Host Hotels & Resorts Inc (HST) 2004 Q1 法說會逐字稿

Good day everyone and welcome to this Host Marriott Corporation first quarter 2004 results conference call. Today's call is being recorded. At this time for opening remarks and introductions I'd like to turn the call over to Senior Vice President of Investor Relations, Mr. Greg Larson. Please, go ahead, sir.

Thank you and good morning. Welcome to our first quarter earnings call. Before we start, I'd like to remind everyone that many of the comments made today are considered to be forward-looking statements under Federal Securities Laws. As described in our filings with the SEC these statements are subject to numerous risks and uncertainties, which could cause future results to differ from those expressed. We are not obligated to publicly update or revise these forward-looking statements.

In this call, we will discuss non-GAAP financial information, such as FFO and EBITDA, which we believe is useful to investors. You can find this information in today's earnings press release, which has been posted on our website. This morning Chris Nassetta, our President and Chief Executive Officer, will provide a brief overview of our first quarter results and then we'll describe the current operating environment in the company's outlook for the remainder of 2004.

Ed Walter, our Chief Financial Officer, will follow Chris and will provide a greater detail in our first quarter results including regional performance. Following their remarks, we will respond to your question. And now here's Chris.

Thanks, Greg, good morning everybody. I'm pleased to announce that the first quarter of 2004 exceeded our expectations. The trends were very positive as demand increased throughout the quarter. Our business mix shifted somewhat from discount business to higher rated segments. Our group booking face continued to strengthen, and our general managers are finally starting to feel more optimistic about the future.

When I take all these factors into account, combined with the recent stong economic data and continued low supply, there are many reasons to feel very confident about the industry and our portfolio. This confidence has enabled us to increase our guidance for the year, which I'll cover in a minute. First let's talk about the specifics for the quarter. Diluted FFO per share was 13 cents for the first quarter, this exceeded the high end of our guidance. Excluding adjustments related to the repayment of debt totaling 4 cents per share we exceeded the consensus estimate of 15 cents by 2 cents per share. Comparable RevPAR increased 3% compared to 2003 level while comparable hotel adjusted operating profit margins increased approximately 55 basis points.

Our top line results were driven by 1.9 percentage point increase in average occupancy and a slight improvement in average room rate. It should be noted that the March results for our non-Marriott properties are not included in the reported results for the first quarter ending March 26th. On a calendar quarter basis, comparable RevPAR increased approximately 5.5% compared to the prior year. Adjusted EBITDA was 172 million for both first quarters of 2004 and 2003. RevPAR results showed strong sequential improvement throughout the quarter. Although, RevPAR decreased 1.8% in the first period it increased 3.2% and 6% in the second and third periods respectively. Initial results for the fourth period indicate continued positive improvement and RevPAR result.

Although part of the improvement relates to easier comps compared to last year, at the lead up to the war and the war itself reduced travel the remainder is a direct result of an increase in demand. This can be illustrated by the gradual period by period improvement in RevPAR throughout the first quarter of 2004 when compared to the first quarter of a more normalized year. More importantly, the increase in demand is the primary reason for RevPAR increasing in the quarter above our guidance. The increase demand resulted in a substantial increase in room nights for the quarter compared to last year.

The largest increase was in group up over 80,000 room nights. transient (ph) increased over 20,000 room nights while contract room nights declined approximately 15,000. Importantly, and unlike prior quarters, demand shifted from lower rated segments in transient (ph) group, the higher rated segment. Total group demand increased approximately 7% with a corporate segment of group demand up nearly 12%. This strong increase was partially offset by an 8.8% decrease in association group business. The group booking pace continues to improve for the remainder of 2004 definite group room nights are up over 1.6% while tentative group room nights are up approximately 20%.

While the fourth quarter bookings still remain below last years pace, the GAAP is narrowing and we feel comfortable with our manager's ability to add business as the year progresses based on the short booking window, strong tentative, and an improving economy. Perhaps more important, is that business demand improves as increased business travel occurred sooner and with more strength than we expected. Total transient demand increased over 1.5% with both the premium and corporate sectors up over 10%. These substantial increases were partially offset by a 9% decrease and special corporate and a slight decrease in other discount business.

