Hyatt Hotels Corp (H) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2010 Hyatt Hotels Corporation earnings conference call.

My name is Carma and I'll be your coordinator for today.

At this time all participants are in a listen-only mode.

(Operator Instructions) Later we will conduct a question-and-answer session.

I would now like to turn the call over to your host for today, Mr.

Atish Shah.

Please proceed.

Thank you, operator.

Good morning, everyone, and thank you for joining us for Hyatt's third quarter 2010 earnings call.

Here with me in Chicago today are Mark Hoplamazian, Hyatt's President and Chief Executive Officer, and Harmit Singh, Hyatt's Chief Financial Officer.

As for the format for this call, Mark and Harmit are each going to make remarks about our results for the third quarter, progress made during the quarter relating to long-term value creation and recent business trends.

After the comments we will take questions from the call participants.

Before we get started, let me remind everyone that certain statements made on this call are not historical facts and are considered forward-looking statements.

These statements are subject to numerous risks and uncertainties as described in our annual report and on Form 10-K and other SEC filings, which could cause our actual results to materially differ from those expressed and/or implied by our comments.

Forward-looking statements in the earnings release that we issued earlier this morning, along with the comments on this call are made only as of today, November 3, 2010 and we undertake no obligation to publicly update any of these forward-looking statements as actual events unfold.

You can find a reconciliation of non-GAAP financial measures referred in our remarks to our on website at Hyatt.com under the press release sector of our investor relations link and in this morning's earnings release.

An archive of this will be available on our website for 90 days.

Additionally, a telephone replay of this call will be available for one week.

To access it dial 617-801-6888.

The passcode is 77755086.

And with that, I'll turn it over to Mark to get started.

Thanks, Atish.

Good morning, everyone, and welcome to our third-quarter 2010 earnings call.

Let's start off with our third-quarter operating results that we reported this morning.

Our results were solid throughout the portfolio, ranging across different types of hotels and in a variety of locations.

During the third quarter occupancy levels, as compared to the prior year, increased in over 75% of the hotels that we operate around the world.

Average rates at our full service hotels increased this quarter on a global basis.

This was a continuation of rate increases that we saw internationally earlier in the year, and in North America the increase came primarily as a result of a shift in business mix from lower-rated transient to higher-rated transient business, and increased group demand.

There were four particular areas of improvement in the third quarter.

First, we saw an increase in group travel during the quarter.

Second, our owned and leased portfolio performed well with strong flow through, despite the relatively more occupancy-led increase in RevPAR in the quarter.

Third, in international operations the strong increase in RevPAR was partially driven by hotels opened over the last few years, particularly in the Asia-Pacific region, and those hotels are benefiting from ramp up following opening and strong economic growth in greater China.

And fourth, our select service hotels continue to perform well, with third-quarter RevPAR growth of 9.1%, which is the highest rate of quarterly growth for our select service brands in comparable periods following the renovation and rebranding of the former AmeriSuites hotels to Hyatt Place hotels.

We continue to make progress on the two areas that we've described in the past as being our main drivers of earnings growth over time; namely improving the results of our existing hotels, and increasing our presence by expanding the number of hotels we have in markets in which we're not represented or underrepresented.

As to improving the results of our existing hotels, our performance continues to climb in relation to our three main constituencies; our associates, our guests and our hotel owners and franchisees.

We've seen positive results across the board from our continued focus on associate engagement, on guest service, on satisfaction levels among meeting planners and corporate travel managers, and on efficient operations in our hotels.

This is seen in increased engagement levels among our teams in our hotels, increased market share and solid financial performance.

During the quarter, our executive team and our board of directors spent time in greater China for a board meeting.

Our progress on engaging with our associates, guests and owners is very evident in this region.

We spent time with the teams in a number of our hotels and also with developers and owners in Hong Kong and in mainland China.

We have a tremendously strong operations and development team, very strong brands with solid recognition, and we continue to be a leader in innovative hotel design and food and beverage concepts, as well as operations.

Most importantly, with decades of building teams and supporting GMs in the region, we have a platform to ensure that we grow, support, and enhance the Hyatt D&A, as we hire new people and build new teams to lead new hotels in the future.

