 68% two years after the peak of 2008 and were down 77% by mid-2011. We therefore expect supply will be mitigated over the long-term, with rooms under construction declining over time and likely bottoming at even lower levels than in the last recession, given a significantly greater degree of distress. In addition, we expect record levels of permanent hotel closures due to the unprecedented level of distress in the market. According to Trup, the lodging delinquency rate has risen from 2.7% in April to 19% in May and has reached approximately 24% in June. Our analysis indicates that nearly 30% of upper tier hotels in our top 20 markets are temporarily closed. Seven hotels in our top 20 markets have already reported to be permanently closed, and we expect more of the temporary closures to become permanent. To conclude, we have experienced four months of significant economic uncertainty as our nation began to reopen, flattened infection rates in certain markets, and experienced sharp increases in others. Although we expect economic uncertainty to prevail until the health and safety risks posed by the pandemic are fully addressed, we are encouraged by the following. First, our operators' ability to adapt the operating model to record low levels of demand by reducing our hotel level operating costs by 72%. Our goal is to make a portion of these cost reductions permanent and to achieve higher levels of profitability and lower levels of occupancy. Second, the resilience of lodging demand which began to return as states and markets reopened and as our booking trends indicated would have been greater had infection rates continued to flatten rather than rise. Although there is some debate about the future of business travel as professionals grow accustomed to virtual meetings, we would note that U.S. occupancy has achieved higher peaks following the last three downturns, including 9/11, when many believed air travel would be permanently impacted. While speculating on long-term behavioral trends in the midst of the biggest global health and safety crisis in a century is likely to be unproductive, business transient and group business customers have a proven track record of choosing the effectiveness of in-person interactions despite the efficiency of video conferencing technology. Finally, we are confident in the strategic advantages provided by our financial capacity to withstand prolonged business disruption. Host is different in its potential to not only survive this crisis but also to capitalize on future long-term value creation opportunities that meet our strategic objectives. We are excited to have entered a new cycle with the highest quality portfolio of iconic and irreplaceable hotels in the company's history and likely in the lodging industry. When demand recovers, we believe that the quality of our assets, many of which will be newly renovated, will be a true differentiator that will help us gain RevPAR index share and outperform the industry. We continue to believe in the strength of both geographic and demand diversity through this cycle. Geographic diversity will serve us through an uneven recovery as various states and markets recover differently, while demand diversity will help us drive optimal revenue management and pricing through this cycle. My remarks would not be complete if I didn't mention how conversations about confronting systemic racism have reverberated throughout our society. Diversity, equality, and inclusion remain at the forefront of our priorities and integral to our corporate values. I was proud to recently join the CEO Action for Diversity and Inclusion Initiative and as an organization, Host remains committed to fostering these values in our company and our communities. With that, I will turn the call over to Brian.

