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Host Hotels & Resorts Inc  (NYSE:HST)
Q4 2018 Earnings Conference Call
Feb. 20, 2019, 10:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good day, and welcome to the Host Hotels & Resorts Incorporated Fourth Quarter and Full Year 2018 Earnings Conference. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Gee Lingberg, Vice President. Please go ahead, ma'am.

Gee Lingberg -- Senior Vice President

Thanks, Ebony. Good morning, everyone. Welcome to the Host Hotels & Resorts Fourth Quarter 2018 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 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 reconciliation to the most directly comparable GAAP information, in today's earnings press release, in 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 his remarks on our fourth quarter and full year results, our 2018 achievements including the acquisition of the 1 Hotel South Beach and conclude with our capital allocation strategy and outlook for 2019. Michael Bluhm, our Chief Financial Officer, will then provide commentary on our fourth quarter and full year performance, including market, margins, balance sheet and our guidance for 2019. 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 F. Risoleo -- President, Chief Executive Officer & Director

Thank you Gee, and thanks, everyone for joining us this morning. We are pleased to report another quarter that exceeded our internal expectations on both the top and bottom line and beat consensus estimates for adjusted EBITDAre and adjusted FFO per diluted share. We finished the year strong with fourth quarter comparable constant dollar RevPAR growth of 2.3% and an increase in comparable hotel EBITDA margin of 45 basis points. Adjusted EBITDAre was $372 million for the quarter and adjusted FFO per diluted share was $0.43, beating consensus estimates by $8 million and $0.02, respectively.

2018 was a solid year for Host with comparable RevPAR growing 2% and (technical difficulty) margin growing an impressive 60 basis points. This resulted in a 3.4% EBITDAre expansion to $1.562 billion and a 4.7% increase in adjusted FFO per share to $1.77. We had a consistent beat and raise year with margins, EBITDAre and FFO, all coming in well ahead of the top-end of our initial guidance provided last February.

We beat the midpoint of our original RevPAR guidance by 50 basis points, margins by 80 basis points, EBITDAre by $62 million or 4% and adjusted FFO per share by $0.12 or 7.3%.

These strong results continue to underscore the advantages of our geographically diversified portfolio of iconic and irreplaceable hotels, our unprecedented scale and platform to drive internal and external growth and the power and flexibility of our investment-grade balance sheet. Together, these key pillars form the foundation of Host, the premier lodging REIT.

As noted in our press release, 2018 was an incredibly active and successful year across several fronts. In addition to achieving industry-leading margin improvements, we advanced our long-term strategic vision and executed on several important initiatives that we believe better position our irreplaceable portfolio to continue outperforming the industry and creating value for Host Hotels' investors.

We sold non-core assets, including those profitability-challenged in New York as well as our international assets, all at attractive pricing and reinvested a portion of that capital into higher growth, low CapEx need assets to create long-term stockholder value. On the disposition front, we actively reshaped the composition of our portfolio by following through on two key initiatives we set up early on in my tenure as CEO; reducing our exposure to New York and exiting our international assets to focus our attention on the US, where we have the greatest scale and competitive advantage.

In total, we executed on $2.2 billion of non-core asset sales, since the beginning of 2018, at a combined EBITDA multiple of 21 times. As it relates to New York, on January 9th, we closed on the previously announced sale of The Westin New York Grand Central for $302 million, inclusive of the FF&E reserve. With the completion of that sale and including the New York Marriott Marquis retail and signage, we sold over $1.1 billion in the New York market or 25 times EBITDA.

As a result, we have reduced our percentage of hotel EBITDA from New York to less than 7%, significantly eliminating our exposure to profitability-challenged assets in the market. On the international front, we closed on the sale of our 33% interest in our European joint venture to our two former partners,(ph)great gross asset value of our interest of approximately EUR700 million and an EBITDA multiple of 17 times on 2018 results. After accounting for fund level debt, we subsequently used a portion of the net proceeds of approximately EUR435 million to repay the outstanding EUR207 million draw on our credit facility, which was drawn to hedge our equity interest in the venture. We also sold the JW Mexico City for $183 million or approximately a 15 times EBITDA multiple on 2018 forecasted results. We previously held a 52% interest in the hotel in a joint venture with Marriott International. As a result of these two sales, approximately 1% of our EBITDA now comes from outside the country with only two hotels in Canada and three hotels in Brazil.

2018 was also an exciting year from an acquisition standpoint, as we further enhanced our irreplaceable portfolio by adding four world-class assets. As many of you know, we purchased three iconic and irreplaceable hotels from Hyatt in March of 2018; the Andaz Maui, Grand Hyatt San Francisco and Hyatt Regency Coconut Point in Florida. These hotels had outperformed our underwriting and based on our 2019 budget, are currently yielding 70 basis points higher than where we initially purchased hotels last spring. This translates into a 14% growth in net operating income. In addition, and as noted in our press release, we recently closed on the acquisition of 1 Hotel South Beach in Miami, Florida for $610 million. This extraordinary resort is located on prime beachfront real estate in the vibrant South Beach area Miami Beach, has no near-term CapEx needs and carries a RevPAR of over $488 and total RevPAR of $764, making it one of the top three in our portfolio.