We have long said that people are the avenue to long-term competitive advantage and we are thrilled with the passion and energy that is alive and well in our hotels.

As to increasing our presence, we continue to make progress against this goal with the opening of our fifth Andaz hotel; the Andaz on Fifth Avenue in New York.

The customer feedback has been excellent and we encourage you to visit this flagship property for the Andaz brand.

We also opened two Hyatt Place hotels during the quarter.

As to our expansion plans for the future, we've made several announcements since the beginning of the third quarter.

In China we announced that in addition to the 11 hotels that we have open and operating at this time, we have another 22 full service hotels in various stages of development across all of our brands in several new markets within China.

The significant investment that third-party owners are making is a clear sign of confidence in our brands.

We recently announced the development of the Andaz Wailea Resort and Residences in Maui.

This resort is in a luxury destination on an exclusive beachfront location in Wailea and is currently scheduled to open in 2012.

This resort will complement our existing presence in Hawaii, which currently consists of the Hyatt Regency Waikiki and one property one each of Maui and Kauai.

This project will have a residential component, as well, which we believe is appropriate for the location and the quality of the overall development.

We're very excited about this project and believe that it will be a fabulous addition to the Andaz portfolio.

We're also happy to be working with Starwood Capital, as they bring a significant amount of development experience and expertise to our partnership.

We expect to invest about $90 million for an equity stake in this development and expect that the financial terms will be attractive, both because of our expectation as to how the Andaz brand will perform in the Wailea market and our belief in the recovery of this unique resort destination.

We and our partners at Starwood Capital are currently working on securing construction financing for this development.

This morning we announced that we entered into an agreement to purchase a Park Hyatt hotel in New York City upon completion of construction in 2012.

This 210-room hotel will be located on West 57th Street and will be our North American flagship for the Park Hyatt brand.

The hotel is being built by an experienced New York developer, Extell Development, as part of a mixed use project that is expected to contain some of the most luxurious residences available in New York.

The total purchase price for the hotel upon completion is $375 million.

We are investing in this hotel in a partnership with Extell and we expect to own a two-thirds interest in the hotel.

If we were to acquire the hotel without any property level debt, our investment would be roughly $250 million, based upon the agreed-upon acquisition price.

Both the Andaz Wailea and Park Hyatt New York, although some time away from opening, are good examples of the kinds of investment opportunities that we're seeing; redevelopment and new development projects in world-class locations.

The opportunity to expand our brands and serve our guests in new markets that are truly global destinations with very high barriers to entry is very exciting.

In addition to the Park Hyatt in New York we announced last week the two new Hyatt hotels are in development in Manhattan; one is at Lexington and 48th Street and the other is near Union square.

Both of these hotels are full service properties that are under construction now and that are scheduled to open in 2011.

These hotels are being developed by Hersha Development Corporation, which has extensive experience developing hotels in New York and throughout the northeast.

Both of these properties will be managed by a Hersha affiliate, a group with whom we have a very strong existing relationship.

I would like to touch upon other transaction activity at this point.

As a part of our strategy to recycle capital in order to expand and increase distribution, we expect to be in the market from time to time on both the buy side and the sell side.

As we mentioned on our last earnings call, we were exploring the sale of 11 properties.

During the third quarter we sold one of those properties, the Hyatt Regency Greenville, as stated in our earnings release.

We sold this hotel to an existing franchisee that plans to invest capital to upgrade the property.

It will remain in our portfolio as a franchised hotel.

With regard to other potential sales, at this time our best estimate is that we will sell between three and five additional hotels over the next few months.

We expect to announce sales as they are closed.

In terms of the remaining hotels that were a part of the group of 11 properties, it is unlikely that we will sell them in the near term.

Overall, we expect the hotel dispositions to achieve a number of strategic objectives that we have described in the past.

These include; one, freeing up capital so that we may recycle it into other projects to increase our presence; two, welcoming new or reinforcing existing relationships with third-party owners who are committed to investing in our hotels under our brands and with whom we hope to do additional projects in the future; and three, maintaining our presence in markets by selling hotels with long-term management or franchise agreements.

