Host Hotels & Resorts Inc (HST) 2004 Q2 法說會逐字稿

Good day everyone and thank you for your patience. We would like to welcome you to the Host Marriott Corporation second-quarter 2004 results conference call. As a reminder, today's call is being recorded. And now at this time for opening remarks and introductions, I would like to turn the conference over to the Senior Vice President of Investor Relations, Mr. Greg Larson. Mr. Larson, please go ahead.

Thank you and good morning. Welcome to our second-quarter earnings call. Before we start I would 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're 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, which has been posted on our website.

This morning, Chris Nassetta, our President and Chief Executive Officer, will provide a brief overview of our second quarter results and then will describe the current operating environment and the Company's outlook for the remainder of 2004. Ed Walter, our Chief Financial Officer, will follow Chris and will provide greater detail on our second quarter results, including regional performance. Following their remarks, we will be available to respond to your questions.

Good morning everybody. I'm pleased to announce that for the second straight quarter results have exceeded our expectations. We're in the initial stages of what we think will be an extended rebound in the lodging industry which should translate into a powerful recovery for Host Marriott. Obviously it is important to recognize that we are in the very early stages of the recovery. In fact, this is only our second quarter with positive year-over-year RevPAR results, and our first quarter with positive year-over-year margin results. However, the combination of historically low supply growth and an expanding economy should generate continued earnings momentum as RevPAR and margins should continue to improve throughout this recovery. This positive momentum has enabled us to increase our guidance for the second time this year which I will discuss shortly.

First, let's talk about specifics for the quarter. Diluted FFO per share was 21 cents in the second quarter which exceeded the top end of our guidance. Excluding adjustments related to the repayment of debt totaling 9 cents per share, we exceeded the consensus estimate by 2 cents. Excluding these adjustments, our FFO increased over 36 percent for the quarter compared to 2003.

Our comparable RevPAR increased 8.8 percent for the second quarter compared to last year, while comparable hotel adjusted operating profit margins increased 60 basis points. Our top line results were driven by an increase in occupancy of 5.3 percentage points combined with an increase in average room rates of 1.1 percent.

Adjusted EBITDA for the quarter was 218 million, which represents an increase of 13 percent from 2003 levels. Year-to-date adjusted EBITDA was 390 million, up 7 percent from 2003. Year-to-date comparable RevPAR increased 6 percent compared to 2003 levels as a result of a 3.7 percentage point increase in occupancy and a slight increase in room rates of 0.6 percent. Year-to-date comparable hotel adjusted operating profit margins increased 10 basis points.

As is indicated by the results, the operating and financial leverage that we have as a pure owner are starting to produce impressive growth in earnings. In evaluating our results, it is important to note that our RevPAR growth clearly benefited this quarter from depressed business levels in 2003 in large part due to the effect of the war in Iraq. As a result, the bulk of our RevPAR gain was attributable to improvements in occupancy.

Going forward as the recovery strengthens, we expect the increase in RevPAR to be more balanced between rate and occupancy, thus allowing our operating leverage to improve and resulting in even stronger relative EBITDA and FFO growth.

In addition, although our RevPAR comparisons become more difficult throughout the remainder of 2004, the expense comparisons become easier. Easier expense comparisons, combined with a greater percentage of rate improvement, should allow us to record better margin results for the second half of 2004.

Let me make a couple of other points on the quarter. First, total RevPAR, which compares this year's average RevPAR to last year's, taking into account the assets owned in each year, increased 13.5 percent for the quarter. The large increase in non-comp RevPAR is due to strong growth, as well as portfolio upgrades that we have made over the last year. As we sell low RevPAR hotels with lower growth rates and replace them with high-quality assets with higher growth rates, we're building a higher quality portfolio with higher average RevPAR and higher replacement costs on a per room basis.

Second, for the same reasons that our big convention hotels held up better and outperformed in the early stages of the industry's downturn, they also lagged the industry's performance in the early stages of recovery. However, as with other recoveries, we expect that these hotels will ultimately outperform, and their performance will stay strong for a longer period of time.

We continued to see positive demand trends which resulted in a substantial increase in room nights for the quarter compared to last year. On the transient side, the business mix data for our portfolio is continuing to show a shift in transient room nights from lower rated discount and special corporate business to corporate and premium business. This is an extremely positive time and suggest that hotels are having greater success in closing out discounted rates in the face of improving transient demand.

Midweek demand continues to strengthen. In fact, over the past 4 weeks weekday demand for our portfolio has increased over 10 percent, and the weekday average rate is up almost 5 percent. For the quarter, total transient demand increased over 4 percent compared to last year, with both the premium and corporate sectors up approximately 20 percent. These substantial increases were partially offset that by a 5 percent decrease in special corporate business. Other discount business was relatively flat.

For the remainder of 2004 we're confident about our transient business as the net reservation volume continues to exceed last year's pace, and a number of our properties are starting to successfully increase rates as we continue to see strengthening of weekday demand.

As a result of these factors, the second half of the year should reflect larger increases in average room rate as business demand increases and hotel managers increase their average room rate and continue to positively changed their mix of business.

