Host Hotels & Resorts Inc

NASDAQ:HST

Earnings Call Transcript 2019-Q4

[Operator]

Good day, and welcome to the Host Hotels & Resorts, Inc. Fourth Quarter and Full Year 2019 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the call over to Tejal Engman, Vice President of Investor Relations.

[Tejal Engman, VP, IR]

Thanks, Travis. Good morning, everyone. Welcome to the Host Hotels & Resorts Fourth Quarter and Full Year 2019 Earnings Call. Before we begin, I'd like to remind everyone that many of the comments made today are considered to be forward-looking statements under federal securities laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed, and we are not obligated to publicly update or revise these forward-looking statements.

In addition, on today's call, we will discuss certain non-GAAP financial information, such as FFO, adjusted EBITDAre in our comparable hotel results. You can find this information, together with reconciliation to the most directly comparable GAAP information in today's press release and our 8-K filed with the SEC and the supplemental financial information on our website at hosthotels.com.

This morning, Jim Risoleo, our President and Chief Executive Officer, will provide overview of our fourth quarter results, key business trends, and our outlook for 2020. Brian MacNamara, our Principal Financial Officer and Controller, will then provide detailed commentary on our fourth quarter performance, our capital position and our guidance for 2020. Following their remarks, we will be available to respond to your questions.

And now I'd like to turn the call over to Jim.

[James Risoleo, President, CEO & Director]

Thank you, Tejal, and thanks, everyone, for joining us this morning. Before I address our 2019 results and 2020 guidance, I want to take a moment to thank Michael Bluhm for his service as CFO. We had significant accomplishments under his tenure that Brian will address and we wish him well as he begins his role as Global Head of Lodging for Morgan Stanley based in Los Angeles.

2019 was another highly productive year for Host. We successfully executed large value-enhancing capital allocation transactions and delivered a solid operational performance, which exceeded our adjusted EBITDAre and adjusted FFO per diluted share expectations for the fourth quarter. We capitalized on favorable market conditions and sold 14 of our lower total RevPAR, higher capital expenditure hotels for $1.3 billion. We further upgraded the quality of our portfolio by acquiring the iconic 1 Hotel South Beach, completing 4 renovations as part of the Marriott transformational capital program, and investing in multiple value-enhancing development projects across the portfolio. We returned $1.1 billion to shareholders through dividends and share repurchases while further strengthening our best-in-class investment-grade balance sheet.

Finally, we delivered our strongest comparable total RevPAR and RevPAR performance for 2019 in the fourth quarter, while achieving solid margins in the year challenged by accelerating wage and benefit expense growth. We exceeded the top end of our full year 2019 adjusted EBITDAre guidance range, primarily due to stronger-than-expected total revenue growth at our noncomparable hotels. Comparable hotel total RevPAR was 190 basis points due to better-than-expected food and beverage as well as other revenues. We will discuss our fourth quarter results in more detail later.

I would like to now focus on the 4 key business trends that impacted our 2019 operational performance and that are expected to impact 2020 as well. First is the strong food and beverage and other revenue growth that we experienced in the quarter and year. We delivered comparable total RevPAR growth that is 200 basis points higher than comparable room's RevPAR growth for the quarter and160 basis points higher for the year. Food and beverage revenues grew largely because of corporate in-house group business, which typically had robust contribution ratios. Other revenues were bolstered by miscellaneous increases, including higher golf and spa revenues. Our solid total RevPAR growth speaks to our ability to grow revenues through multiple channels at our hotels. Approximately, 35% of our revenues are earned from food and beverage, conference and meeting space, spa and other amenities. In an environment where the industry is near peak occupancy with modest ADR growth, our ability to grow revenues through nonroom sources is a key strength of our portfolio. While we expect continued total RevPAR growth in 2020, its growth rate should be roughly the same as RevPAR due to a tougher year-over-year comparison.