So to wrap-up, as we're about to recognize the anniversary of our initial public offering we're thrilled with the commitment we continue to enjoy from every member of the Hyatt family, with the support we continue to see from sophisticated and world-class developers and hotel owners, and with the ongoing performance of our teams and our brands for the benefit of our guests, meeting planners and travel managers.

We remain focused on continuing to strengthen our culture and our values, something we believe is critical to our success as we continue to execute our expansion plans in many markets around the world.

So with that, I'll turn it over to Harmit to talk more about our results.

Thank you, Mark, and a warm welcome to those who have joined our third-quarter 2010 earnings call.

I will be discussing our performance in the third quarter, as well as recent business trends, and providing information on full-year 2010.

In the third quarter adjusted EBITDA was $111 million, an increase of just over 20% compared to last year.

This increase is a result of stronger performance at owned and leased hotels and higher management and franchise fees.

Fees were higher, partially as a result of revenue improvement from our comparable hotel base, hotels that are ramping up and newly-opened hotels.

As many of you know, we have three business segments; owned and leased hotels, North America managed and franchise operations, and international managed and franchise operations.

Let's discuss the three business segments in more detail, beginning with our owned and leased hotel segment.

Excluding the impact of currency, RevPAR for our owned and leased hotels increased by 7.3% in the third quarter of 2010.

Results in North America were negatively impacted by renovations at five owned properties.

In terms of margin growth, the solid margin growth that we have demonstrated in the first half of the year continued into the third quarter, with our operating margins at comparable owned and leased hotels increasing by 130-basis points in the third quarter.

The margin improvement was largely a result of continued productivity gain and improved food and beverage profitability.

Similar to the second quarter, we were able to manage expense increases to approximately 4%, even as occupancy increased by 440-basis points.

I would also point out that lower cancellation and attrition fees in the third quarter of 2010 relative to the third quarter of 2009, as well as the aforementioned renovations, negatively impacted margins in the third quarter.

Next I'll talk about North America managed and franchise hotels.

Third-quarter comparable RevPAR for full service hotels increased 7.3% driven by occupancy, which increased 360-basis points, or 60% of North America full service hotels showed rate increases in the quarter, which compares to about 35% in the second quarter and 15% in the first quarter.

As to business by customer segment, our full service hotels experienced a 20% increase in group room nights with essentially flat room rates compared to last year.

The strength in the group business was partially a result of good turnout for association business that was on the books, as well as recently-booked corporate business.

Also, our food and beverage revenues increased more than 8% relative to the third quarter of 2009, driven by higher banquet and catering revenues as group customers increased spending in these areas.

Expenditure by group customers in other areas, such as spa services, remains relatively weak.

The group revenue base for 2010 continued to improve through the third quarter and is up over 3% for the full year.

In the quarter bookings for the year were up over 60% based upon room nights and at higher rates, partially as a result of corporations booking meetings with relatively short lead times.

I would like to offer one additional point of context on our group business that may be helpful.

Over the last five years, on average, approximately 70% to 75% of our group business is booked prior to the year of realization, with approximately 25% to 30% booked in the year for the year.

This is the reason for a lag on the group side, with rate recovery potentially taking longer than on the transient side as we cycle through group business booked in past periods.

This lag should be taken into consideration in analyzing our rate and earnings profile over time, given the significance of group business as a proportion of our total activity in North America.

As to transient demand, we saw an increase of approximately -- we saw an approximately 4% decline in transient room nights due, in part, to an increase in occupancy from short-term bookings.

Overall, transient revenues were down only slightly as rates increased.

Business hotel showed better revenue growth due to the relative proportion of recently booked group rooms.

Our transient guest mix across different channels continued to improve, as more business was realized through our own channels as opposed to third-party owned websites, including discount Internet channels.

For example, our racked rated room nights increased over 20%, with improved rates compared to the prior year, while our room nights sold through lower-rated third-party Internet channels decreased approximately 15%, even as rates in those channels increased relative to the prior year.

Now let me turn to select service hotels.

Comparable RevPAR at our managed and franchised select service hotels increased 9.1% in the third quarter of 2010 compared with the third quarter of 2009.

Both occupancy and rates increased.

Year to date our select service occupancy was over 72% and a majority of our select service hotels continue to gain revenue share in their respective markets.