Brian Macnamara, Principal Financial Officer and Controller

Thank you, Jim. Good morning, everyone. Building on Jim's comments, the volatility in the second quarter was unprecedented as the demand landscape changed over the course of the quarter. Although second quarter RevPAR declined by 93% year-over-year, it grew 133% from the depths of the crisis in April through the end of June, when 10 of our hotels exceeded or were close to achieving breakeven EBITDA. For the quarter, we delivered a RevPAR of over $14 driven by average occupancy of 8.8% and an average room rate of approximately $162. Total RevPAR of approximately $23 benefited from $14 million of mostly COVID-related group cancellation and attrition revenues recognized in the second quarter, compared to $10 million of similar revenues recognized in the first quarter. In the second half of this year, we do not expect to recognize any further cancellation and attrition revenues related to the pandemic, as we continue to prioritize the rebooking of group business. Our second quarter results include $45 million for healthcare benefits and special pay for nearly 80% of hotel level employees who have been furloughed. We have accrued $35 million for that expense in the first quarter. In the second quarter, we accrued an additional $32 million for similar payments that will be made in the third quarter. The decrease in the third quarter primarily reflects the reopening of several suspended properties since April. As Jim mentioned, we work closely with our operators to reduce expenses and have realized a 72% decrease in second quarter hotel level operating costs. Our wage and benefit expenses during the quarter were approximately 81% lower, excluding one-time wage and benefit-related special costs. Our variable costs decreased 93% due to lower occupancy, while our fixed costs, including fixed wage and benefits expenses, were approximately 50% lower. The decrease in fixed costs was driven by wage and benefits above property cost relief, utility expense, and property-specific sales and marketing reductions that partially offset other fixed costs, such as property tax and insurance. Although long-term costs associated with revised cleanliness protocols are yet to be fully determined, we believe the cost increase will be more than offset by productivity improvements. Our operators provided significant cost relief for above-property shared service and allocated costs, which are normally considered fixed. These costs include sales offices, rent revenue management, advertising, the program services funded by Marriott, centralized human resources, accounting, payroll, as well as IT systems and support. These fixed costs saw unprecedented reductions, with some allocated costs reduced by as much as two-thirds. Overall, we reduced operating expenses by approximately 72% year-over-year at our low occupancy hotels and by approximately 75% at hotels where operations were suspended. For the third quarter, we believe we will see continued cost containment for wages, benefits, and variable expenses with cost reductions mirroring reductions in overall volume. With regards to fixed costs, while the brands have not communicated above-property service cost targets as yet, we expect utility and property-specific sales and marketing cost reductions to continue. Moreover, we would also expect the tax benefit we experienced in the second quarter to continue along the same trajectory. Moving to revenues, portfolio-wide average occupancy declined by approximately 73 percentage points year-over-year to 8.8%. And our average daily room rate was down 35%, but still nearly $162. We have generally found that our operators are able to preserve and in some cases even exceed rates versus the same time last year at properties that are in high demand on strong compression dates, such as national holidays. For example, our Florida hotels delivered remarkable ADR growth of approximately 12% year-over-year, with ADR for the month of June approximately $97 higher. Thus far, this downturn has distinguished itself by the fact that average rates’ decline is not driving occupancy to the extent that it normally would. Customers are more sensitive to cleanliness and sanitation standards than to room rates. We are hopeful that rate degradation will be less severe than in prior downturns, and that branded hotels will benefit from having stringent cleanliness standards that should help gain customer trust and strong loyalty programs that should help drive demand. Shifting to market performance, hotels in our drive-to-leisure markets, which include Phoenix, San Antonio, San Diego, Florida Gulf, Miami, and Jacksonville, were running at 1.8% occupancy at the beginning of the quarter, and had progressed to 17.4% by the last week of June. Although the portfolio was in negative territory in the second quarter, markets with relatively better performance include Jacksonville, the Florida Gulf Coast, New York, Houston, Los Angeles, Miami, and Atlanta. The Florida markets, excluding Orlando, benefited from leisure demand. The Ritz Carlton Amelia Island outperformed STRs, upper-tier RevPAR in Jacksonville by 600 basis points, while our Miami hotels outperformed their STRs peers by 250 basis points of RevPAR. Our hotels in New York and LA benefited from medical-related business as well as the closure of hotels within those markets. It is estimated that 50% of New York hotel inventory is in suspended operations and that 20% of closed hotels in Manhattan may not reopen. In Atlanta, our hotels in the market benefited from short-term transient demand, as well as crew contract business. Our worst-performing markets in the second quarter were Orlando, Boston, Malleo Wahoo, New Orleans, Seattle, San Diego, and San Francisco, largely due to suspended operations at several of our hotels in those markets through much of the second quarter. Turning to CapEx, at the outset of the pandemic, we reduced our expected 2020 capital expenditures by approximately $100 million and through the second quarter, we have completed almost 60% of the total CapEx spend we have planned for the year. We received $8 million of operating profit guarantees at the Marriott transformational capital program year-to-date and expect to receive another $12 million over the second half of the year. As Jim mentioned, we successfully amended our revolving credit facility and term loans at the end of June. In the amendment, we accomplished three key objectives. First, we bought our portfolio time to make inroads into the recovery. We suspended the testing of financial covenants through the second quarter of 2021 and gained additional flexibility to accommodate our portfolio's recovery for three quarters following the covenant relief period. Second, we preserved our ability to capitalize on opportunistic value-enhancing investments during this period of extreme dislocation. Under the waiver, we have the ability to acquire $1.5 billion of assets using our existing liquidity while maintaining certain minimum liquidity requirements. We have the ability to issue equity without any requirement to repay debt. We have preserved the flexibility to use $750 million of net proceeds from asset sales for reinvestment purposes. And lastly, we preserved the flexibility to spend up to $500 million in ROI CapEx during the covenant waiver period. This provides us the ability to continue value-enhancing repositioning and development projects within the portfolio without experiencing revenue disruption, as well as to continue the Marriott transformational capital program, which benefits from operating profit guarantees. On behalf of the Host management team, I would like to thank the members of our Bank Group for their continued support. Looking forward for the rest of the year, we are not providing 2020 guidance at this time due to the continued lack of visibility on the depth and duration of this crisis, the timing of the reopening of individual states and localities, and the expected operating restrictions for businesses as well as individual company travel restrictions. Once again, we would note that in prior recessions peak to trough, the declines in hotel level EBITDA have been roughly twice as large as the peak to trough declines in RevPAR, although this 2:1 ratio should have deteriorated considerably in a near-zero revenue environment. We believe that will continue to hold true for our portfolio due to the significant success in reducing fixed costs at the property level. Today, more than ever we believe that Host Hotels & Resorts is the premier lodging REIT in the industry. We have a high-quality, well-diversified portfolio, whose consistent performance is driven by strong in-house analytics and by working with the best operators in the business. We are the only investment-grade balance sheet among lodging REITs, with no significant debt maturities until 2023 and approximately $2.5 billion of available liquidity as of June 30th. We are well-positioned to deal with this crisis and to continue to execute our strategic vision to create long-term value for our shareholders. Thank you. And with that, we will now be happy to take questions. To ensure we have time to address questions from as many of you as possible, please limit yourself to one question.