The second trend is the strong growth we've experienced in loyalty redemption revenues, which has supported our leisure demand. Some of the increase is due to structural changes that Marriott International has introduced Bonvoy redemption, such as the opportunity to earn greater redemption revenue through increased occupancy tiers. Marriott introduced Bonvoy in early 2019 with the rollout across all consumer touch points, including our property sales and marketing channels, digital, mobile and co-branded credit cards. Additionally, the launch was boosted by a multimillion dollar media campaign. In late 2019, Marriott announced peak and offpeak redemption schedule, which should further support our 2020 growth expectations. Our redemption revenues have grown well in excess of the revenues outlined in the business case Marriott made for Bonvoy in 2019. In the fourth quarter, we grew Marriott Bonvoy redemption revenues by nearly 22% for our comparable hotels and 24% for all our own Marriott hotels, with the Venetian Ritz-Carlton, Naples and Ritz-Carlton, Marina del Rey achieving the highest redemption revenues in the portfolio. Although redemption revenues will also face tough comparisons this year, Host's ability to leverage Marriott's powerful loyalty program is another key strength for our business.

The third trend is the continued acceleration in wage and benefit expense growth. Wage and benefit expenses increased 370 basis points in the quarter and 290 basis points for the year on a year-over-year basis. We were able to largely offset this expense growth through a variety of external and internal initiatives, which allows us to achieve breakeven margins at 1% RevPAR growth in 2019. Our external initiatives were driven by near-term Marriott-Starwood merger synergy, which were largely realized in 2019. Our internal initiatives, we expect smaller incremental efficiencies in 2020 relative to last year. Meanwhile, we expect wage and benefit expense growth to increase by approximately 5% in 2020 over 2019 as unemployment remains at all-time lows and job openings in the lodging sector reach record highs.

Our 2020 guidance for comparable hotel expenses, however, is for 2.5% to 3.5% growth per available room, primarily due to productivity gain, partially offsetting wage and benefit expense growth. As a result, we expect breakeven margins at 3.5% to 4% RevPAR growth in 2020. We will further detail the impact of wage and benefit expense growth on our 2020 EBITDA margins. But here are 3 key takeaways on this issue. First, we expect the rate of wage and benefit growth to peak in 2020. Second, we are continuing to work with our operators to adopt productivity-enhancing technology that will decrease our operating costs over the long term.

And third, our exposure to world-class operators like Marriott and Hyatt leaves us relatively well positioned in a tight labor market, given their best-in-class retention and low turnover. Finally, we see prolonged macro uncertainty continuing to negatively impact expectations for U.S. nonresidential fixed investment, which has slowed materially from 6.4% in 2018 to 2.1% in 2019 and is now expected to grow by just 70 basis points in 2020. RevPAR is highly correlated with this metric, which is being impacted by trade and political uncertainty in an election year as well as by coronavirus. A sustained increase in nonresidential fixed investment would be a positive catalyst for the industry. But until it accelerates, our expectations for business transient travel remain muted, and our managers continue to focus on driving group and leisure business.

Moving on to our outlook for group business in 2020. We are pleased to begin the year with total group revenue being 4.2% ahead of the same time last year as we benefit from a favorable citywide convention calendar 2020, with San Diego, Miami, Orlando and Washington, D.C. all pacing ahead. We had approximately 77.5% of our group rooms on the books and are 150 basis points ahead of the same time last year. Thus far, we haven't experienced a material direct impact on our business from coronavirus as Chinese travelers contribute approximately 1.5% of our room revenues. That said, the situation continues to evolve and the prevailing uncertainty could put further downward pressure on business transient revenues.

Additionally, supply is continuing to grow this year with a 2.3% increase expected across all scales on a net basis. As a result, we expect full year comparable constant dollar RevPAR growth to range between flat to up 1%. We would note that the addition of the 1 Hotel South Beach added approximately 10 basis points to our newly defined 2020 full year comparable RevPAR growth guidance as we owned the hotel for nearly all of 2019. We expect comparable EBITDA margins to be down 165 basis points at the low end and down 125 basis points at the high end of our guidance. These assumptions result in full year forecasted adjusted EBITDAre of $1.360 billion to $1.405 billion. While the midpoint of our -- of our 2020 total EBITDA guidance reflects a 10% year-over-year decline, approximately 60% of this decline is attributable to 2019 asset sales and declines in our noncomparable hotels due to renovation. Notably, our comparable hotel EBITDA is expected to decline by only 2.5% to 5% year-over-year.

Finally, with much of the decline in EBITDA mitigated by our stock repurchase program, we expect adjusted FFO per diluted share of $1.65 to $1.71. Although margins are being impacted by accelerating wage and benefit cost growth this year, it is important to note that comparable EBITDA margins have improved by 80 basis points from 28.2% in 2016 to approximately 29% last year. We have held total expense growth steady at less than 1.5% for the last 3 years through a variety of external and internal initiatives. As mentioned earlier, wage and benefit cost growth is expected to peak this year, and we are working with our operators to adopt productivity-enhancing technology that we anticipate will decrease our operating costs over the long term.