For the first time since 2000 our business mix out of our portfolio is showing a shift in transient room nights from lower rated discount and special corporate segments to the corporate and premium segments. This is an extremely positive sign and suggest that hotels are having greater success in closing out discounted rates in the face of improving transient demand. For the remainder of 2004 we feel good about our transient business, as the net reservation volume continues to significantly exceed last years performance and a number of our properties are starting to successfully test rate increases, as we continue to see a strengthening of weekday demand. All of these factors illustrate a strengthening of business transient demand.

On the investment front, we are seeing opportunities to purchase -- purchase assets that satisfy our investment criteria. We just announced the acquisition of the 455 room 17 story downtown Embassy Suites Chicago Lakefront for 88.5 million representing an approximate 20% discount through replacement cost. This property opened in August of 2001 and it's a flagship of the Embassy Suite system. The property was acquired at approximately in 11 EBITDA multiple and an approximate 8% CAP rate. We expect stong growth from this asset due to the natural acceleration of earnings given its recent opening combined with a strong outlook for the Chicago market in 2005 and 2006. This property represents our second Hilton branded property and expands our presence in the downtown Chicago market.

Today we're in a very competitive acquisition environment, we believe that even in this type of environment we can remain disciplined in investing our capital and still achieve our original guidance for the year of roughly 3 to 500 million in acquisitions, weighted more heavily in the second half of the year. In addition to acquisitions it's worth noting we also expect to accelerate the pace of ROI investments in our existing portfolio. Over the next couple of years, we expect to identify and begin construction on projects totaling approximately 150 to 250 million. In the past, we've generated superior returns from these investments and we're optimistic that we'll enjoy similar results in the future.

And example of one project, is the Newport Beach Marriott, which we'll reposition to take advantage of its superior location and changes in the market. The hotel is located at the top of a hill on Newport Center Drive opposite the Fashion Island Mall and abutting the Newport Beach Country Club Golf Course. Located approximately one mile from the Pacific Ocean and overlooking the Newport Yacht Basin and the Pacific coastline, property is one of the most desirable pieces of real estate in southern California. The physical product [inaudible] prevent the hotel from realizing its true potential and profits potential. Our plan calls for a complete repositioning of the hotel for approximately 60 million, which will be invested over the next two years. We estimate the unlevered [inaudible] this project will exceed 20%.

We continue to see strong market interests in our non-core assets, which represent hotels that we expect will generate lower returns in the remainder of our portfolio and/or are likely to require significant capital expenditures over the near term. So far this year, we have completed the sale of six non-core assets for approximately 100 million. For the year we expect to sell an additional 3 to 400 million in assets. We generally expect that the proceeds from these sales will be utilized to repay debt as we continue to reduce our leverage.

Now let me spend a few minutes on our outlook for the remainder of 2004. With demand continuing to improve we are now expecting RevPAR to increase 4 to 6% for the year with margins generally flat up 50 basis points. We're raising our RevPAR guidance based on the positive trends in the first quarter, strong group booking pace data, increasing business travel, and positive reforecast from our hotel. This operating forecast combined with the disposition acquisitions and debt repayments mentioned earlier will result in approximately 61 to 71 cents of diluted FFO per share for the year, which includes a 16 cent per diluted share reduction due to certain adjustments consisting of call premiums and accelerated deferred financing costs associated with debt repayment.

For the second quarter, we estimate that RevPAR will increase 5 to 7%. This will result in second quarter diluted FFO per share of 17 to 20 cents, which includes the 9 cent per diluted share reduction due to call premium and accelerated deferred financing costs associated with debt repayment. Adjusted EBITDA for the full year should be approximately 725 million to 755 million. The operating environment for the lodging industry has brightened considerably over the last few months. Demand in our upper upscale segment has started to accelerate, the business traveler is starting to return, the group booking pace continues to strengthen and in certain markets our general managers are starting to test rate increases for the first time in three years.

Clearly, we believe the stage (ph) isn't set for us to sustained (ph) recovery in the lodging industry. The economy has decidedly (sic) turn the corner after three difficult years. We believe the combination of demand growth, stimulated by a stong economy, and historically low projected supply has positioned the industry for a period of the same growth. We feel that we have positioned the company to maximize this opportunity and we look forward to the next three to five years. We have never felt better about the future of our business. Thank you, and now let me turn the call over to Ed Walter.