We are pleased that our customer service cost for both Hyatt Place and Hyatt Summerfield Suites increased in the third quarter, as well.

Overall, including both full service and select service fee income for North American management and franchising operations increased 14.3%, primarily as a result of increased base management and franchise fees.

Now let me turn to our international business segment.

On the international managed and franchised side RevPAR increased 15.1% in the quarter, excluding the impact of currency, with improvements in occupancy and average rate in each of our regions.

The Asia-Pacific region continues to benefit from significant revenue growth at hotels in Shanghai, Beijing, Hong Kong and in other cities in which our newly-opened hotels continue to ramp up.

RevPAR in China increased approximately 50%, partially due to greater demand in Shanghai as a result of the World Expo.

We experienced RevPAR growth in other Asia-Pacific region counties, including Japan, Korea and Australia, between 5% and 10%.

The southwest Asia region realized RevPAR growth lower than that of the other regions as RevPAR growth, while still positive, was weaker in the DCC countries than in other parts of the region.

Over 50% of international hotels showed rate increases in the quarter, which compared to about 45% showing increases in the second quarter, and 35% in the first quarter relative to the prior year.

Overall, international fees increased 14.8% in the third quarter of 2010, excluding the impact of currency, as a result of higher revenues and a greater number of hotels versus last year.

Now that I have talked about our three segments, I would like to talk about two other topics; SG&A expenses and a special item during the quarter.

On SG&A, we continued to manage expenses with much focus.

Our adjusted SG&A expenses increased 3.4% in the third quarter, due to higher incentive compensation and travel costs.

The special item that I would like to discuss relates to a $35 million gain as a result of debt that was extinguished when we conveyed the Hyatt Regency Princeton to the lender at the end of the quarter.

Based on our valuation, the property was worth less than the $45 million of outstanding, non-recourse debt, therefore we elected to transfer the deed back to the lender.

We continue to manage the hotel.

We have secured mortgages outstanding on only two other hotels.

As I've done on past earnings calls I would like to conclude by reviewing some information on how the remainder of the year looks for us.

We had previously provided some information on 2010 as it relates to capital expenditure, depreciation and amortization and interest expense.

On capital expenditure, we have lowered our range to $250 million to $260 million.

Part of our capital expenditure relates to broad-scaled renovations at five of our owned hotels.

We have discussed these projects before, so I would like to provide some detail as they're now fully underway.

These projects are going well and on track.

Some of the first components of these projects are nearing completion.

For example, the new restaurant and bar at the Grand Hyatt New York opens later this month.

I would like to spend a few minutes discussing the impact to business as a result of the renovation.

First, during the third quarter, the negative impact to owned and leased hotel RevPAR is estimated to have been 175-basis points and approximately $4 million of EBITDA.

We expect the impact will be greater in the fourth quarter, as the renovations take more rooms out of service relative to the third quarter of 2010.

Based on our estimates of displaced revenues, the fourth-quarter 2010 negative impact is expected to be about 350-basis points to owned and leased RevPAR, and approximately $8 million of EBITDA.

This estimate of impact is slightly higher than what we discussed on our last call, as the market in which these properties operate have performed better than previously estimated.

As far as 2011, we expect the renovation activity at these hotels to displace revenues during the first, second and third quarters, and the renovations to conclude during the fourth quarter of 2011.

The impact will vary from quarter to quarter, depending on the particular phase underway at each of the five projects.

We estimate that during the first three quarters of 2011 the cumulative negative impact of the renovation at these five hotels could approximate between 300-to-350 basis points of RevPAR to our owned and leased segment, and in the range of between $20 million to $25 million of EBITDA.

This estimate could fluctuate significantly, based upon market performance.

Overall, we are excited about these projects, think they're a good use of capital and believe that guests and meeting planners will continue to respond well to our efforts to modernize these properties.

Upon conclusion of these renovations we anticipate improved performance on both an absolute and a relative basis.

Other information relating to 2010 is as follows.

Our estimate of depreciation and amortization expense is now slightly lower at between $275 million to $285 million.

The interest expense range remains the same at between $50 million to $55 million.