Additionally, it is LEED-certified, has some of the largest guest rooms in our portfolio, over 160,000 square feet of meeting space, restaurants, pools, luxury retail space and other amenities. The property generated $45.8 million of EBITDA in 2018 or 13.3 times our purchase price. This equates to $107,000 per key.

Based on our 2019 budget, the purchase price equates to 13 times EBITDA and EBITDA per key of over $109,000. The 1 Hotel is expected to add $36 million in EBITDA and $0.05 of FFO per share in 2019. Our ability to convert high EBITDA multiple asset sales of non-core, high CapEx and profitability-challenged hotels into a resort of this caliber, was materially improved the overall portfolio, is an excellent example of disciplined and prudent capital recycling. Another exciting accomplishment in 2018 was our agreement with Marriott International to execute a portfolio of transformational capital projects, beginning last year with the San Francisco Marriott Marquis and carrying through 2021. As we have described these portfolio investments will position the targeted hotels, which are some of the most notable in our portfolio to compete even better in their respective markets with the goal of enhancing long-term performance and becoming number one in their competitive sets.

Notably, Marriott will provide operating profit guarantees as protection for the anticipated disruption associated with the incremental spend and increased priority returns on the agreed upon investments, which will result in reduced incentive management fees. We believe this is a great high return use of shareholders' capital, as transformational capital projects have typically resulted in meaningful increases in RevPAR yield index, which translate to strong improvement in EBITDA.

Turning to our capital structure. We entered 2019 with the strongest balance sheet in the Company's history, providing us with substantial flexibility to continue executing on our strategic initiatives. Michael will discuss this in further detail, but on a high level with leverage at only 1.8 times, over $1.2 billion of unrestricted cash after accounting for the sale of The Westin Grand Central and the acquisition of 1 Hotel South Beach and $945 million of capacity available under our credit facility as of the end of the year, we are well positioned to continue driving stockholder value.

Finally, in 2018, we listened to your need for greater transparency and insight into our business. We overhauled our investor presentation and added enhanced supplemental financial information that provides property level detail into the top hotels that drive our overall performance.

Looking forward, we are off to a strong start to 2019 with the acquisition of the 1 Hotel South Beach and the sale of The Westin Grand Central. In addition to acquisition and disposition opportunities, we will continue to mine the portfolio for value enhancement projects, including the extension of ground leases and looking for redevelopment opportunities where we can either take advantage of underutilized spaced or redevelop an area from the ground up.

As we contemplate future capital allocation, we continue to be very disciplined with respect to both our underwriting and balance sheet position. Given the $1.2 billion of cash on hand and 3 times being the high end of our leverage target range, we have total investment capacity of $2 billion to $2.5 billion. We do not intend to move higher than our targeted leverage range, nor do we intend to invest beyond that capacity. As there has been recent speculation about Host, I want to be clear that while we are always open to opportunistically looking at value enhancing assets, we are not focusing on pursuing large scale portfolio acquisitions at this time.

We are very happy using our current investment capacity to make smart, targeted add-on acquisitions, like the 1 Hotel South Beach announced today, to invest in our portfolio, as we are doing with the Marriott transformational capital program or to buyback our stock. We remain focused on acquisitions that have a high return and complement our iconic irreplaceable portfolio. We are thrilled with the portfolio we have today, which we believe is the best in the industry, but we'll continue to opportunistically prune it to maximise value for shareholders.

As always, our team is laser focused on maximizing portfolio operations in what remains a stable operating environment with positive fundamentals, albeit in an environment that is now 10 years into the current cycle. As we sit here today, the US economy continues to exhibit strength and appears supportive of industry growth. Importantly, the economic indicators we follow closely, including corporate profits, nonresidential fixed investment and consumer confidence, while slightly lower than last year, remain quite strong relative to historical levels.

Specifically, corporate travel demand improved in 2018 and is anticipated to remain stable in 2019. And while the growth in nonresidential fixed investment is anticipated to slow, it is still healthy and we anticipate it will remain that way. We expect leisure travel to continue to grow, but at a slower pace, supported by strong consumer income growth, solid employment and healthy sentiment. On a macro level, we continue to monitor the impact of a stronger US dollar, the ongoing global trade dispute including its impact on businesses' willingness to invest and the performance of the overall global economy.

While a modest 2019 GDP deceleration is why we anticipated as the near-term benefits of the tax cut paid and the government shutdown gave the industry a slower start than we otherwise would have expected, we believe that overall industry fundamentals are on solid ground. Taking all that into account, our initial guidance, our comparable RevPAR growth of 0% to 2% and comparable EBITDA margin guidance of minus 50 to plus 10 basis points results in adjusted EBITDAre of $1.515 billion to $1.580 billion and adjusted FFO per share of $1.72 to $1.81.

While our headline RevPAR is impacted by approximately 45 basis points from the incremental capital expenditures we are making this year related to the Marriott transformational capital program, because of the operating profit guarantees we are receiving from Marriott, we were able to mitigate the impact on the bottom line. Included in our EBITDA guidance is an estimate of $23 million for the operating profit guarantee, $10 million of which is associated with comparable RevPAR. We remain focused on our bottom line results, which we continue to think will set the standard for the lodging REIT space.