Total group demand increased approximately 12 percent with the corporate portion of our group demand up nearly 20 percent. This strong increase is partially offset by a 4.5 percent decrease in association group business. Our group booking pace at our largest hotels continues to improve with definite group room nights up over 5 percent for the full year. For the third quarter we're now ahead of last year's pace by approximately 40,000 room nights, a pickup from our last earnings call of approximately 27,000 room nights.

While the fourth quarter bookings still remain below last year's pace, the gap is narrowing and we feel confident in our managers' ability to add business as the year progresses based on a short booking window and an improving economy.

During the second quarter we announced that we entered into an agreement with Fairmont Hotels to acquire the Fairmont Kea Lani resort for 355 million, which we completed last week. The hotel's current results are very strong, as demand on the entire island continues to exceed our expectations.

In fact, our recent acquisition in Maui, the Hyatt Kaanapali, has forecasted results for 2004 that are over 3 million, or 10 percent higher than our underwriting completed just 9 months ago. Today after the closing of the Fairmount transaction we now have perfect bookends on the island. The resort in Kaanapali is at the northern end of the island and derives the majority of its business from upper uphill transient and group business, while the resort in Weialei is at the southern end of the island and caters more to the luxury market. We feel fortunate to have these two great assets in Maui with over 60 acres of fee (ph) ownership.

We're now forecasting the combined first-year cash yield on these properties will be approximately 9 percent, and the forecasted 10-year unlevered returns on these two high-quality assets will significantly exceed our long-term weighted average cost of capital. It is rare to be able to buy high-quality assets with fee ownership on the Hawaiian island with these kinds of returns.

We have now acquired approximately 450 million in assets this year, and over 760 million since November of last year. As we've stated before, the best time to buy assets is at the beginning of a cycle, and we think we are in the first stage of another lodging cycle. We have also indicated that our initial acquisitions will be funded with a disproportionate amount of equity. Given that we have raised a substantial amount of equity, and the recovery is picking up momentum, we now have flexibility to take on additional debt under our indenture, and we expect to be more balanced in funding future acquisitions.

At this point we anticipate completing an additional 100 to 200 million in acquisitions during the remainder of 2004, which will generally be funded by our existing cash, our untapped line, assumption of debt or additional asset sale proceeds. Our pipeline is still strong and we are working on a number of transactions, including one acquisition on which we have a signed agreement subject to certain closing conditions which represents an investment of approximately 50 million. Once we have completed this transaction we will give you more details.

We continue to see strong market interest in our noncore assets, which represents hotels that we expect will generate lower returns in the remainder of our portfolio. So far this year we have completed the sale of 7 noncore assets for approximately 155 million. For the year we expect to sell an additional 100 to 200 million of assets. We generally expect that the proceeds from these sales will be utilized to repay debt or will be recycled into superior assets with higher growth prospects.

Our disposition target for the year has declined somewhat as we have deferred some sales to take advantage of a recovery that continues to exceed expectations.

Now let me spend a few minutes on our outlook for the remainder of 2004. With demand continuing to improve we're now expecting comparable RevPAR increase of 5.5 to 7 percent for the year, with comparable hotel margins generally up 40 to 80 basis points. We're raising our RevPAR guidance based on positive trends in the first half of the year, stronger group booking pace, increased business travel, and positive week (ph) forecast from our hotels. This operating forecast, combined with the acquisitions and dispositions mentioned earlier, will result in approximately 70 to 76 cents of diluted FFO per share for the year, which includes a 15 cent per diluted share reduction due to certain adjustments consisting of call premiums and accelerated deferred financing costs associated with debt repayments.

Adjusted EBITDA for the full year should be approximately 760 to 785 million. The midpoint of this forecast it is over 9 percent higher than the midpoint of our original adjusted EBITDA forecast for this year.

In light of the strength of this recovery, combined with positive expectations for continued growth in 2005, we would like to update you with respect to the reinstatement of our common dividend. As you know, we are required to distribute 90 percent of our taxable income in order to qualify as a REIT. Our policy has been to generally distribute at least 100 percent of our taxable income to avoid paying taxes on the remaining 10 percent. We currently have excess taxable income from 2003 that we intend to distribute as a common dividend in the fourth quarter of 2004.

We expect that this dividend will be approximately 4 to 6 cents per share. Based on the strength in operations this year and an expectation for continued strength in 2005, we intend to maintain a 4 to 6 cent per share quarterly dividend in 2005, resulting in a full year common dividend of 16 to 24 cents per share. As we have stated in the past, our common dividend will be reinstated at a low-level, since we will be the cresting over into taxable income. However, assuming continued improving fundamentals in the industry combined with the benefits of operating and financial leverage, the common dividend amount has the potential to grow substantially in subsequent years.

The operating environment for the lodging industry continues to strengthen considerably. The 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 many markets our General Managers are increasing rates.

Clearly we believe the stage has been set for a sustained recovery in the lodging industry. The economy has decidedly turned the corner after three difficult years. We believe the combination of demand growth, stimulated by a strong economy, and historically low projected supply has positioned the industry for a period of sustained growth. We feel that we have positioned the Company to maximize this opportunity. And we certainly look forward to the next three to five years.