Shifting to the Marriott transformational capital program. 2 of the 4 renovations we completed last year, Coronado Island Marriott and New York Marriott Downtown have already achieved meaningful RevPAR index gains and are well positioned to accelerate EBITDA growth and stabilization. The San Francisco Marriott Marquis and Santa Clara Marriott were completed in the second half of 2019. And while it's too early to measure improvement, we have high expectations for these 2 properties. We expect to invest between $180 million to $200 million in the program this year and to complete renovations at the San Antonio Rivercenter and Minneapolis Marriott City Center in the first and second quarter, respectively, and JW Marriott Atlanta Buckhead in the fourth quarter. We will also complete the second phases of 3-phased renovations at both the New York Marriott Marquis and the Orlando World Center. By the end of 2020, this program will be 60% to 70% complete. We are pleased to be completing these renovations in a low RevPAR growth environment, which minimizes the impact of the disruption and leaves us well positioned to achieve meaningful RevPAR index gains and accelerated EBITDA growth at stabilization.

In addition to the Marriott transformational capital program, we are also implementing multiple value-enhancing ROI projects across the portfolio. We categorize these as product development, operational projects and energy efficiency or sustainability projects. Product developments include developing a 165-key AC by Marriott on excess surface parking at The Westin Kierland in Scottsdale and adding 19 new two bedroom luxury villas at the Andaz Maui. Operational projects include adding meeting space at the Orlando World Center, converting underutilized lobby space into grab-and-go marketplaces, repositioning F&B office and adding keys at several properties. Additionally, we have multiple energy efficiency projects which are an important part of our industry-leading corporate responsibility program and include major systems overhauls, LED retrofit and solar panels, among others.

We have historically achieved a high-teens average cash-on-cash return on these ROI projects, and we expect to grow this program going forward as an important piece of our capital allocation strategy. We differentiate ourselves through extraordinary execution, which achieves both a strong business case and prioritizes our sustainability goals for these projects. We have been recognized for our leadership and performance on sustainability, earning our seventh consecutive Green Star and Overall Global Sector Leader designation as well as a 5-star rating from GRESB this year. We have also been named to the Dow Jones World Sustainability Index for the first time and the North America Sustainability Index for the third time. Have won the NAREIT Lodging and Resorts Leader in Light Award four times in the past five years and most recently have been named to CDP's A list for leading our action against climate change.

To conclude with capital allocation, let me briefly review our execution over the last two years within the context of our long-term strategic vision for Host. Since 2018, we sold $3.3 billion of relatively lower quality and lower total RevPAR assets in our portfolio. We have invested $1.6 billion into iconic assets with 2019 total RevPAR with more than double that of the assets we sold. All 4 of our acquisitions are in excellent condition, with limited near-term capital needs. We achieved higher blended cap rates and EBITDA multiples on our acquisitions than on our dispositions and have thereby minimized dilution to earnings while significantly upgrading the quality of our portfolio. In addition, we have bought nearly $610 million of stock since mid-2019, amounting to nearly 5% of our weighted average share outstanding.

Finally, we have meaningfully strengthened our balance sheet by increasing our liquidity, extending our debt maturities and lowering our borrowing costs. Our asset recycling has reduced our CapEx intensity and improved the blended cap rate and long-term NAV profile of our portfolio. Our share repurchases have been accretive to FFO per diluted share, and the enhanced flexibility of our balance sheet has provided us with greater optionality to create significant long-term value for our shareholders. Today, our flexibility and willingness to use the appropriate value creation tool, whether it's stock buybacks, asset recycling, development or redevelopment at the opportune time to create meaningful value for our shareholders is what best differentiates Host from most of its lodging REIT peers. We have clearly demonstrated our willingness to use these value creation tools in 2019 and will continue to do so in 2020.

Our long-term strategic vision is to own iconic and irreplaceable assets with high total RevPAR and limited near-term CapEx needs in key markets with strong and diverse demand generators. Market conditions over the last couple of years have enabled us to substantially reposition our portfolio at an accelerated pace. We believe that apart from a small number of assets that we would like to eventually monetize, our portfolio is where we want to be at this point in the economic cycle.