Given our optimal group and transient mix, we are pleased with our position going into 2019. 2018 was a record year for group room nights, with over 5 million group rooms booked for the year. For 2019, total group revenue pace is up 1.4%. We continue to see the group booking window extend and revenue pace is up almost 7% for the period 2020 to 2023. From a capital standpoint, we anticipate spending between $235 million and $275 million on renewal and replacement capital expenditures and between $315 million and $350 million of redevelopment and ROI projects this year.

The increase over last year is primarily due to the Marriott transformational capital program for which we are being well compensated. Some major renovation projects to be completed this year includes the San Francisco Marriott Marquis, New York Marriott Downtown, Coronado Island Marriott Resort, the Santa Clara Marriott and the Whitley in Buckhead Atlanta.

Before handing the call over to Michael, I would like to reiterate that we are very pleased with yet another beat quarter, as it under -- again underscores the strength and advantages of our premier lodging REIT. We are also pleased with our ability to continue to outperform on margins, despite the fact that we are in a lower RevPAR growth environment with strong employment. Our diversified portfolio of irreplaceable assets, our unmatched scale and platform and our investment-grade balance sheet, all position us to continue to outperform in the near, medium and long term. We will remain disciplined in our approach to capital allocation.

With that, I will turn the call over to Michael, who will discuss our operating performance and balance sheet in greater detail.

Michael D. Bluhm -- Executive Vice President, Chief Financial Officer

Thank you, Jim. Good morning, everyone. Building on Jim's comments, all of us at Host are pleased with our beat-and-raise performance in 2018 and a strong finish to the year. Through active portfolio management over the last 12 months, we've ensured that the Company is stronger than ever and well positioned for continued profitable growth. With that, let's discuss the details of our results.

Our comparable RevPAR for the fourth quarter on a constant currency basis increased 2.3%, driven by a 2% increase in average rate and a 20 basis point increase in occupancy. Stronger than expected group business enabled us to compress business and grow RevPAR predominantly by average rate. We expanded our comparable hotel EBITDA margins by 45 basis points in the quarter, due to a combination of our internal initiatives and the continued benefits accruing to us from the Marriott-Starwood merger. These results led to adjusted EBITDAre of $372 million and adjusted FFO per share of $0.43, which exceeded both our internal and consensus estimates.

For the full year, comparable RevPAR on a constant currency basis increased 2% with an impressive margin expansion of 60 basis points. Adjusted EBITDAre increased 3.4% to $1.562 billion and adjusted FFO per share increased by 4.7% to $1.77.

Turning to the segments of our business, while some transient room nights were displaced by group, the holiday calendar was less favorable for transient business travel. Group demand exceeded our expectations as revenues grew 5.6% in the quarter, driven by volume growth of 2.9% and a 2.6% increase in average rate. October and December saw significant group room nights with corporate and other group revenues growing 4.8% and 14%, respectively in the quarter.

Finally, our asset managers and enterprise analytics team in collaboration with our managers, continued to drive comparable hotel EBITDA margin growth and generate impressive profitability at our properties at this stage in the cycle. In the fourth quarter and for the full year, EBITDA margins grew 45 and 60 basis points, respectively due to productivity gains in the rooms and F&B department and synergies from the Marriott-Starwood integration in particular reduce travel agency commissions and loyalty program expenses. We continue to believe the benefits from the Marriott-Starwood merger will generate 40 basis points to 50 basis points of incremental margin improvement annually for the near term.

Turning to our individual markets. Our best performing domestic markets were Miami, San Antonio, San Diego and Seattle, all of which had double-digit RevPAR growth in the fourth quarter. RevPAR at a Miami hotels increased over 31%. The significant outperformance was due to the 200-plus rooms at the Miami Biscayne Bay Marriott that came back online after being out of service last year following Hurricane Irma. The Miami hotels improved average rate by 8.5% and expanded occupancy by 13.8 percentage points through strength in both transient and group business, which also contributed to the strong increase in food and beverage revenues of 22% this quarter.

Our hotels in San Antonio grew RevPAR by 14.4% this quarter. Strong citywide led to solid group business that resulted in the ability to drive transient average rate of 8.6% and an increase in food and beverage revenue of 20%. The hotels in San Diego improved RevPAR by 11.7% this quarter, driven by the business generated from a large citywide and additional short-term transient in government-related business. The 24% increase in group business enabled our hotels to maximize transient average rate, which increased 7.7%. In Seattle, our hotels increased RevPAR 11.6%. Strong group business at our hotels which improved over 17% this quarter, enabled our manager to drive the transient average rate growth of 8.7%.

Now looking to markets that were more challenged in the quarter. Our hotels in Atlanta experienced a RevPAR decline of 9.2%. This was primarily driven by the conversion of the Ritz-Carlton in Buckhead for the Whitley. In Orlando, RevPAR declined 6.8% this quarter with an occupancy decline of 5 percentage points and average rate increase of 70 basis points.The Orlando World Center Marriott had difficult comparisons to last year because of the hotel benefited from the post Hurricane Irma business last year and some of its competitors had rooms out of service for renovations during the fourth quarter of '17. Washington D.C. experienced a RevPAR decline of 3.3% in the fourth quarter, as attendance from citywides were lower than anticipated, hindering our ability to drive higher rated transient business and requiring the hotels to take more discounted business.