Thank you, Chris. Let me start by giving you some detail on our RevPAR results. Looking at the property based on property type, our airport hotels perform the best with first quarter RevPAR growth of 6.6% as occupancy improved by 3.3 points and rate improved by 1.7%. Our resort in suburban hotels experienced RevPAR increases of 4.8 and 3.9% respectively. Although our urban hotels increased by just 1.2% for the quarter, we were encouraged by the significant improvement we experienced during the quarter, which outpaged (ph) the portfolio as a whole.

Turning to our regional results for the quarter, our top performing region was the Washington D.C. metro region, which enjoyed a 8.2% RevPAR increase driven by the continuing strong performance of our northern Virginia hotel, which resulted primarily from strengthening transient demand. In a welcome development, our Pacific region experienced a RevPAR increase of 5.1% driven by occupancy growth of more than 6 points.

Although many of our Los Angeles area properties enjoyed double digit RevPAR growth, the top performing market for the quarter was San Francisco, which saw growth of 14% lead by the San Francisco Marriott, which surged by 31% as group bookings were very strong. Conversely in reversing the trends from last year, our San Diego market underperformed in part because of difficult comparisons related to hosting the Super Bowl in 2003. Our [inaudible] region also had a stong quarter as RevPAR grew by 4.4% lead by the Orlando World Center Marriott, where RevPAR increased by almost 9% as closed (ph) group and transient demands were strong.

Our mid-Atlantic region also generated good results as RevPAR increased by 3.5%. In this region our large box hotel enjoyed a solid quarter as RevPAR increased by 10% at the Philadelphia Convention Center Marriott and 6% at the New York Marquis driven by strong in-house group and transient demand. The Marquis had a phenomenal March as RevPAR increased by more than 22%. All right, Lansa (ph) and New England regions underperformed as RevPAR declined by a tenth in Atlanta and 3% in New England. Atlanta's performance was caused by isolated, last minute in-house cancellations, at city wide conventions enjoyed strong attendance. The outlook for Atlanta is expected to improve over the course of the year.

New England's first quarter underperformance was generated by a weaker convention schedule and continued soft transient trends as our largest hotel, the [inaudible] Marriott declined by more than 6%. This market is also expected to rebound (ph) strongly during the second half of the year. Our South Central market also fell by 3.3% as our large hotels in both New Orleans, San Antonio declined by 12% and 9% respectively.

Looking at our courtyard joint venture with Marriott International RevPAR improved by 3.5% for the quarter as occupancy increased by 2.2 percentage points and rate increase by one tenth of a percentage point. Similar to our full service asset, this portfolio saw RevPAR growth accelerate through the quarter. Although we were encouraged by our top line performance we found it challenging to maintain margins. Overall EBITDA margins declined by approximately 55 basis points driven primarily by higher wage and benefit costs and an unexpectedly high increase from state unemployment packages. We are also seeing higher than expected travel agent commissions in some markets including for group business. Finally, utility expenses have escalated by 5.9% due to higher oil and gas costs.

Looking out through the remainder of the year, we expected as RevPAR gains accelerate past 4%, we should begin to see margin improvement but progress on this front will still be modest until RevPAR gains are generated, more so by rates, than by occupancy increases. For the quarter we completed approximately 50 million in capital expenditures. We continue to expect to send approximately 255 to 265 million in capital improvements for the year, including carry over projects from 2003. We continue to make meaningful progress towards improving our balance sheet during the first quarter.

During the quarter, we repaid mortgage debt with $82 million with the proceeds from asset sales, we also fully redeemed the remaining 218 million outstanding principle balance of our Series C Senior Notes, and issued a call notice to the trustee of our intention to repay 65 million of our Series C Senior Notes in early May. More importantly, we issued 500 million in exchangeable debentures which bear interest at a rate of 3.25%, which are exchangeable for common stock at an initial conversion ratio, which reflects the stock prices of $18.30. The proceeds from this offering at available cash we used in April, to repay 494 million, in our 7 and 78 Series C Senior Notes, which matured in August '08. You will note that both of these balances are included in the debt portion of our balance sheet because the notes were not repaid until the second quarter.

Adjusting our debt balances and interest expense for the effect of these transactions, we have reduced our average interest rates to 7.1%, which is a 60 basis point decrease from year-end 2003. We finished the quarter with 526 million of cash, although we have spent or committed to spend 100 million of this cash in connection with the redemptions of our Series C Senior Notes that I just described. The remaining balance will be deployed for acquisition, investments in our portfolio, other corporate purposes, and to maintain our working capital, which we do expect to reduce to approximately $150 million by year-end. We continue to have 250 million of capacity on our credit facility and face no debt maturities for the remainder of the year.