With regard to acquisitions, while the bar remains high, we will continue to evaluate assets that meet our strategic objectives, focusing on opportunities where we can leverage our competitive advantages such as the owner, broker and operator relationships, our ability to do large transactions and our reputation for providing speed and certainty of closing and the flexibility of operating, taxes and e-structures to sellers.

Overall, we are very well positioned with a favorable citywide convention calendar supporting operational performance this year and balance sheet flexibility providing us with greater optionality to create significant long-term value for our shareholders.

With that, I will turn the call over to Brian.

[Brian MacNamara]

Thank you, Jim. We delivered adjusted EBITDAre of $355 million for the quarter and $1.534 billion for the year. As mentioned, we exceeded the top end of our 2019 adjusted EBITDAre guidance mainly due to strong revenue growth at our noncomparable hotels. Noncomparable total RevPAR grew 940 basis points for the quarter, primarily due to a post renovation lift at the San Francisco Marriott Marquis and strong redemption revenues at the Ritz-Carlton Naples.

For the fourth quarter, comparable total RevPAR grew 190 basis points primarily due to higher food and beverage and other revenues. While fourth quarter comparable RevPAR declined 10 basis points, it would have been flat if adjusted for the estimated 10 basis points of renovation disruption related to the Marriott transformational capital program. During the quarter, occupancy was unchanged, but ADR decreased by 10 basis points, primarily due to the anticipated decline in group business, driven by an unfavorable citywide convention calendar. Transient revenue grew 270 basis points due to the growth in leisure demand which more than offset the continued business transient weakness. Although business transient revenues for the fourth quarter were down 350 basis points, driven by a room night decline of 340 basis points, we would note that the fourth quarter was the least affected by declines in business travel due to the favorable holiday shift in December.

Looking at individual market performance for the fourth quarter. Our top 5 total RevPAR growth markets were: Orlando, Florida Gulf Coast, Atlanta, Denver and Phoenix, while New Orleans, Seattle, San Antonio, Northern Virginia and Hawaii trailed the portfolio. We think an important measure of our success in 2019 was our ability to deliver strong margin performance. Comparable EBITDA margins only declined 10 basis points for the quarter and 5 basis points for the full year, in line with the midpoint of our full year 2019 guidance. We believe this is an impressive performance as wage and benefit expense grew 370 basis points, driven by hourly wage rate increases, most notably in Southern California. While California was especially affected, the unemployment rate in most of our markets was below the national average of 3.7%, driving significant increases in wage and benefit expense across the portfolio.

Moving on to the balance sheet. We ended 2019 with $3.8 billion of total debt, $1.6 billion of unrestricted cash and $1.5 billion of available capacity under our credit facility revolver. During 2019, we achieved several major financial milestones. First, we refinanced $1 billion in term loans and expanded our revolving credit facility by $500 million to $1.5 billion. Second, we achieved an upgrade of our corporate credit rating to BBB- from BB+ by S&P Global Ratings. Third, we refinanced $650 million of senior notes by issuing the first green bond in the lodging industry, with a coupon of 3 3/8% and yield to maturity of 3.467%. These represent the lowest effective 10-year bond pricing and overall yield achieved in our history. Lastly, we have minimal debt maturing until 2023, with a balanced debt maturity schedule with no more than 7% of our debt as a percentage of enterprise value maturing in any given year.

In summary, we have executed over $3 billion of refinancing, which resulted in extending our total weighted average debt maturity to 5.4 years, reducing our weighted average interest rate to 3.8%, all while maintaining an appropriately balanced floating rate mix of 26%.

Finally, in 2019, we returned significant value to our shareholders with $482 million of stock repurchases as well as a total cash dividend of $0.85 per share, which represents a yield of approximately 5% on our current stock price. We also just announced the first quarter dividend of $0.20 per share.

Turning to the forecast. Let me take a few minutes to detail the assumptions underlying our 2020 guidance. As Jim mentioned, we expect our revenue performance to be driven by group and leisure transient business as a result of the citywide calendar, growing economy and strong employment numbers. While the U.S. economy continues an unprecedented growth cycle, we have been thoughtful about the impact of the global economy and our own election cycle, which we believe continues to constrain the level of business investment. Overall, we expect our performance to be stronger in the first half of 2020 due to the strength of our group booking pace and more difficult comps in the second half of the year. We will also continue to benefit from owner's priority and operating profit guarantees related to the Marriott transformational capital program. Our forecast includes a total of $16 million of operating profit guarantees from Marriott, of which $9 million is included in comparable hotel EBITDA. Equally important, we expect as more properties are completed, we should begin to see an increase in each hotel's RevPAR index, which should bolster overall EBITDA for the properties.