Moving to 2019, we expect markets such as the Florida Gulf Coast, Atlanta, Hawaii and Miami to outperform the portfolio from below average supply growth and continued strength in corporate and leisure demand and strong citywides. Conversely, we expect Seattle, Boston and D.C. to underperform the portfolio due to above average supply or weak citywide calendars.

Moving to our balance sheet. In January, we paid a quarterly cash dividend of $0.25 per share, which included a dividend of $0.05 per share -- a special dividend of $0.05 per share, bringing the total dividends for the year to $0.85. This represents a yield of approximately 5% on our current stock price and a payout ratio of 48% on our 2018 adjusted FFO per share. In addition, we announced a first quarter dividend of $0.20 per share. We continue to operate from a position of financial strength and flexibility. We're the only lodging REIT with an investment-grade balance sheet, which we are committed to maintaining as we believe it is a prominent differentiator, relative to our peers and provides flexibility to take advantage of value creation opportunities throughout the cycle.

At December 31, 2018, we had unrestricted cash of $1.5 billion, not including $213 million in the FF&E escrow reserve, and $945 million of available capacity remaining under the revolver portion of our credit facility. Subsequent to quarter end, we closed on the sale of The Westin Grand Central and the acquisition of the 1 Hotel South Beach Miami. The net effect of these transactions is a decrease to our cash balance of $308 million, resulting in unrestricted cash of $1.2 billion as we sit here today. Total debt at the end of the year was $3.8 billion with a weighted average maturity of 4.2 years and a weighted average interest rate of 4.4%. In addition, we have no debt maturities until 2020. Our leverage ratio at the end of 2018 is approximately 1.6 times as calculated under the terms of our credit facility, providing a significant dry powder for opportunities to increase long-term shareholder value including potential acquisitions, organic investments and/or share repurchases.

Now, let me take a few minutes to discuss some assumptions included in our 2019 guidance. Our comparable RevPAR guidance for the year is 0% to 2%. Notably, we estimate a 45 basis point impact of RevPAR due to the renovation disruption related to the Marriott transformational capital projects. As Jim mentioned, without this impact, the midpoint of our RevPAR guidance would have been approximately 1.45%, which is mitigated by $10 million of the operating profit guarantees that has been included in our comparable hotel EBITDA.

For 2019, we expect to receive a total of $23 million of Marriott's operating profit guarantees for both comp and non-comp transformational capital projects, which have been included in our guidance for EBITDA. In addition, our outsized leverage to the Marriott-Starwood integration along with our internal initiatives from our asset management and enterprise analytics team are also driving forecasted margin outperformance. At the midpoint, a decline of only 20 basis points of RevPAR growth of -- on RevPAR growth of 1% is quite impressive, given the current environment of wage and benefit increases. Lastly, keep in mind, we generally earn 25% to 26% of our total EBITDA in the first quarter.

Overall, we are pleased with our strong operating results, which meaningfully be our initial guidance provided last February. Our performance continues to demonstrate that owning a portfolio of iconic, irreplaceable and geographically diversified hotels, having the scale and platform to drive value, combined with a powerful investment-grade balance sheet, creates a strong strategic position to deliver significant value to our stockholders over the long term.

This concludes our prepared remarks. We are now interested in answering any questions you may have. To ensure that we have time to address questions from as many of you as possible, please limit yourself to one question. Thank you.

Questions and Answers:

Operator

(Operator Instructions) And we will take our first question from Anthony Powell with Barclays. Please go ahead.

Anthony Powell -- Barclays Capital -- Analyst

Hi, good morning, everyone. You made it pretty clear that you are not focused on large scale portfolio deals right now. How many more deals like the 1 South Beach are out there? What kind of pipeline do you have for acquisitions and how confident are you in -- how confident are you in your ability to deploy that $2 billion to $2.5 billion of capacity over the next couple of years?

James F. Risoleo -- President, Chief Executive Officer & Director

Anthony, I'm glad you picked up on the fact that we're not interested in large scale portfolio of acquisitions. With respect to the pipeline, there are always transactions, there are always opportunities that present themselves, there are opportunities that we go after -- that aren't on the market. So we will continue to look for assets that fit our profile. We will be disciplined in our underwriting criteria and we will be opportunistic in investing going forward. So it's very difficult to talk hypothetically about any deal. But we have a number of assets that are in the pipeline that we're evaluating today and we'll just see if any of those pencil out. I can tell you with respect to the 1 South Beach, we've been working on that deal for two years. So we are very patient and we wait for the right opportunities to come to us.

Operator

We'll take our next question from Michael Bellisario with Baird. Please go ahead.

Michael Bellisario -- Robert W. Baird & Co. -- Analyst

Good morning, everyone. Just wanted to focus on the South Beach deal. Could you maybe give us your view on that market or the Miami market broadly, your outlook and then kind of your underwriting assumptions for that asset in '19 and '20, because it looks like you're not assuming much growth there?