Finally, we note that a revision to a recently issued accounting standard [inaudible] requires that we reclassify our subordinated debenture issue or quick security from mezzanine (ph) equity to debt, resulting in an increase in total debt of 492 million. This modification has no affect upon our FFO nor does it affect any of our financial covenants and our debt instruments. The progress we have made on our balance sheet, combined with the improvement in operations, has resulted in our EBITDA to interest coverage ratio as calculated under the indenture to exceed 2.0.

As a result, provided we continue to exceed this coverage ratio on a pro forma basis, we are not prohibited under our indenture from incurring debt or paying dividends. Since we expect that operations will improve over the remainder of the year, we expect to be able to make the quarterly dividend payment owed on our perpetual preferred securities going forward. We do not expect to resume payment of the common dividend in 2004, other than a modest amount which may be required to satisfy redistribution requirements remaining from 2003.

As we have detailed today, operating trends are more favorable than we have seen in three years. As the economy continues to improve, lodging demand and business travel should continue to accelerate leading to further improvement in operating results. Our actions to enhance our balance sheet have improved our flexibility and positioned us to take advantage of the opportunities we expect to see over the next several years. This completes our prepared remarks. We are now interested in answering any questions you may have.

Thank you. Our question and answer session will be conducted electronically. If you would like to signal to ask a question, please press the star key followed by the digit 1on your touch-tone phone. Again, that's star 1 to signal to ask a question. If you've muted yourself, please make sure you unmute before you signal, that will block your signal, so again, star 1. Our first question will come from Steve Kent at Goldman Sachs.

Hi, good morning. Chris, could you just discuss a little bit more what you need to get those margins moving in the right direction and getting a more dramatic move upward? Is it simply RevPAR? Or are there some other things that you're working on right now that should improve those margins in the next 12 to 18 months? And then just, I think it was Ed, who mentioned something about travel agent commissions being high. I don't recall you ever discussing that before, so if you could just give us a little bit of color on that.

Yeah, Steve, obviously we're always working on ways to get more efficient and get more productivity in the hotels. And as we talked about prior calls, there are a number of new labor management models we're now -- I should say, you know -- we've invested in, through our managers, to employ that will allow us to become more efficient. So, the list is too long to get specific, but there are a number of initiatives underway to get more efficiency out of the hotel.

Obviously, you know, we expect over the next several years that you'll see some stabilization in the benefit side. That is very difficult for us this year. We've already seen some stabilization in the insurance side of it. We would hope that utilities, given, you know, as the world hopefully starts to settle down a little bit, that the utility increases would become a little bit more normalized.

So, in addition, to, kind of, just working to utilize technology to become more efficient, in terms of labor-management models, we're certainly hopeful that you'll see stabilization in some of those areas. And then, obviously, yes, I mean, it's kind of a leading question. But, as RevPAR begins to accelerate, that short, intermediate, and long term is going to make it a lot easier to get additional margin growth and flow through. I think on the travel agent issue, I think the highlight there, is just that we have seen a little bit more of a trend in Ed's comments.

In the group side of the business, that some groups are basically buying through travel agents. I don't know that it's a seismic shift, it's just that, you know, a modest shift where we had very little of that in the past. And we're seeing a little bit more of that. And so, some businesses where we wouldn't have had travel agent commissions before, now we do.

Okay, thanks.

Next question will go to Harry Curtis of J.P. Morgan.

Good morning. Could you guys talk a little bit about what percentage of your hotels are tied to incentive-management fees?

And what percentage are actual paying? And then, any expectation about what that percentage might look, given the trends that you've talked about by the end of this year? Thanks.

Yeah, at this point, Harry, around 40% of our hotels are paying incentive-management fees. If you look at it in the first quarter, instead of management fees are actually down about 15% on a year-over-year basis.

We expect, obviously, that trend will reverse itself as operations continue to improve throughout the year. I don't have the exact answer -- I haven't done anything else, but it's probably roughly half by the end of the year. Half our wholesales would be incentive-management fee territory.

And would you expect a meaningful increase in year-over-year incentive-management fee comparisons then, at that 50% number?

I wouldn't say meaningful. I would say expected increase but not that meaningful.

Okay, very good. Thank you.