Operator, Operator

Our first question comes from the line of Anthony Powell with Barclays. Please proceed with your question.

Anthony Powell, Analyst

Hello, Good morning. Question on cash burn and capital allocation. How comfortable are you pursuing some of these opportunities like CapEx and acquisitions with cash burn at $50 million a month at the hotel level? Do you need to see cash burn come down more before you continue with your CapEx or would you consider maybe reducing CapEx, if cash burn want to stay to be levels for a long period of time?

Jim Risoleo, President and CEO

Anthony, the way we're thinking about the business today is really quite simple: liquidity is king, and we are being very thoughtful about how we're allocating funds for CapEx in 2021. It's something we talk about as a management team all the time. And, if we don't see the situation improve, you can expect to see us cut back. With respect to potential acquisitions, although from a capital allocation perspective, we have the flexibility to invest in up to $1.5 billion of acquisitions with existing liquidity subject to maintaining $500 million of liquidity. I'll make a couple of comments with respect to that. Number one, there aren't many opportunities in the marketplace today. We expect to see investment opportunities in the latter part of this year and into next year as special servicers and other lenders resolve issues with their borrowers, and in some instances properties are going to come to market. In other instances, properties are going to be recapitalized. But it's the same thought process with respect to buying hotels at this point in time. We have to be comfortable that we're going to have the right amount of liquidity to ride through the crisis.

Operator, Operator

Thank you. Our next question comes from the line of Michael Bellisario with Robert W. Baird. Please proceed with your question.

Michael Bellisario, Analyst

Good morning, everyone. Jim, you mentioned a big number of potential cost savings. Can you maybe give us some insight into the conversations that you're having with the brand and then how receptive they are to all those reductions that you listed?

Jim Risoleo, President and CEO

Yes, I want to point out that the number that we discussed was between $100 million and $150 million in permanent cost savings. And we were very careful, Mike, to use the word 'potential' cost savings, because we have to reach agreement with our operators. And it's going to take some time to implement the cost savings on a permanent basis. So, I would tell you that they are very receptive. I think you're going to see, and you've already seen it at Hilton, as an example, a meaningful reduction in their corporate headquarters staff. I think you're likely to see it unfortunately, at the other brands as well. And those functions, in many instances, relate to the shared services that are above property. And we think that there is a good potential that we are going to be able to achieve these cost savings over time.

Operator, Operator

Thank you. Our next question comes from the line of Shaun Kelley with Bank of America. Please proceed with your question.

Shaun Kelley, Analyst

Hi, good morning, everybody. Jim, you mentioned a sequential setback or downturn in your markets. Could you provide more details about that? Do you think we observe in the industry data that it has leveled off, but we haven't really experienced a significant drop in occupancy levels, even in some Sunbelt markets? For the hotel data, we tend to see more abrupt changes compared to restaurants and other data. Could you elaborate on what you're seeing in those areas? I think you identified 30 markets with some regression; additional details would be helpful.