James F. Risoleo -- President, Chief Executive Officer & Director

Yes, I -- couple things about South Beach, Michael. It's the second best performing -- over the last 20 years, second best performing RevPAR market in the country, only following the Florida Keys; Key West in particular in the surrounding islands. So we are very bullish on the Miami Beach market. It's really, you know, there are multiple demand drivers that drive business into that market. For the 1 Hotel in particular, it's a mix of high-rated leisure business and high-rated corporate group. The segmentation is roughly 75% leisure, 25% group. It's a terrific hotel and we would expect the market to continue to exhibit growth. You're right, we were conservative in our underwriting. I pointed out, what the hotel did last year, $45.8 million in EBITDA and we're roughly, call it $46.7 million this year. We were thoughtful about trends. We want to make certain that we put a budget out there that we're very comfortable with and that is achievable if not beatable and we're excited about some other things that are happening in that market. In late 2019, the Convention Center will reopen, which we think is going to serve to drive additional demand into the South Beach market, into our hotel in particular. We're also have underwritten, but haven't included it in our numbers, going to be developing a beach club at the hotel. We have a fantastic beach there. I think it's the best beach on South Beach hands down, 600 foot of white sand beach. So we think putting the beach club there will enhance top line revenues. And additionally, we will go into the property as we do on all of our assets and look for additional ways to enhance top line revenues and to bring efficiencies to the bottom line. Lastly, I would just add that the Super Bowl is being held in Miami in 2020, so we feel confident about how 2020 is going to perform as well. So we have been conservative. We think that's the right way to approach the business today.

Operator

Moving next to Smedes Rose with Citi. Please go ahead.

Smedes Rose -- Citi -- Analyst

Hi, thanks. I just wanted to ask also on the 1 Hotel, you mentioned that you'd been negotiating for the last two years and I'm just wondering if you could just talk about a little more about the origins of the deal and were there other bidders at the table and it seems like a fairly favorable multiple for such a large luxury asset. I'd just be interested in hearing a little more color on the background, how you were able to get it?

James F. Risoleo -- President, Chief Executive Officer & Director

Sure, Smedes. I wouldn't say negotiating for two years, I would say we started our quest of the project two years ago and there were other players that were interested in the hotel, high net worth individuals, family offices, offshore interest primarily from the Middle East. At the end of the day, we distinguish ourselves above and beyond everyone else. And we're delighted to be associated with this hotel and with the 1 brand. So we bring an institutional pedigree to the property and to the 1 brand going forward. So that's all I can say. I can't -- I cannot give you dynamic on other bidders and their views of the world. I can only talk about how we view it.

Operator

Next we'll move to Bill Crow with Raymond James. Please go ahead.

Bill Crow -- Raymond James Financial -- Analyst

Good morning, Jim. Two part on RevPAR growth, like ex the renovation disruption, you said 1.45% midpoint for this year, should we be happy with that? I mean, it feels like that's pretty conservative to start the year and maybe that's the case, but the second part is, if you could just talk about how the renovations will progress through 2020? And is it going to be a greater impact or lesser impact as we think about next year?

James F. Risoleo -- President, Chief Executive Officer & Director

So I think you should be happy with the -- call it a midpoint of 1.5% out of the box and that's how I would look at it. We have -- as I mentioned, we did -- we had a great year last year. We saw 2.3% RevPAR growth in the quarter. We actually saw a pickup in group in the fourth quarter that gives us confidence. As we do our bottom up budgeting process on a property by property basis, this is where we're comfortable giving initial guidance. So I think you should be comfortable with it. I think you should be really comfortable with our margin assumptions and our margin performance. So with respect to -- your second question with respect to the big deal in 2020, was that it, Bill?

Bill Crow -- Raymond James Financial -- Analyst

Yes.

James F. Risoleo -- President, Chief Executive Officer & Director

Hang on one second, I'll get the data on that. We don't have it on hand, but my recollection Bill is, it's similar spend to '19. So think about the RevPAR disruption in around the same way for 2020.

Operator

Next we'll go to Jeff Donnelly with Wells Fargo. Please go ahead.

Jeff Donnelly -- Wells Fargo -- Analyst

Good morning, guys. Can you just give us an update on where the Hyatt three-pack and Don CeSar acquisitions finished in 2018 versus your original underwriting. I'm just curious what drove any variances there, whether it's sort of market, or just taking share, or losing share or just how your margin is sorted out?

James F. Risoleo -- President, Chief Executive Officer & Director

Hang on, Jeff. Let's see -- I don't have the numbers for '18 in front of me. But I can reiterate that on our 2019 budget for the three Hyatts, we expect to finish 70 basis points up, which equates to a 14% improvement in NOI. And I am happy to get the numbers for you on the Don and performance in '18. I know that Don has performed really well in '18, we're well ahead of budget on that of our pro forma and I don't want to quote numbers because I don't have it in front of me, but I know we performed really strong and we had said when we bought the hotel that we anticipated turning that, I think it was a(ph)6.5% cap rate into an 8% . And last I looked and I would know, we were ahead of our projections. But we'll get you the specific numbers.

Operator

We'll take our next question from Rich Hightower with Evercore ISI. Please go ahead.