Last, I would also point out that our owned and leased portfolio and associated earnings will change based on asset sales that have occurred, or could be completed.

For instance, the 2010 full-year pro forma EBITDA, associated with the properties that we sold all conveyed during the third quarter at approximately $5 million.

So in summary, in the third quarter, we saw improved demand and higher rates in North America business, continued strong growth across our international business, and improved top and bottom-line results from our owned hotel portfolio, and higher customer satisfaction scores across the business.

With that, I'll turn it back to Atish for Q&A.

Thank you, Harmit.

That concludes our prepared remarks.

For our question-and-answer session, please limit yourselves to one question at a time and we'll take follow-up questions as time permits.

We're happy to take your questions at this time.

Operator, may we please have the first question?

(Operator instructions).

First question comes from the line of Josh Attie from Citi.

Please proceed.

Thank you.

Can you talk about your return expectations for the capital you're investing, both in New York and Hawaii, and generally, how you're thinking about and underwriting these deals?

Sure.

Good morning, Josh, it's Mark Hoplamazian.

The markets are obviously different markets, but we looked at the locations and the actual -- the layout and area programming for these two hotels and we believe that what we're building in both of those locations is very well suited to our brands and will have a significant impact on other development projects and developer interest over time.

We believe that the New York market for this type of property, and given its location, is a market with relatively lower cap rates in terms of disposition prices.

And when you think about returns, obviously, you assume a sale of the property in the course of that and we would think about that in the context of our recycling strategy.

So, with respect to the Park Hyatt New York, on an unlevered basis, we would expect returns in the high single digits, and probably -- and with leverage, obviously, higher than that and somewhat higher than that in Hawaii, that is in the low double digits from an unlevered perspective.

But we expect to, and we are planning to use leverage in both cases.

And is it possible to break out of those unlevered returns how much is coming from cash on cash and then how much is coming from the exit?

I don't have the breakout handy, but there are a couple of components in respect to the Hawaii project.

For example, there's -- the project itself is a 290-room hotel, but also has a residential component.

The residential component -- the entitlements are for 38 residences --or 38 residential units, and the initial phase will include the build out of at least six oceanfront villas and probably some others, so there are other components to the total return profile.

Okay, thanks a lot.

And the next question comes from the line of Steve Kent from Goldman Sachs.

Please proceed.

Hi, good morning, can you hear me?

Yes, thanks, Steve.

I guess a couple of questions.

Can you just give a little bit more color on corporate rates as you're moving into next year?

And also, given the amount of cash that you are sitting on, is there anything in your filings that prohibit you from issuing a special dividend?

Steve, hi, this is Harmit, I'll take the first on corporate rates.

Again, we are in the early stages of negotiations with the corporates.

Just by way of color, the corporate rates are down, I think, approximately 15% to 20% from the peak --- during the peak downturn levels.

Our intent, as we've begun the negotiations, is to try and seek in any way from a mid to a high single-digit rate increase.

The corporates are pushing back, they're looking for a flat to a decrease.

Given the uncertainty in the economy, especially in the US, things have lagged a little, but I think the industry is more focused in trying to get anywhere between mid to high single-digit rate increase and that's the intent that we're focused on at this point of time.

On the second question, Steve, the answer to your question is, to my knowledge there's nothing structurally that would limit or otherwise constrain us with respect to how we approach setting a dividend policy.

As you know, when we came public, when we effected our IPO, we established a no dividend policy and the reason for that was we believed then and we continue to believe that we have attractive opportunities to be able to utilize capital to help us grow the business.

Okay, thank you.

Thanks, Steve.

The next question comes from the line of Chris Woronka from Deutsche Bank.

Please proceed.

Good morning, guys.

Good morning.

How should we think about costs for next year on your owned and leased portfolio?

If you could just give us a quick run through of some of the key items and maybe what your internal models are thinking in terms of ranges for those things like labor and such?

Sure, Chris, again, cost management, the way we look at it is a way of life, both of the hotels and corporate, and as you've seen from results that we have delivered over the last couple of quarters we are focused on enhancing both productivity and that is measured using cost per occupied room.

Cost per occupied room in our owned portfolio, for example, in quarter three is down 0.8%, despite an increase in occupancy by 440-basis points.