Jim Risoleo, President and CEO

Sure, absolutely. Shaun, as we consider this, we may have been a bit overly optimistic about the potential performance due to the forward bookings we observed for the 4th of July weekend specifically. One market that stands out to us is Miami Beach. We opened our hotel in South Beach in early June and noted strong forward bookings, anticipating occupancy levels above 70% for the 4th of July weekend. Unfortunately, that didn't happen because the mayor closed the beaches and bars. As we know, there was an increase in COVID-19 cases in Florida, and we ended up with around 20% occupancy. There are both positive and negative aspects to this situation. The positive is that there's significant pent-up demand, and once the virus is under control, we expect people will travel and seek a luxury experience again. The downside is the surge in cases, which is beyond our control. We are all waiting for the nation to get the pandemic under control, and everyone is looking for an effective vaccine or therapy to enable a return to normal business. Other markets performed well over the 4th of July. For instance, both Ritz-Carlton locations in Florida, Ritz Naples and Ritz Amelia Island, achieved occupancy rates in the 60s with average daily rates of $600, which were higher than the same period last year. We believe that if the surge in cases hadn't occurred in Florida, we would have performed better at those properties. When I mention a deceleration, it really relates to our expectations.

Operator, Operator

Thank you. Our next question comes from the line of Neil Malkin with Capital One Securities. Please proceed with your question.

Neil Malkin, Analyst

Hi, everyone. Good morning. I just wanted to go back to a group commentary you made a statement about 2021 group bookings being below this year. Just maybe one to get some more color and make sure I understand that and then with the group, maybe talk about the landscape for maybe the back half of next year, either in terms of people who have canceled in 2020 or incremental people, groups who may be getting optimistic on what next year could look like?

Jim Risoleo, President and CEO

Sure. I think the message around group was that our total group revenue pace for 2021 is down high single digits for next year over the same period of time last year. And most of the cancellations that have occurred in 2021 have occurred in the first quarter. So the business is hanging in there certainly for the second half of the year. We all hope it's going to show up. We all hope by the end that we are going to have a vaccine and/or therapeutic and we'll continue to see groups want to get back into the hotels and have their meetings. Again, the positive is that our tentative business for 2021 is 30% over the same time last year. So that just goes to prove that there is a lot of pent-up demand. And we are fully confident that the group will recover. We've always said that the way this recovery was going to play out was drive-to leisure transient first, with business transient second and which group last, and I think that's exactly how things are playing out.

Operator, Operator

Thank you. Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question.

Bill Crow, Analyst

Hi, good morning, gentlemen. Two-part question, one topic, which is long-term or permanent impairment. And the first part is on business travel, you sounded confident that you thought business travel would recover to previous levels and decided some historical information. But we've never really been stressed like this. And we've never had the technology that's been proven in such a way. So I'm just curious about your thoughts. Why we wouldn't see a 10% or 15% or 20% permanent impairment in business travel in the future? And the second thing is; are we seeing a long-term or permanent impairment in values of hotels in certain markets where the government reaction to COVID, the labor reaction to reopening might change investors' views? Thanks.

Jim Risoleo, President and CEO

Sure. I'll address the second question first. It's really too early to determine the long-term impact on values. Currently, most companies are trading significantly below their replacement costs. We are likely under 50% of the replacement value. We've included some data on replacement costs in our investor presentation for clarity. Some assets currently on the market are valued 20% lower than their pre-COVID value as of February 1st. I believe that, as cash flows and EBITDA recover, values will generally return to pre-COVID levels and may improve. However, some markets may face additional challenges due to ongoing supply issues or high cost structures, which will make it harder for those assets to maintain their value. On the whole, I expect us to return to our pre-COVID position and then grow beyond it. Our geographically diversified portfolio, with no more than 11% of EBITDA from any single market, positions us well for whatever lies ahead. As for business travel recovery, technology has been beneficial; we've been using it for earnings calls in various locations. While virtual meetings are not ideal, they ensure safety and health. Personally, I'm eager to travel; I've had an average of 450 Zoom meetings per week over the last several weeks. Although Zoom has been helpful, we recognize that personal interactions are crucial. We've considered potential scenarios if business travel doesn't return to pre-COVID levels. We noted comments from airlines; United believes travel will fully recover, while Delta predicts a 20% decline. We analyzed Delta's perspective and evaluated the implications for our current portfolio and how we might adapt our business model. We discovered that shifting a 20% reduction in business travel towards leisure would have a minimal effect on EBITDA, though it would impact our EBITDA margins since the business travel segment is our most profitable. We are prepared for whatever recovery comes our way and have the flexibility in our portfolio to adjust by focusing on leisure and group segments while managing revenue on an asset-by-asset basis almost daily.