Richard Hightower -- Evercore ISI -- Analyst

Hey, good morning, guys. Just want to follow-up on the earlier -- what sounds like a categorical statement about not pursuing a very high profile portfolio that's potentially in the market here pretty soon. If I'm accurate in sort of describing it this way, or asking the question this way, what -- has anything changed in terms of your thinking about that particular transaction? Is it partially a function of the fact that you did a $600 million deal recently and you just kind of running up against capacity constraints financially or did something change philosophically or with respect to feedback from investors or just a little more color on that would be helpful?

James F. Risoleo -- President, Chief Executive Officer & Director

Well, Rich, I think it's -- we're not going to comment on hypothetical deals that may or may not be in the market. What I will tell you is that we're going to be opportunistic. And we're going to continue to pursue assets like the Hyatt three pack and like the 1. It's nothing more complicated than that. We'll be opportunistic on the acquisition side and we will be opportunistic as we think about selling hotels, it's a same thing. Nothing is in guidance or additional acquisitions or additional sales, because we don't have anything to talk about. And when we have something to talk about, we'll be glad to share that with you.

Michael D. Bluhm -- Executive Vice President, Chief Financial Officer

And I think just Rich to add on to that. I think we continue to be incredibly happy with our scale. We're not going to grow for growth sake. As you can see with the 1 Hotel, we can absolutely execute upon our strategic vision and the upgrading of the portfolio through other means, and certainly as we sort of think about where we are in the current environment and being thoughtful about how conservatism and underwriting into this type of environment, I think all this has to sort of play into how we think about acquisitions at any degree of scale, frankly. And of course, again, and I guess one final point will be, right, we want to be incredibly prudent with our balance sheet, again, at this part of the cycle, I think it's paramount that we're doing that.

Operator

Our next question will come from Chris Woronka with Deutsche Bank. Please go ahead.

Chris Woronka -- Deutsche Bank -- Analyst

Hey, good morning, guys. Had another question on the 1 Hotel and that's -- can you maybe give us a little general sense or flavor on the structure of the management contract and does that involve kind of a franchise fee to the 1 brand? And along those lines, are you willing to consider other assets from that brand as it expands?

James F. Risoleo -- President, Chief Executive Officer & Director

The 1 Hotel is going to be -- it's not a franchise fee, it's a management agreement. And it is a market negotiated management agreement with the manager that we're very comfortable with. The answer with respect to are we willing to consider other hotels in that brand. Again, it depends on pricing. It depends on the opportunity, but I will tell you that Barry Sternlicht has been very successful in the past creating brands, think W. This is an incredible LEED-certified, mission-driven luxury lifestyle brand, it's inspired by nature, it fits right in with how we think about sustainability and some of the awards we received, the Leader in the Light Award from NAREIT and things we've done around corporate responsibility and sustainability. You may know that there are current hotels in Manhattan and Brooklyn, as well as the 1 in South Beach and there are hotels that are expected to open and he has them under control in West Hollywood, Cabo San Lucas, Kauai, Sunnyvale and we would certainly look at most of those with our focus on US-centric investments today probably wouldn't be looking Cabo and they have one in the works in Sanya. So it's a real brand and it's going to grow and we're excited about it.

Operator

Next we'll take a question from Stephen Grambling with Goldman Sachs. Please go ahead.

James F. Risoleo -- President, Chief Executive Officer & Director

Hey, Stephen.

Stephen Grambling -- Goldman Sachs -- Analyst

Hey, how are you?

James F. Risoleo -- President, Chief Executive Officer & Director

Good. Hey, Stephen, let me just respond in a little more detail to Bill Crow's question about the MI transformational capital plan because we pulled the number up. Our spend in 2019 is it -- though anticipated to be $225 million, in 2020 it's anticipated to be $207 million, so slightly less. Sorry, Stephen.

Stephen Grambling -- Goldman Sachs -- Analyst

No, that's helpful too, I guess one more hotel follow-up on the 1 Hotel. Could you give a little more background on the history of the 1 Hotel on the brand change as it relates to the fundamentals of the property?

James F. Risoleo -- President, Chief Executive Officer & Director

Well, I think this was the flagship one, or the one in -- two in New York, one in Brooklyn, one in Manhattan and this property it was really the brand. I mean, this is how the -- this is where the brand was formed and founded. The property had been the Gansevoort hotels and the Gansevoort had been in financial difficulty over the years and a venture led by Starwood Capital brought the property and they invested $300 million in the asset, which is something that I hadn't pointed out. So it's a brand new hotel. It has no near-term CapEx needs and given the high RevPAR of this asset, the ability of this property to support itself through the FF&E reserve is very strong and highly likely. So in addition to upgrading the overall metrics of our portfolio from a RevPAR -- total RevPAR EBITDA per key perspective, this goes a long way to enhancing the free cash flow position of Host.

Operator

We'll take our next question from David Katz with Jefferies. Please go ahead .