For modeling purposes, we expect adjusted EBITDA in the first quarter will range from 26% to 28% of our annual forecast. Lastly, total shares currently outstanding are approximately $705 million, reflecting the additional shares repurchased in the first quarter.

In conclusion, 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. With the only investment-grade balance sheet among lodging REITs, we are well positioned to continue to execute on our strategic vision to create long-term value for our shareholders.

With that, we will now be happy to take questions. [Operator Instructions].

[Operator]

[Operator Instructions]. Our first question comes from Anthony Powell, Barclays.

[Anthony Powell, Barclays Bank]

Question on your commentary about cost increases peaking in 2020. I'm just curious why would that be given unemployment is still pretty low? Is it because of your own initiatives to increase productivity and efficiency? Or do you think that underlying inflation may start to decline next year and beyond?

[James Risoleo, President, CEO & Director]

I believe that the underlying reason that we're seeing 5% increases in wages and benefits in 2020 really has to do with wage parity in certain markets. It's not a -- the 5% number is not rolled out across the portfolio, but it's in markets like Orange County, California and Houston, Texas. And we think that as we roll wage increases out, bring our associates at the hotels to parity, that we'll see more normalized wage increases going forward.

[Operator]

Our next question comes from Smedes Rose, Citi.

[Smedes Rose, Citigroup]

I just wanted to ask you on your decision to change the same-store guidance. So I know that it affected for the new -- more newly acquired properties, but does it also change the timing from when renovated properties will come back into the same-store pool?

[James Risoleo, President, CEO & Director]

It does not, Smedes. We have -- we studied this. We've thought about it and talked about it quite a bit internally. And I'm sure you're aware there is really no consistency among the lodging REIT peer group with respect to how we handle renovation projects and when renovations are deemed to be noncomp and when they come back into the comp pool. So we're still thinking about that. We obviously had a number of projects this year. There is a noncomp, and we frankly didn't think it was appropriate to make any changes with respect to the renovation side of the definition at this point in time. One thing that is consistent though that we have before not done is to report acquisitions on a pro forma basis. And everybody in the world of lodging REIT does report acquisitions on a pro forma basis, and that's why we made the change with respect to the 1 Hotel South Beach, and we will handle that in that way going forward.

[Operator]

[Operator Instructions]. Our next question comes from Bill Crow, Raymond James.

[William Crow, Raymond James & Associates]

I'm actually going to ask 1.5 questions. Half a question is really focused on a follow-up from Anthony on labor costs. Just wondering how that's manifesting itself in your operations? In other words, are you seeing turnover dramatically higher? And is it fair to go back to the brands and ask for some flexibility in brand standards when it comes to labor, given the stress that everybody is under?

[James Risoleo, President, CEO & Director]

Bill, we're not seeing inordinate amount of turnover. In fact, we benefit from the labor practices of two world-class operators who run most of our hotels, Marriott and Hyatt. They had very good retention rates. They're very attractive organizations for people to work at. So it really is solely as a result of wage parity in certain markets. That's why we're seeing the large increases this year.

[William Crow, Raymond James & Associates]

All right. And the real question is more strategic in nature. And thinking about it from a capital allocation perspective and even the share repurchase perspective, how would you do things differently if we're -- if you thought we were kind of trapped in the slow growth environment for several years?

[James Risoleo, President, CEO & Director]

Well, Bill, you asked one question that keeps us up at night. Again, it's something that we think about from a -- not only from a capital allocation perspective, but also from an operation perspective. We have lived through some pretty meaningful down cycles. I won't go back beyond 9/11. But of course, we learnt a lot, given what happened to our industry in the post 9/11 world and then lived it again in 2008, 2009. So I think if we were to find ourselves in this type of tepid RevPAR growth environment or flat to negative RevPAR growth environment with resulting EBITDA declines, we would be having meaningful conversations with our operators about lasting brand standards. And that can mean everything from taking a look at restaurant offerings and hours of operation to in-room guest amenities, to guest amenities in concierge lounges and club lounges. Not that we're not doing this today. We would really push beyond those lines labor scheduling and technology.