Operator, Operator

Thank you. Our next question comes from the line of Rich Hightower with Evercore ISI. Please proceed with your question.

Rich Hightower, Analyst

Hey, good morning, everybody. So, Jim, just to just to follow up on the prior question, and maybe to combine it with another question on acquisitions. Look at some point. I mean, it's premature to maybe talk about this right now. But maybe sometime in the early to mid-part of next year, Host is going to have the flexibility to go on a shopping spree of sorts, certainly relative to several public and private peers. And so as you think about what the portfolio looks like today, what you want to look like over the next 5 to 10 years, what's on your screen as far as that is concerned? And where's the puck going in terms of what Host should look like, again, and that sort of 5 to 10-year outlook as you think about what the portfolio needs to look like?

Jim Risoleo, President and CEO

Yes, Rich, I believe the portfolio will likely remain as it is today, with an ongoing emphasis on enhancing the overall quality of our assets. To clarify our perspective on the business, strong geographic diversification is essential, and maintaining an investment-grade balance sheet is also crucial. These are two key factors that set us apart. We currently possess the best collection of iconic and irreplaceable hotels in the industry. As we strategize on developing the portfolio over time, we appreciate the model we have, which includes robust geographic diversification and a diverse business mix in the hotel sector, encompassing leisure travel, business travel, and group events. This approach leads to multiple demand sources in dynamic markets with substantial barriers to entry, guiding our vision for building the company over the next three to five years.

Operator, Operator

Our next question comes from the line of Lukas Hartwich with Green Street Advisors. Please proceed with your question.

Lukas Hartwich, Analyst

Thanks. Good morning. Hey, Jim, can you provide an update on the competitive dynamics for hotels versus short-term rentals?

Jim Risoleo, President and CEO

Sure, happy to. I would tell you that short-term rentals right now, when I'm talking about Airbnb in particular, have seen a surge in drive-to leisure business. As you know, the same thing that we've talked about; people want to get out, and they have been driving to Airbnb in leisure and drive-to-leisure markets. Our point of view is as we start recovering and markets start opening up, the urban markets in particular are going to be more challenged. We think that the short-term rental business, some of the other platforms that are out there that were out there, I don't quite know what's going on with them, but Lyric and Sonder and some of those, as well as Airbnb are going to face serious financial difficulties. And it's difficult enough for hotel owners that have well-heeled equity partners with them to work their way through this pandemic with literally no cash flow or minimal cash flow coming in. I think that issue is compounded by the individual Airbnb owners who have taken on a lot of debt, unfortunately, and nowhere to turn when it comes to servicing that debt. So I think you're going to see in the urban markets in particular, a recalibration of alternative accommodations.

Lukas Hartwich, Analyst

Great. And then do you expect hotels to permanently close in large numbers in markets outside of New York?

Jim Risoleo, President and CEO

I don't know if I can say large numbers today. But I do think you're going to see a lot of hotels adapted for other uses in markets across the country. I think it's too soon to say, but there are markets that had excess supply coming into this pandemic, and those markets I think are going to be fairly challenged coming out. So I would expect that if people, again, it's going to be dependent upon the wherewithal of the individual owners and what the dynamic and fundamentals look like on a market-by-market basis with respect to assets that may be taken back by lenders and what those lenders might do with those properties. And when they bring them to market whether the buyer is going to continue to operate that particular facility as a hotel or look to an alternative use. So I do think it's a little too soon to say, but we would expect to see this happen across the country.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes our time allowed for questions. I'll turn the floor back to Mr. Risoleo, for any final comments.

Jim Risoleo, President and CEO

I'd like to thank everybody for joining us on the call today. I know these are exceptionally difficult and challenging times for all of you. We really appreciate the opportunity to discuss our second quarter results with you. And we look forward to talking with you in a few months to discuss our third quarter results. Hopefully, we'll be able to get together in person in the not-too-distant future. So have a great day and a great weekend everyone.

Operator, Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.