I'll now go to Jeff Donnelly at Wachovia Securities.

Good morning, guys. Chris, I'm curious of your thoughts here, conventional wisdom is the large group houses tend to lag a little bit in the recovery on the RevPAR side.

Can you talk a little bit more about what past experience has been or what your expectations are in terms of how long that lag could last? And then looking ahead, in the general sense, when in the cycle do you see these hotels being to outperformed?

Yeah, that's a great question and one that we alluded to in our comments but didn't hit specifically. Obviously, you've seen some other companies, who will remain nameless, have a higher RevPAR growth in the first quarter then we do. What I would say, and I'll answer your question is -- as we have analyzed it -- and obviously we've studied this very carefully -- I think that the three reasons that you've seen while being on a calendar basis, 5.5% RevPAR is pretty good it's still a little bit less than some others.

I think the three reasons are partly geography, partly that we have a heavier business orientation than some of the competition. And then lastly, kind of, getting to your point that, you know, we have -- we're a large portion of our portfolio is driven by these large group houses, the large convention hotels. And they do lag. The positive thing is thought -- that we have started to see -- if you look at the trajectory in what's happening with our RevPAR vis-a-vi (ph) others, I think you see a steeper slope.

So, I think it's reflective of what we would have expected, frankly, in this quarter and we would probably expect, to some degree, in the next quarter or two, that we're probably, you know, a quarter or two on a lag to other competitors that aren't as oriented towards the large group houses. But that our trajectory -- that it's picking up steam. We're starting to see of them come back, slowly but surely. I would say, it's hard to be precise. Within the next couple of quarters you'll start to see that outperformance.

We are clearly, as we study and analyze it, of the mind that ultimately, these hotels in this type of portfolio that we have is going to outperform. And that, you know, we're starting to see that, as I said, from a trajectory point of view in terms of the momentum we're gaining. And I'd hope in the next couple of quarters you'll start to see that. So, that -- I think that answers to the question, that's, kind of, why -- maybe, you know -- you're seeing a little bit lighter RevPAR rate now.

But within the next, you know, next few quarters I would expect that to reverse itself. And though the -- as we get into the real thick of the recovery, you know, our expectations of this type of portfolio we have is going to outperform. And historically, it has. And the patterns that we're seeing right now are very consistent with, and what I just described is very consistent with the history as we've seen it in our portfolio.

Great, thanks.

Yeah.

Next question will go to Will Trulo (ph) of UBS.

Hi, guys. Chris, you mentioned about the increase in the fees associated with travel agents and what not. As you know Marriott International now has a policy where you get the lowest-rate guarantee regardless of the channel that you go to.

Is that, is that because now everyone has the same price people are now opting to go to travel agents, which is no longer the low-cost alternative, such as vis-a-vi (ph) called internet bookings? So is that maybe why you're seeing higher travel agent costs? And if that's the case would that only be, really, to the Marriott portfolio or do you see that cost different in the Marriott portfolio of your hotels versus the non-Marriott hotels?

I think it's probably a little more Marriott then the other operators. But I also think part of what's going on is that, you know, the group business is just, a shifted a little bit, just in terms of how it's bought generally. I mean, it used to be that if you were part of a group you always booked through, the kind of, the rooms blocked that the group, you know -- whoever set up the event had set aside.

And I think what you're seeing now is that group business is being bought to a large degree then we've seen historically through a bunch of other channels. I mean, some of your groups getting bought through the internet, ultimately, they're going around the room block, more now than they used to in the past. Part of that, I think, and this is just my own opinion, that you'll see stabilize and maybe reverse itself right in terms of the laws of supply and demand, I mean to some extent.

Still, while it's changing rapidly, it's still been a little bit more until recently of a buyer's market and so, buyers had the option to, kind of, you know, jump a room's block and, kind of, book it themselves and try and find a cheaper way to do it. As demand continues to pick up and you don't have particularly, you know -- we say a demand -- that we're already seeing much greater strength in, you don't have as much supply of rooms out there. You will, I think, find that the trend will be that groups will start to book in the more traditional ways because they won't have other options, they'll have to book through the block that's been set aside.

Great, and can you comment a little bit and give a little color on the San Francisco market? You indicated that the San Francisco Marriott is doing quite well. How close is that to the Masconi Center that just expanded? Are you relatively close in getting a lot of compression from the additional convention business there?

