After a strong opening quarter and with plenty of group business on the books, executives at Host Hotels & Resorts are optimistic about the rest of 2023.
Comparable hotel revenue per available room for Host's portfolio was up 31.1% year over year, shattering the real estate investment trust's first-quarter projections. As a result, Host raised its 2023 outlook and anticipates RevPAR growth between 7.5% and 10.5% for the full year, aided by growth between 4% and 6% in the second quarter.
"We continue to be optimistic about the state of travel today," Host President and CEO Jim Risoleo said. "Despite the underlying uncertainty in the economy and lack of clear visibility in the second half of the year, we are not seeing any signs of a slowdown and our outlook for the rest of the year has improved since our last earnings call."
Host's urban hotels, not just its luxury resorts in vacation destinations, performed better than expected in the first quarter, said Executive Vice President and Chief Financial Officer Sourav Ghosh.
"Holiday performance in the first quarter was strong, particularly at our downtown hotels. Downtown hotels saw increased leisure demand over last year, gaining more than 10 points of occupancy for both Martin Luther King Jr. and Presidents Day weekends," Ghosh said. "Downtown properties also drove overall portfolio spring break RevPAR growth of 7%, which is quite impressive when you consider the elevated resort comparison from the 'mother of all spring breaks' last year."
Risoleo added it took longer for urban hotels to recover from the pandemic, but those properties are definitely back.
"We anticipated that there was going to be a natural migration out of the resorts as people got more comfortable traveling internationally to the Caribbean, to Europe, into other places. ... Our downtown hotels have really seen business return in a material way. And not only business transient but leisure business. We feel really good about the way the recovery is unfolding," he said.
Group Demand and San Francisco
While all three demand segments — leisure, business transient and groups — are performing well, Risoleo singled out group demand as "firing on all cylinders." Host's group revenue is outpacing 2019 by 2.5%, group rate on the books for the year is up 6.4% year over year, and the company's hotels have 3.4 million definite room nights on the books, which is 94% of its group room nights sold in 2022.
Ghosh added that group booking activity has been much more consistent in the first few months of 2023 than it was even pre-pandemic.
"Specifically when you look at the second half, what really gives us confidence is group booking activity," he said. "For the second half [of 2023], we picked up 237,000 room nights. Just to put that into perspective, that's 35% more than what we picked up in [the first quarter] of '19 for the second half of '19."
As group demand at Host's resorts has proved resilient, the company's revenue managers have continued to keep rates high, Ghosh said.
"We continue working with our managers to make sure that rate is certainly a priority," he said. "Those conversations, frankly, in a high-inflation environment are much easier to have than otherwise."
He added that Host's optimism for group bookings and the ability to capitalize on high rates extends through the rest of 2023 and into 2024 as the lead time for groups booking in advance keeps growing.
While Host's markets are all mostly performing well, Risoleo said the company is watching what's happening in San Francisco very closely.
"I don't want you to think that we don't have concerns about San Francisco because we do absolutely have concerns about how the market's performing relative to 2019, what's happened with the layoffs in the world of tech and the like," Risoleo said. "Return to office in that market is really lagging the rest of the country. But it is the center of tech and it's going to be the center of artificial intelligence as the world returns."
Risoleo said three of Host's hotels in San Francisco — the Marriott Marquis near the Moscone Convention Center, Marriott Fisherman's Wharf and Grand Hyatt San Francisco — are in "pole position to really take market share and be the first to fill as business returns," in terms of location and condition.
Asset Strategy
Risoleo applauded Host's asset strategy over the past five years as a big contributor to the company's outperformance over the past several quarters.
While Host has leverage to spend on acquiring hotels, Risoleo indicated the company is waiting for sellers to lower their pricing a bit.
"Right now what we're seeing out there is a a fairly wide bid-ask spread between what sellers want and what we're prepared to pay today," he said.
Regardless of how the economy reacts to more interest rate fluctuation in the back half of the year, Host is prepared for a multitude of scenarios, Risoleo said.
"We can get more bullish on our underwriting and have a different point of view with respect to our cost of capital if the Fed does get into an interest-cutting mode, which you know [Wall Street] seems to be banking on, that they're looking for two rate cuts the back half of the year. I don't know if that's going to happen or not," he said.
"On the other hand, if things get tough, then maybe some of the sellers' expectations are going to change regarding values. We're keeping very close tabs on what's happening in the transaction market. We're also tracking all of the CMBS loans that are going to be maturing later this year and into '24 and '25. That is one place clearly that we will be prepared to deploy capital," he added.
During the quarter, Host sold The Camby, Autograph Collection by Marriott, a 227-room, upper-upscale hotel in Phoenix, for $110 million. The buyer was KHP Capital Partners. Risoleo said during the earnings call that Host provided a $72 million loan to the buyer with up to an additional $12 million available for renovation costs.
Risoleo said the company still has a great presence in Phoenix, and proceeds from the sale were invested in the Four Seasons Jackson Hole, which Host acquired in November.
"We made a decision that The Camby wasn't an asset that we needed to own or wanted to own for the long term given the amount of [capital expenditure] that needed to go into the property and our terrific exposure in the Phoenix metropolitan area with the Phoenician and the Westin Kierland. We've got, I think, the two best resorts in the market. There's some new supply coming into the Phoenix area, and we made a decision that at $110 million, it made sense to sell that hotel," he said.
As far as providing a loan to the buyer, Risoleo said Host has done similar arrangements with buyers of its other assets, but it's not going to make a habit of it.
"I don't see us doing this on any broad scale for a number of reasons. No. 1, the portfolio is in a really terrific position right now given the capital allocation decisions that we've made over the last six years. From 2018 forward, we have sold $5 billion plus of assets and really have culled the assets that we didn't want to own for the long term out of the portfolio," Risoleo said. "I don't see us doing many more bridge loans, if any more bridge loans, today. But the assets that we have sold, not greater than I think 65% to 70% loan to value, so we've gotten a nice flood of equity in connection with the sale and if something were to go south, what we do for a living is own hotels, so it wouldn't bother us at all if we had to take a property back."
Earnings Performance in the First Quarter
During the first quarter, Host Hotels & Resorts reported revenue of $1.38 billion, up 28.6% over the first quarter of 2022, according to its earnings release.
Host's first-quarter net income was $291 million, and adjusted EBITDA for real estate was $444 million.
The company's portfolio achieved first-quarter RevPAR of $217.77, which was up 31.1% year over year. Average daily rate was $318.49, which was 4.2% higher than the first quarter of 2022. Hotel occupancy was 68.4%, up 25.7% from the same quarter in 2022.
As of press time, Host's stock was trading at $17.27 per share, up 7.6% year to date. The Nasdaq Composite Index was up 14.5% for the same period.