Now what's beginning to happen is because it's an occupancy-driven recovery, we're beginning to add staff, especially hourly staff in the hotels to keep pace with the occupancy that's happening.

We're still tight relative to management staffing and we'll continue to be tight on management staffing to the extent we can.

The only other thing I would say in terms of costs and the implications going forward is that we have incorporated wage inflation this year, so we are giving merit increases, we've continued to give merit increases as we look into 2011.

Bonuses have been reinstituted, and as a result, the lower expectation that's going to happen.

The one uncontrollable -- or two uncontrollable at this point of time, are heat-energy costs, and second is the healthcare costs.

We try and limit the increases to the extent we can, but those are the factors we bear in mind as we think forward relative to cost management, both in the hotels and corporate.

Sure.

And I apologize if I may have missed the data point on this earlier, but can you tell us some of the variance in performance maybe during the third quarter?

How did the -- how did your resorts perform relative to your urban and convention hotels?

Yes, the -- our group business was relatively strong, our transient business, again because the group business is strong, transient business largely the leisure side was a little weaker.

Convention and business hotels have performed stronger than resorts and as -- over time, as leisure traveler gets back, our results over time will improve in their performance.

But that's the trend we're seeing at this point.

Given the uncertainty in the environment it has largely been a business-driven recovery and as, for example, unemployment comes down and housing prices over time, stabilize, I think you'll see the leisure traveler return back.

But that's lagging at this point and will take a little time.

Okay, very good.

Thanks.

Thanks, Chris.

Your next question comes from the line of Janet Brashear from Sanford Bernstein.

Please proceed.

Hi, this is Jonathan Wing for Janet.

I was hoping you could talk a bit about your international development strategy for Hyatt Place and Summerfield Suites?

Sure, be very happy to.

We had talked previously about the projects that we've undertaken in India, which will be the first market in which we are opening outside the US, and we've got projects underway there, in part through a joint venture that we've established with a little developer, and also with third-party developers who are building hotels we will manage.

Those are all under the Hyatt Place brand.

We are also looking at opportunities for Hyatt Summerfield Suites in India at this time.

We've also announced some projects outside the US in Panama, and we are looking at further expansion in a number of different markets.

And we believe that we will have prospects to expand both Hyatt Place and Hyatt Summerfield Suites into the vast majority of the markets in which we currently operate as a full service matter.

So we continue to work on those plans, as we speak.

Great, thanks.

Take the next question, please.

The next question comes from the line of David Loeb from Baird.

Please proceed.

Mark, I wonder if you can give us some thoughts on what you think may happen when the lock-up expiration -- the first wave of the lock-up expiration happens?

Do you expect that there may be some selling on the part of Pritzker family or other insiders, or do you think that they're likely to wait and do a more organized secondary offering when they're looking for liquidity?

We really can't comment on the Pritzker family stockholders intentions at this point.

If we do have information that we think is appropriate for disclosure, we will let you know through press releases or SEC filings as appropriate.

Do I get another shot since that was no comment?

Sure.

Okay, thank you, Atish.

Can you talk a little bit about your capital deployment expectations for next year, how that relates to your development targets for next year and where you see this netting out in terms of assets sold versus acquired, or new construction starts?

Sure.

There are multiple components in there so let me try to give you an overview as to how things are progressing at this point.

Much of the development activity that we have going on a global basis, proportionately speaking, is driven by third-party developers, so if you look at hotel projects that we currently have signed up and others that we are signing up currently and have done so during the course of this year, if you look at the total number of those projects that relate to third-party projects versus projects in which we are putting capital or acquiring, the vast majority of them are third party led.

We are investing in projects, as we described today, and the form of our investments have come in various styles and various structures, including some equity, some lending and some mezzanine, or preferred style investments, and those are the sorts of things that we continue to see because the needs in individual circumstances really vary and we try to be responsive to that.

The other thing I would say is that we are -- we continue to apply capital to the renovation projects that Harmit mentioned earlier and so we will continue to commit capital in that way.

And we're actually very excited about the prospects of getting those major renovations completed during the course of next year and remain committed to them.

So those are the ways in which I would describe what we're doing at this point.

Great.