So I think that's one of the first things that we would do if we found ourselves near to this environment for an extended period of time. On the capital allocation front, our balance sheet has never been in better shape. We -- as we sit here today, we have $1.6 billion of unrestricted cash. And if we were to go 3x leverage today, we could buy $2.5 billion plus of assets -- $2.5 billion to $3 billion plus of assets. As we think about the macro environment that we operate in today, we are being measured in our capital allocation decisions. We like the optionality that our balance sheet gives us today. If we're in a slow growth environment, couple of things we would consider doing might include accelerating investment in our portfolio going forward. We have the ability to do that, so that our assets are very well positioned when we see a reacceleration of RevPAR. We might consider if our stock price comes under pressure, enhancing the buyback program.

And lastly, I think that if we are in this environment for an extended period of time, you're likely to see some distress in the hotel world. We're seeing it already in New York. There's been a number of articles written regarding the level of default in New York City going up. And we like the position we're in with the balance sheet that we have, the optionality and flexibility to pivot one way or the other in good times or in tough times.

[Operator]

Our next question comes from Rich Hightower, Evercore.

[Richard Hightower, Evercore ISI]

So like Bill, I'm going to ask 1 question with two totally unrelated parts. So here it goes. So really quickly the first part, just talk about maybe the thought process behind a relatively narrow range of comp RevPAR guidance, 100 basis points from top to bottom? And then -- so that's the first one. And then quickly, just more on the topic of cost controls. Are you seeing -- when we think about sort of more catastrophic weather events around the country, around the world, are you seeing a tightening in insurance market, specifically? And how do you sort of think about that with respect to your Florida exposure and maybe some other at-risk areas?

[James Risoleo, President, CEO & Director]

The tight range, Rich, was really based on our view of the group visibility that we have today with 4.2% total group revenue pace and 77.5% of our group on the books. I would add that, I didn't address this in my comments, our group business is weighted more heavily towards the first half of the year than the second half of the year, which gives us comfort and visibility. And we continue to see strong leisure business -- transient leisure business. We're not seeing anything, frankly, on the business transient side. So we were very comfortable with the range we gave, primarily based on group visibility. And your second question was related to cost controls -- was it related to insured cost?

[Richard Hightower, Evercore ISI]

Yes. Just related to insurance cost, specifically, as we think about your Florida, your California exposure and is -- I guess, is Host in a position where you're big enough to where you can self-insure to some extent and so you see maybe a little less inflation in that particular cost category?

[James Risoleo, President, CEO & Director]

No, we don't self-insure. We are in a unique position given the platform that we have, the scale that we have across a very diversified set of market. Our insurance cost will be going up this year. The insurance renewals occur midyear. So we would expect to see insurance cost increase in July, going forward lapping. Insurance cost is about 10% of our total cost basis. So it's not that meaningful.

[Operator]

Our next question comes from Michael Bellisario, Baird.

[Michael Bellisario, Robert W. Baird & Co]

Just on your development and redevelopment comments that you made in the prepared remarks, is there room to do more here? And then how do you think about returns on these types of projects and then the risk associated with doing more redevelopment and development projects at this point in the cycle?

[James Risoleo, President, CEO & Director]

Well, returns on development and redevelopment projects will at stabilization be double-digit cash-on-cash. It's going to range from property to property. Our returns on the Andaz Maui villas given the cost associated with developing and building Hawaii is likely to be on the lower end of that range, whereas we're in the process of moving forward with a large part at the Orlando World Center Marriott, where we expect very meaningful cash-on-cash returns as a result of putting that amenity in place and what that will allow us to do is shoulder a weakened transient business.

So the attractive returns we think that in addition to buying back our stock, which we view as incredibly inexpensive today, that investing in our portfolio is a very good place to be allocating capital. It's easier to underwrite these returns given our knowledge of the assets and the in-house expertise that we have. We have a best-in-class team, both on the asset management side and on our design construction side with years and years of experience of doing these types of projects. We are not going to say we never had a surprise, but we had very few surprises when it comes to construction budgets and timing. And we're very comfortable with our underwriting. I would just point out on the Marriott transformational capital program, where we're slightly underbudget in the aggregate for all the deals that we have undertaken today, and those are major products.

[Michael Bellisario, Robert W. Baird & Co]

Got it. And just fair to assume though that maybe versus 12 months ago, your appetite for doing more redevelopment and development is higher? Is that fair?

[James Risoleo, President, CEO & Director]

I wouldn't say that -- I wouldn't really say it any differently. I mean, again, we have -- I have talked about it before. I mean we have the optionality given our balance sheet to allocate capital in a lot of different areas, whether it's within our portfolio, whether it's making acquisitions or buying back our shares.