David Katz -- Jefferies LLC -- Analyst

Hi, good morning, everyone, and congrats on a good quarter and your acquisition. I hope you'll humor us and allow me to just beat the horse one more time. But with respect to the perspective large portfolio out there that -- I think if we're understanding correctly, it's not formally on the market yet. And so for that reason and that context, there wouldn't be anything to talk about at this stage, but at some point it could hit the market in whole or in part. I'm just -- I just want to be clear about sort of where the line is that you're drawing and is it because something is not in the market yet or available or you're setting some sort of firm boundaries that will be there when it is. And the second part of my question was, we're just trying to gauge your appetite for share repurchases, given the liquidity that you have, given the strength of the business and sort of where you are? Thank you.

James F. Risoleo -- President, Chief Executive Officer & Director

I'm going to take the first part of this. I'll let Michael talk about share repurchases, David. I think my comments were pretty clear. And I would encourage you to take them literally that we have (technical difficulty) investment capacity today between of $2 billion to $2.5 billion at 3 times leverage. We intend to stay within that range of $2 billion to $2.5 billion and 3 times leverage. That's how we're viewing the world today. Michael, you wanted to--.

Michael D. Bluhm -- Executive Vice President, Chief Financial Officer

Sure. I think, look David, I would say as we think about share repurchases, I put that in the context of all capital allocation decisions whether investing organically in our portfolio through capital reinvestment like we're doing with the transformational projects and the Marriott program or where we're looking externally for opportunities like the 1 Hotel, which I think is fantastic in a lot of ways as Jim's pointed out, and I think hit accretion from fairly just about every metric, whether it's earnings, free cash flow and frankly, I'd even argue on(ph)any day , day one. I think we do have -- as you know, we do have a -- we do have authorization for a buyback and it is a tool that we will look to, but again it's in the context of all the -- of all other investment opportunities that we think about and how we're looking out to -- the sort of the outlook for 2019 and what we think that's going to bring in terms of both acquisition opportunities as well as value enhancement opportunities.

Operator

Moving next, we'll go to Jim Sullivan with BTIG. Please go ahead.

James Sullivan -- BTIG Research & Strategy -- Analyst

Good morning, guys. Just another question on capital allocation if you would. And this really relates to the transformational Marriott program as you've described it the way you're investing some $200 million plus a year. Can you -- you have talked about this as the objective in terms of operating results as to take each asset up to number one in its comp set. And I wonder if you could just help us understand how that -- what kind of ROE you're projecting that to deliver on the capital investment?

James F. Risoleo -- President, Chief Executive Officer & Director

Sure, Jim, because obviously -- excuse me, before we commit any capital, we start with a detailed return on investment analysis and we did that with this deal as well. We believe that the IRR unlevered on the Marriott transformational capital program will be in the low to mid-teens. That's how we've looked at it, we think it's a great use of our capital. The properties are clearly going to gain market share. Marriott in cases that they've already completed can see up to 6 points in yield index growth from really transforming and reinventing our hotel. We weren't even that aggressive when we did our IRR analysis, we assume somewhere between 3 points to 5 points on each asset.

Operator

Next we'll go to Patrick Schultz with SunTrust. Please go ahead.

Patrick Schultz -- SunTrust -- Analyst

Hi, good morning. When we think about what markets that you'd like to get into, and others that you'd like to get out of certainly Miami getting into, New York getting out, how do you think about that going forward?

James F. Risoleo -- President, Chief Executive Officer & Director

Yes. Patrick, we will continue to be focused on markets that have multiple demand generators, that have high barriers to entry with respect to new supply and just good growth fundamentals all lining up from top to bottom whether it's a favorable labor environment to the support of the local municipal authorities, and again, high barrier to growth is probably top of the list, because new supply is what can get you.

Michael D. Bluhm -- Executive Vice President, Chief Financial Officer

And I think certainly, importantly diversification continued to be paramount to our overall investment strategy. So if we sort of think about different market, we certainly have a keen eye on making sure that we're not overly weighting or -- overly weighting to certain markets.

Patrick Schultz -- SunTrust -- Analyst

Okay, thank you for that. And then secondly, I may have missed it. Did you say (technical difficulty) group pace is shaping up?

James F. Risoleo -- President, Chief Executive Officer & Director

What's that, Patrick? You cut out.

Patrick Schultz -- SunTrust -- Analyst

I'm sorry, didn't hear you.

James F. Risoleo -- President, Chief Executive Officer & Director

I'm sorry, I didn't hear your question.

Patrick Schultz -- SunTrust -- Analyst

Okay. Did you -- I'm sorry if I missed it, did you say how your 2019 group pace is shaping up?

James F. Risoleo -- President, Chief Executive Officer & Director

Yes, I did. It's total group revenue pace is up 1.4%.

Operator

Next we'll go to Shaun Kelley with Bank of America.

Shaun Kelley -- Bank of America Merrill Lynch -- Analyst

Hi, good morning, everyone. I know you're keeping it tight so my main question was one to the Analyst Day in South Beach, but I don't know if you're going to comment there. So instead maybe you guys could just give us a little bit of color on, I think we noticed toward the end of the year there was a lot of stock market volatility, obviously, there is also a big strategic change here in terms of sort of your discussion plan around the portfolio deal. But you didn't actually buy any stock in the fourth quarter and I'm kind of curious just big picture, how the stock buybacks fit into the broader strategy here as it relates to kind of what you're seeing out there and deployment of that capital relative to kind of what you can do with your own stock?