David, on the renovations, we're in the middle of the budget process like most people are and while we'll have -- as Mark mentioned, we will continue the projects we just talked about, we're exploring the assets that we were exploring from a sale perspective, if we don't sell them they may require some CapEx.

So we're thinking through that, as we speak.

We'll provide more color when we release our quarter-four earnings in February of next year.

Okay, helpful.

Thank you.

Thank you.

Thanks, David.

We'll take the next question, please.

The next question comes from the line of Smedes Rose from KBW.

Please proceed.

Hi, good morning, it's Smedes.

I wanted to ask you just a little bit more about your investment in the Park Hyatt in New York.

If the costs of construction go up does your investment in that property go up proportionately?

And also, it seems like, from what you said, your investment is around $1.8 million a key, and I'm just -- are there not luxury assets on the market in New York now that you could purchase now and rebrand for somewhere between $1.8 million and $2 million a key?

I'm just wondering about the strategy on that.

Sure.

The arrangement that we have is that we and our partner, Extell, have fixed a price for the hotel, so we have a variety of different milestones and property description that are embedded in that, but the basic costs of the hotel is actually already established for us.

So that answers your first question.

As to the second, the fact is that for the types of properties and in the types of markets that we are focused on getting access to and the establishing a presence in, the number of properties that would be potential candidates for a conversion, and then looking at the ones that would be available for sale, are few and far between.

And we also don't have the benefit of really establishing a presence in the manner that we really think is most suited to our brands, if we don't control -- or we don't necessarily have control over the final product in the same manner.

I think that a couple of things that are notable, while we are, in this case, committing to acquire a new hotel upon completion, it's also true that if you look at our progress in New York we started this year with one property, the Grand Hyatt New York, which we are, as you know, extensively renovating, and we now have five proj -- five additional projects on the books.

And of those six hotels five will be open and operating by the end of next year, which they will all be either brand new or freshly renovated.

So our presence in New York is really being transformed over this period of time and as we think about how else we can expand in New York, because we continue to remain focused on that market, we really felt that this location, and the partnership with Extell and the quality and the type of product that we will create there is actually perfectly suited for a flagship property in North America.

We've seen the halo effect from other prominent Park Hyatt products.

The Park Hyatt Tokyo had a significant affect on the Park Hyatt brand development in Asia.

The Park Hyatt's in Paris, Zurich and Milan, for example, have had a significant impact on the European presence for the brand.

So there are a lot of considerations, obviously, that we took into account as we committed to this project.

Okay, that makes sense.

Can you -- would you share with us the per key investment at the Andaz on Fifth Avenue?

The per key investment is, I would say, roughly 10% or so below what the Park Hyatt property is, so maybe in the range of $1.6 million or something like that per key.

The issue -- a couple of things -- comments I would make about that, first of all, we bought a structure that we had to significantly redevelop, and we, in effect, demolished a piece of the building in order to build some residential units on top of the building.

So the top four floors are brand new construction of units that are actually designed and built out as residential units, but we are retaining them for hotel inventory at this time.

We will continue to run it as a unified hotel until a time when we believe that the residential market's returned and we will look to -- we anticipate that we will turn to sell those units when that happens.

So right now, we've got 184 keys in the property, 40 of which, roughly, are residential units at the top of the building, so we -- there's more to the development story, really, than simple math would suggest.

Okay, great.

That's great, thank you.

Okay, thanks, Smedes.

(Operator instructions) The next question comes from the line of Kevin Milota from JPMorgan.

Please proceed.

Hey, guys, a couple of questions here.

One, the New York Park Hyatt seems to -- the mid -- or excuse me, the high single-digit return you are after, what ADR levels are you basing that on?

And presumably you looked at a comp set to underwrite the deal, what are you seeing the Plaza, the Mandarin, St.

Regis and the other competing products achieving in this market and going forward?

And then secondly, on the asset sales that you pulled from the market, what were the challenges with those deals and was it lack of demand or pricing or what could cause you to pull this?

Thank you very much.

Yes.

So on the first point, first of all, the property that we're building is really purpose suited.

With the area programming of it, the other facilities that we've got included in it, the style and the space -- the meeting space that we're creating, the indoor pool and the spa and the other facilities are really integrated to provide an experience that will be at the top of the luxury market in New York.