[Operator]

Our next question comes from Gregory Miller, SunTrust Robinson Humphrey.

[Gregory Miller, SunTrust Robinson Humphrey]

Jim and Brian, I'm on for Patrick Scholes. Just a quick question. How sustainable do you see the dividend today given the trajectory of RevPAR margins this year and next as you mentioned earlier about the balance sheet being in -- never being in better shape?

[James Risoleo, President, CEO & Director]

We feel that this dividend based on our forecast for this year and how we're looking out to 2021 is sustainable at its current level. If we were to take into consideration our discretionary CapEx, not our maintenance CapEx, but our discretionary CapEx, our AFFO payout ratio is approximately 70%.

[Operator]

Our next question comes from Neil Malkin, Capital One Securities.

[Neil Malkin, Capital One Securities]

I'm just going to ask one question with zero follow-ups. So I guess, just relating to the political landscape in California, you've seen the Oracle canceling the event in San Francisco, moving to Vegas, citing homelessness, drug, et cetera. You have split roll coming potentially at the end of this year. Just, I guess, what are you guys doing to combat these issues that seem to be garnering more and more headlines? Are you guys doing things with other peers, lobbies, et cetera? I'm just interested to know how you think about that area and your plans to navigate that going forward.

[James Risoleo, President, CEO & Director]

Well, as I'm sure you will -- Neil will accept, myself and others at Host are very involved in various trade associations. I'm an officer of NAREIT, I'm an officer of AHLA. Struan is involved with AHLA. Nate is involved with AHLA. We are keenly focused on these issues not only at Host, but in concert with our constituent groups at those respective organizations. So when we think about split roll, it's something that we talk about internally, that we talk about at AHLA and NAREIT. And I would tell you that there is a unanimous point of view about how that will be approached going forward from a lobbying perspective and otherwise.

[Neil Malkin, Capital One Securities]

Okay. I guess, so in terms of like maybe San Francisco, does -- I mean do you think there's more to come, in terms of people leaving or anything like that would be helpful as well?

[James Risoleo, President, CEO & Director]

We don't see anything more on the horizon there. Rich, actually I want to clarify something I said about insurance. I put an extra 0 behind the expense growth, it's 1% of expenses, it's not 10% of expenses.

[Operator]

Our next question comes from Shaun Kelley, Bank of America.

[Shaun Kelley, Bank of America Merrill Lynch]

Jim, just wanted to clarify the -- maybe -- I think it was in the remarks to an earlier question, but just to make sure I caught it correctly. At least one of the big hotel operator -- brand operators did mention a little bit of positive activity on the sort of the demand or transient side over the last few weeks. Curious if you can corroborate anything you've seen in your hotels or anything that stands out maybe on the transient or the corporate side? And then -- so that would be the positive. And then on the cautious side, you gave the Chinese exposure on the coronavirus and that's really helpful. But we have seen some evidence of some group cancellations. Anything that's impacted Host Hotels or sort of just discussion points in the industry on group cancellations would be helpful.

[James Risoleo, President, CEO & Director]

Yes, sure. On the business transient side, Shaun, we just don't see pickup. In business transient, our long history is really driven by nonresidential fixed investment. And the uncertain macro environment that we're living in today is driving nonresidential fixed investment down to a forecast of 70 basis points for 2020, off of a high -- not high, off of a 6.4% number in 2018. So I think businesses are being very cautious. Small businesses, in particular, are being cautious about spending money in this environment. So we have more clarity on the election and more clarity on coronavirus. I do think we still need clarity on trade policies. I know we've implemented a Phase 1 deal with China. I think there's a Phase 2 deal with China that needs to happen. And there's uncertainty with respect to our trading partners in Europe today. So we're not seeing it on business trend.

I wish I could tell you that we were, but we're just not. We are comfortable with the cadence in our guidance based on our group visibility, which is weighted towards the first half of the year. And we expect to see further pickup in leisure transient going forward. So coronavirus, we've seen a total impact top line revenues of about $1.5 million. We -- this year that there's a 1 group -- Facebook canceled a meeting in San Francisco. It was about 14,000 room nights scheduled for the first week of March. We really don't know why they canceled that meeting. There's some speculation that it was as a result of coronavirus, but definitively, I can't say it was for that reason or something else. And we're not sure of anything else at this point in time.