James F. Risoleo -- President, Chief Executive Officer & Director

Yes, Shaun, we think about deploying capital, obviously, we've talked about it before, but just let me hit the highlights real quick for you. Due to buying assets like the 1, investing in our portfolio like the transformational capital program or buying back stock, right. But it all starts with sources and uses of cash. And as we sat here at the end of the year, we did not buyback any stock. We knew what we had in the works from an acquisition perspective. We knew that we had The Westin Grand Central under contract, but we had no assurance that that deal was going to close. So that's not to say that we won't be buyers of our stock in the future. We did not buy it now, because we wanted to be thoughtful about the balance sheet and where we were going. Michael has anything to add to that.

Michael D. Bluhm -- Executive Vice President, Chief Financial Officer

No, I think that -- I think that's a good point, I mean, as I think we all know, we sat here on Wednesday -- or sat here in December of last year and the market was pretty volatile. And certainly volatile in one direction. And so as we were sort of looking at things like cash flow, cash that we had coming in throughout the dispositions, acquisitions we were making there was in time where we just need to be incredibly thoughtful about balance sheet preservation.

Operator

Moving next to Thomas Allen with Morgan Stanley. Please go ahead.

Thomas Allen -- Morgan Stanley -- Analyst

Hey, good morning. So about a year ago, you talked about selling land at The Phoenician, where are you in that process? Thanks.

James F. Risoleo -- President, Chief Executive Officer & Director

It's a process, Thomas. We are moving forward. We have the entitlement. We're moving through the plotting with the City of Phoenix. We continue to be optimistic that that's going to happen, but I don't have anything to discuss right now because we don't have a deal done.

Operator

And next we'll go to Robin Farley with UBS.

Robin Margaret Farley -- UBS -- Analyst

Thanks, two questions. One is, you've talked about opportunities looking at the existing portfolio. Are there other things with other Marriott properties that are not part of the agreement you've done already? Or if not, are there other operators that have kind of expressed interest in something similar after seeing that Marriott deal or is that really a very unique sort of one-off kind of arrangement? And then I was just going to ask a clarification on group business, you mentioned the pace being up like 1.4%, last quarter you talked about fewer citywide events in 2019. So is it just the pace coming in, but you're still expecting maybe to be down in 2019? Or has your view on the group outlook changed? Thanks.

James F. Risoleo -- President, Chief Executive Officer & Director

Robin, let me answer the group question first. Yes, I mean, we do have some issues, as you and anyone that owns hotels in Boston, in particular, with a reduction in citywides so this year. That 1.4% number takes that all into account and consideration. So we don't expect to see slippage in the 1.4% number. If anything, and this is not baked into our forecast for the year, we really liked the way we're positioned this year and in those markets where we might have targeted holes, we believe that given the corporate group that we saw in the fourth quarter and over the course of 2018, that gives us some terrific opportunities to the upside. I might also add that after the third quarter call or on the third quarter call I said, our total group revenue pace was flat. And now, it's up 1.4%. So we feel good about that. And with respect to additional transformational capital projects, there's only so much we can push through the system at any one point in time. And I will just tell you, nobody but Host could do what we're doing. And I applaud our design and construction team, and our asset managers, and others in the organization to manage this process. We will work with our operators, both with Marriott on additional transformational opportunities as well as Hyatt on assets that we feel may need to be repositioned, but we're going to be thoughtful, cautious and judicious as we move forward on the process.

Operator

And ladies and gentlemen, this does conclude today's question-and-answer session. Mr. Risoleo, I would like to turn the conference back over to you for any additional or closing remarks.

James F. Risoleo -- President, Chief Executive Officer & Director

Well, thank you, everyone for joining us on the call today. We really appreciate the opportunity to discuss our fourth quarter results and our 2019 outlook with you. We look forward to talking with you in a few months to discuss our first quarter results as well as providing you with more insight into how 2019 is progressing. Have a great day.

Operator

This does conclude today's conference. Thank you for your participation. You may now disconnect.

Duration: 60 minutes

Call participants:

Gee Lingberg -- Senior Vice President

James F. Risoleo -- President, Chief Executive Officer & Director

Michael D. Bluhm -- Executive Vice President, Chief Financial Officer

Anthony Powell -- Barclays Capital -- Analyst

Michael Bellisario -- Robert W. Baird & Co. -- Analyst

Smedes Rose -- Citi -- Analyst

Bill Crow -- Raymond James Financial -- Analyst

Jeff Donnelly -- Wells Fargo -- Analyst

Richard Hightower -- Evercore ISI -- Analyst

Chris Woronka -- Deutsche Bank -- Analyst

Stephen Grambling -- Goldman Sachs -- Analyst

David Katz -- Jefferies LLC -- Analyst

James Sullivan -- BTIG Research & Strategy -- Analyst

Patrick Schultz -- SunTrust -- Analyst

Shaun Kelley -- Bank of America Merrill Lynch -- Analyst

Thomas Allen -- Morgan Stanley -- Analyst

Robin Margaret Farley -- UBS -- Analyst

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