I think so. I mean, you know, the thing we've done in San Francisco is, uh, we really grouped up, recognizing, you know, last year and frankly, the last few years, the transient demand was going to be coming back.

But it's going to be a long time before it came back to a real healthy level, those kinds of levels that we saw in the late 90's and 2000. And so, we're doing really well there because the group business in the market is strong. Our location is incredible. You've got an expanded facility that's got a greater number of groups in there, so we're capturing more.

And we made a concerted effort, really, to go after a lot of that group business. On top of that, while not real but (ph) yet, you're seeing a transient pick up, so your obviously, given that you've really grouped up and you have a smaller segment of rooms available, you're able to manage what transient demand there is more efficiently.

Fantastic, thank you guys.

We'll now go to Brian Egger at Harris Nesbitt Gerard.

Good morning. I just had two questions. The first is, can you give us a little bit more census to, you know, the conversion of tentative bookings into definitive bookings through your group business whether that's changed in any way or any change in that kind of pattern?

And then secondly, you talked about some of your health care benefit costs and other cost trends. But specifically, there's been a lot of talk about worker's compensation reform in California, have you seen anything happening in that front that leads you at all encourages to summer lease, with respect to the worker's comp portion of your cost increases?

Yeah, on the tentative to definite's, I don't think we've seen any big change there. I mean there's, obviously, you're not converting a majority of those tentatives in the definite but you're converting a decent percentage. We haven't seen any real changes in that.

In terms of worker's comp reform, California and elsewhere, we have, obviously, been tracking that with our operators. I guess the way I describe it is, we're hopeful. I -- you know, it's hard to say right now, given the politics of what's going on related to the issue of where it's going to end up. But we're hopeful and we're confident over the next, you know, year or two, that you'll see some stabilization on that issue.

Okay, thanks, Chris.

Yeah.

Next we'll go to Bill Crow at Raymond James.

Hey, good morning, guys. A couple of questions. Chris, as you look into the crystal ball, and see, you know, the opportunity to anniversary some of these higher costs this year and looking at RevPAR next year, at say, up 5 or 6%, where do margins go in that environment?

I think the margins go up. It's hard, you know, it's hard to be too specific this far out. I mean, we're saying at, you know, at 4 to 6, you know, at the high end of that.

We think we can get a half a point of margin. I would certainly hope that -- I'm not suggesting -- by the way, we think next year is going to be 5 to 7. But we're not giving guidance yet because it's too early to do that. But if you had -- in the event you had 5 to 7% RevPAR growth next year, I would hope that a larger part of that would come from rate. This year, obviously, a lot of that growth coming from occupancy.

So, to the extent that you see some of these costs that I described earlier, stabilizing to the extend that more of that 5 to 7%, as a percentage, is coming from rate versus occupancy, you ought to be able to beat a half a point. Being more specific than at this early stage, probably would not be prudent until we really get in and analyze it.

All right, you mentioned that some of the GM's are starting to push rate. Could you specify the markets? I mean, New York seems obvious. What other markets are you seeing that? And at the same time, are they opting to allocate fewer rooms to the third-party internet sites?

Yeah, I don't want to get specific on any particular markets relative to, you know, competitors, you know, you know, disclosing competitive information. New York is a market. You're right on that. And there are a number of other markets around the country, and clearly, you've got, you know, markets like, you know, that have been very, very strong like the DC market, particularly, northern Virginia. But I'd rather not go further then that.

But clearly, you are seeing a situation where we're starting -- we're consciously trying to shift and work with our operators to shift, and start to the extent possible during the week days to close out some, some of the discount business. It would be -- I'd be getting ahead of myself to say that we're able to do that aggressively right now because we're not there yet. As I said for the last three or four calls, I mean, this is, kind of, playing out exactly how I've described on the calls and otherwise. That, you know, the first stages of recovery are going to be more occupancy-driven.

You're going to get a little bit of rate because as you get demand back you're going to start to close out some discounted channels, which we're starting to do, and you'll get a little bit of raise just as a matter of averaging in generally higher rates. But, it's not until you get the occupancies up a bit more that you really can start to be more aggressive about shifting the mix of business and then ultimately, being able to raise rates. So, yeah, we're in the early stages. It's playing out exactly the way it has historically, and frankly, exactly the way that we've said, that we suggested it would. And they're all really good signs and we're starting to see it.