[Operator]

Our next question comes from Aryeh Klein, BMO Capital Markets.

[Aryeh Klein, BMO Capital Markets]

So loyalty redemptions have been very healthy. How sustainable do you believe those are, with some of that pent-up demand post the merger and just customers essentially cashing in? And maybe if you can talk to the visibility you have there going forward?

[James Risoleo, President, CEO & Director]

Our loyalty redemptions have been healthy. As I mentioned in the fourth quarter, we saw a meaningful pickup at three of our hotels, in particular, the Ritz-Carlton Naples, The Rich-Carlton Marina del Rey and The Phoenician as well. The changes that were made to the pricing structure, the tiered pricing structure and the occupancy levels to allow the owners to benefit in a greater way than have been structured under the old bed program we think are very sustainable going forward. We saw a meaningful pickup relative to the numbers that Marriott provided us when they were making changes to Bonvoy and more than double that the business cases they provided to us. And we expect to see additional pickups this year. The other thing that happened in the latter part of 2019 was a rolled out -- Bonvoy rolled out a peak/offpeak tier structure that we also think will provide benefits to the owners going forward.

[Operator]

Our next question comes from Chris Woronka, Deutsche Bank.

[Chris Woronka, Deutsche Bank]

Jim, I was hoping to get your opinion on -- as we see the big brand companies kind of introduce more and more brands and soft brands and semi-soft brands, what's your position on whether those are truly competitive with some of your, I would say, smaller kind of non-big group box properties? And at what point do you think owners -- is it something that the owners have to address with the brand companies?

[James Risoleo, President, CEO & Director]

My personal point of view on supply is supplying that. I don't care what kind of supply it is. It's going to nip around the edges, we call it ankle biters. When we have big room houses and you've got a select-service hotel that's built in your submarket, it clearly is going to have some impact on you. The good news about our portfolio is that it's well diversified. We don't have any more than 10% of our EBITDA coming out of any one market. And it's something that we talk about with the brand all the time. I mean we are in a constant dialogue with them regarding impact of new development projects. It's just something that Host and all other owners are talking about and talking to the brands about today.

[Operator]

Our next question comes from Wes Golladay, RBC Capital Markets.

[Wesley Golladay, RBC Capital Markets]

Just another question on business transient trends, are you seeing much variance by region?

[James Risoleo, President, CEO & Director]

Not really, Wes. I'd say it's fairly flat across the portfolio.

[Operator]

Our next question comes from Jim Sullivan, BTIG.

[James Sullivan, BTIG]

Quick question on the strength of the balance sheet as well as the appetite to buy back more shares. I think in the prepared comments, Jim, you mentioned that in terms of optionality, if shares come under pressure, you could obviously buy back more stock. And I wonder if you could help us understand what kind of flexibility you have and -- whatever metric you want to give, debt-to-EBITDA, is obviously very helpful. In terms of where you think you could go in that ratio, in terms of buying back shares before you'd be, well, maybe hesitate to go any further. How much more debt can you put on the balance sheet to buy back shares before the investment-grade rating becomes an issue?

[James Risoleo, President, CEO & Director]

Well, I think this is a very hypothetical question, Jim. But in theory, and I'm not suggesting for a moment that we would do this, we could borrow up to $2 billion and that would take us to 3x leverage. And that is not anything that we're contemplating at this stage of the cycle given the macro uncertainty that exists in the world today.

[Operator]

Our next question comes from Anthony Powell, Barclays.

[Anthony Powell, Barclays Bank]

Just a question on the mix of customers. I think, historically, we thought that Host had about 2/3 business with group and corporate transient combined. It seems like transient -- I mean corporate side has been weak for a number of years. What's the updated customer mix between group, corporate transient and leisure transient in your portfolio?

[James Risoleo, President, CEO & Director]

Corporate transient is about 59%, Anthony. And of that 59%, roughly 60% business and 40% leisure, contracts about 5% and groups right around 36% to 37%.

[Operator]

This concludes today's Q&A portion. I would now like to turn the call over to Jim Risoleo.

[James Risoleo, President, CEO & Director]

Thank you for joining us on the call today. We really appreciate the opportunity to discuss our fourth quarter results and 2020 outlook with you. Look forward to seeing you at NAREIT and talking with you in a few months to discuss our first quarter results as well as providing you with more insight into how 2020 is progressing. Have a great day, everyone.

[Operator]

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.