The suite mix of the hotel is extensive, it's over 25% suites.

The average square footage, if you will, per key is over 700 and the contemporary luxury style that -- that defines the park Hyatt brand will be really distinctive in that competitive set.

We absolutely are expecting to perform at the top of the -- or towards -- in the top end of the competitive set.

If you look at how the luxury market performed in the 2006, 2007 and 2008 time period, and then you look at supply growth in this segment over time, New York is one of those unusual markets where occupancy remains relatively healthy even through cycles.

The rate obviously fluctuates significantly, but it is a market where, when occupancies do return on a consistent basis and as the economy continues to improve, the rate realization is significant.

So there is -- it's a rate premium market that you can really realize significant rates in.

So what we looked to were the prior period rates for the competitive set, and we are looking forward, now, to 2012 and 2013 and we're hopeful that the economic recovery will be in full swing, so that's the reference point that I would provide.

But the -- but in terms of where the property is positioned, that's really where it's positioned.

And the building itself is going to be iconic and the residential component is also a significant draw to that site, because they're going to be very high-end, beautifully-appointed residences, many of which will have great views of the park and so forth, and it's directly across from Carnegie hall, so the location is really very important to the equation.

Okay, then on the asset sale front and the deals that you had pulled?

Yes.

So as I mentioned, there are a number of considerations that we've got, as we go into these -- as we went into investigating the potential sale of these 11 properties and it's really not one thing that led us to where we stand at this point.

We look at the combination of the type of buyer, the capital available for renovation and the nature of the management or franchise arrangement, and we clearly look at valuation relative to the alternative, which is for us to continue to hold the property.

And so, all of those things factored into each and every one of our considerations, each and every sale that we considered.

So, I can't give you one by each explanation, but it really is a combination of those things.

Okay, thanks a lot.

Appreciate the color.

Thank you.

Next question comes from the line of Janet Brashear from Sanford Bernstein.

Please proceed.

Hi, this is Jonathan.

Just a quick follow-up question on development as it relates to China.

You guys have a strong niche there, I'm just curious, are you seeing any markets that are starting to be overdeveloped?

It's an interesting question.

There are quite a few markets where you have these spurts in development, and I would say that it's sort of accordion like, but it's an upward sloping accordion.

I know that is a bent analogy, but basically, our view is that we look at markets like China and India, where you've got significant secular growth over time, and there's no question that there are going to be periods where new supply comes on board and sometimes that's in a compressed time frame and you may have some market impact.

But we look at this over a number of years and, frankly, as we think about it over a number of decades, and the fact is that you're going to see those kinds of accordion-like adjustments, over time.

A lot of the projects that we are currently pursuing are in cities that many people in the western world would consider to be "secondary cities," but they're really -- we look at them as emerging markets within China and the development there is really interesting in the sense that very few of those markets have existing first-class western standard hotels, so the opportunity to actually serve the market with new product and new concepts not otherwise available anywhere in those markets is really exciting.

And I think we've already demonstrated that that's effective in some new markets that we've looked at.

So I guess what I would say to you is, yes, at different points in time there are going to be individual markets where new supply comes on board and takes some time to get absorbed, but with the urbanization trend in China and the underlying growth in the economy, the absorption rate is actually -- it takes care of the new supply in relatively short order.

I see.

And would you say that in the near future the risk of over-supplying some of the bigger tier cities, like Shanghai, Hong Kong, Beijing, that's not really a huge risk?

I think if you're talking about short-term phenomenon, I think one thing you'd consider is if you look back and see what the impact of the Olympics in Beijing was, obviously that goes back a year now -- a year-and-a-half or two years, actually, and then if you look into next year, the World Expo in Shanghai clearly had a positive impact this year.

So those are the short-term impacts that I would probably look to, as opposed to really supply driven issues.

Got it, thanks again.

Sure.

And we have no further questions at this time.

I would now like to --

Well, thank you very much.

We appreciate everyone joining us this morning, and we look forward to talking to you in the future.

Thank you.

This concludes the presentation for today, ladies and gentlemen.

You may now disconnect.

Have a wonderful day.