We're -- as aggressively as we can, trying to, you know, close out the discounted channels and replace it with higher rated demand. But there's not -- and demand continues to come back. But there's so much demand that you're going to close out all the channels because that's still profitable business. It's not until we get a little deeper into the cycle that you've got enough demands from these other segments to basically, replace all or a large portion of that discounted demand. So, it's happening the way we thought it would. We're seeing very good things and, you know, we're in the early stages of it.

Great, thank you.

Yep.

We'll now go to Phil Malowe (ph) at Merrill Lynch.

Actually it's Steve Andrew (ph). A question for you on, kind of, the forward-looking commentary. What kind of percentage, Chris, can you give us with respect to the group bookings?

Or how do we think about second, third quarter? What's on the book today; because obviously, you have a lot of confidence how you're running in general. How do we think about that?

The way to think about that is, you know, we say we're up like 1.6 in definites for the full year. I think, Q's 2 and 3 are up about double that, and then Q4 is slightly down.

So, as I suggested in my comments, those are pretty good metrics because we got a lot of time to fill in Q4 business, particularly, given into the booking cycles are still pretty short. So, I think that answers it. You know, it was up three-ish, maybe a little bit more in Q's 2 and 3, and then down a point and are a couple points in Q4.

Okay, and any broad comments on what percentage of your business we're talking about here?

I mean, the group business overall is about 35 -- almost 40%. But, you know, and there's lots of different segments within the group, but overall the group makes up about 40%.

Okay, thank you.

We'll now go to Jake Cogan at Banc of America.

Hey, how are you doing, guys?

Hey, Jake.

I got a couple of questions for you, considering the RevPAR environment is definitely surprised the upside overall here early in '04. What do you think group pricing is going to be in '05?

And then also as a second question, given the better RevPAR trends, I think it was Marriott, on their conference call, that they would expect some development activity that's been on the sidelines, on the shelves, to maybe get dusted off a little bit and see some new unit opportunities maybe, beyond what had been expected before. What's your thoughts now in terms of better RevPAR and therefore leading longer term to higher supply increases? Does this change your outlook a bit?

'll take them one at a time. Group pricing in '05, I think for all the reasons I described, I think it's, kind of, you know, flat to modestly up. It's still as I suggested we're seeing great, great trends but it's still -- it's been more of a buyer's market then a seller's market that's changing.

But we got to, kind of, cycle through the stages that I described and get occupancies up and continue to fill the weekday demand. And, you know, that's going to occur; but, you know, it's going to take some time for that to develop. So, we think it's going to be positive but not wildly positive for '05. Development activity, I'm not surprised to see Marriott say they think development activity is going to pick up. That works well for them.

Development activity, in my mind, will eventually, I mean to answer your question, yes, eventually it will pick up when the economic will support it and that's part of, you know, the business, right? We go through ebbs and flows of supply. My own opinion is, when you look at supply for the next three or four years and you look at the data that's out there, I think it's good.

I think you're going to see very little supply, particularly in the upper end of the business. And the reason is, even if you're going duct (ph) -- you know, best case on a large urban or convention or major resort hotel, even if you're dusting it off and pulling it off the shelf, I mean your best case is you're really two or three years from having it in the competitive inventory.

And frankly, given that, while we're recovering, we're at the early stages of recovery, the economic just, buying large don't support it. I mean, there are always exceptions to the rules, but if I were to generalize, clearly, I'm comfortable generalizing, that the economic given the declines in cash flows you've seen don't support it. So, I don't think you're going to see any major movement in the pipeline of development. And, I think you've got, on the supply side, several years of running room, potentially longer. But several years of running room, just because it takes that long to dust it off and get it financed and get it built and into the inventory.

Understood, thanks.

Yeah.

And gentlemen, that does concludes our question and answer session. At this time, I'd like to turn the call over to Mr. Nassetta for any closing comments.

Thanks everybody for joining us today. It's wonderful to finally to be able to have a call and report positive results and increase earnings and have positive RevPAR growth. It's been a -- it's been a long, tough, three years, but, I think, we finally have sustainable traction.

I think the next few years are going to be terrific for the industry. I think the rest of this year is going to be good for the industry and good for our company, and we look forward to getting back with you after the second quarter and talking with you about how demands increasing. So, thanks again for joining us today. I will chat with you after the second quarter.

Thank you, that does concludes our call. We do appreciate you participation. At this time, you may disconnect. Thank you.