Thank you, and now I'm going to turn the call over to Ed Walter to give you some more details on the quarter.

Let me start by giving you some details on our comparable hotel RevPAR results. Looking at the portfolio based on property types, our airport hotels performed the best with second-quarter RevPAR growth of 16.9 percent, as occupancy improved by 12 points, while average rates declined by 1.4 percent. This performance was led by our two San Francisco airport hotels, the Burlingame Hyatt, which increased 21 percent, and the San Francisco Airport Marriott, which increased 37 percent.

Our urban and suburban hotels experienced RevPAR increases of 9 percent and 8.5 percent respectively. Our resort hotels increased by just 3.9 percent for the quarter. These weaker 2004 results are partially due to better performance in this segment last year when leisure travel represented a larger percentage of the available business.

Year-to-date, our RevPAR at our airport hotels increased 12 percent, and our suburban hotels improved by 6.3 percent. Our downtown hotels increased by 5.3 percent, while our resorts are up by 4.3 percent.

Turning to our regional results for the quarter, our top performing region was the Atlanta region, which enjoyed a 12.9 percent RevPAR increase, driven by the continued strong performance of our downtown hotels, including the Atlanta Marriott Marquis, where RevPAR increased by 17 percent, due to a solid convention calendar and strong in-house group business. We expect this region to continue to outperform during the third quarter.

The Pacific region continued its rebound, experiencing a RevPAR increase of 11.9 percent, driven by occupancy growth of 8 points. As in the first quarter, while our Los Angeles area properties enjoyed double-digit RevPAR growth, the top performing market for the quarter was San Francisco, which saw growth of more than 23 percent. Our largest hotels, the San Francisco Marriott increased RevPAR by 23 percent as group bookings were very strong. We expect that San Francisco's growth will moderate during the third quarter as city-wide conventions decline during the second half of the year, but the region as a whole will continue to perform well.

Our Washington D.C. market continued its strong performance as RevPAR improved by 11.1 percent. Our third quarter growth will likely slow in this market as the city's political focus shifts towards Main Street and elections and away from the Capitol Building and the process of government. Several of our Washington area hotels will also be undergoing room renovation, which will result in lower RevPAR growth caused by less room inventory.

Our New England hotels generated a RevPAR growth of 10.8 percent led by the Boston Hyatt, which surged by 28 percent, as we begin to enjoy the benefits of the brand conversion from Swissotel. Our mid-Atlantic region also generated good results as RevPAR increased by 9.6 percent.

Excluding the Marriott Marquis, our New York City properties performed quite well as RevPAR improved by 25 percent. The Marquis' results were affected by the loss of an average of 200 rooms due to the final phase of our rooms redo, leading to RevPAR growth of just 3.5 percent. With all of our rooms completely redone, we expect to have a strong summer at the Marquis. In addition, although there remains some uncertainty as to how favorable the impact the political conventions will have on these markets, both the New York and New England regions are expected to have good third quarters.

Our Florida region had a relatively weaker quarter with RevPAR growing by only 3.9 percent as we were hurt by lower rated group business at the Orlando World Center Marriott where RevPAR decreased by 2 percent. The South Central markets saw RevPAR growth of just 3.5 percent, as our San Antonio properties continued to underperform. Both of these regions are expected to continue to underperform during the third quarter.

Year-to-date the best three markets have been the D.C. metro region with RevPAR growth of 9.8 percent, the Pacific region with growth of 8.5 percent, and the mid-Atlantic region where RevPAR improved by 6.8 percent. The South Central region which experienced a decline of 0.1 percent. And the North Central region, where RevPAR grew by just 1.1 percent, were our weakest.

Looking at our Courtyard joint venture with Marriott International, RevPAR improved by 4.4 percent for the quarter as occupancy increased by 1.7 percentage points and rates increased by 1.9 percent. Year-to-date RevPAR for the portfolio was up 4 percent. It is worth noting that roughly 20 percent of this portfolio was undergoing renovation during the second quarter.

As expected, expense comparisons in the quarter were challenging as hotels implemented temporary cost reduction measures in 2003 to partially offset the decline in business demand resulting from the war in Iraq. Comparable hotel margins improved by 60 basis points for the quarter.

Overall margin improvements were limited because occupancy improvements were still the primary driver of increased revenues, and because wage and benefit costs continued to go faster than inflation. We're also seeing higher sales and marketing costs, which is reflective of the weak marketing environment in 2003, and a sense this year that a more aggressive sales approach will bear fruit in the form of increased revenues. While still above inflation with growth of 3.6 percent, the utility expenses have moderated from the first quarter.

On a more positive note, our real estate taxes remained essentially flat year-over-year. And we significantly reduced our insurance costs as a result of our successful placement of property insurance for virtually all of our hotels pursuant to a self-directed program separate from that of our operators.

Looking out through the remainder of the year, we expect that as RevPAR increases are driven by rate as well as occupancy gains, and as expense comparisons ease, we should begin to see better margin improvement.

We expect to see some evidence of this benefit in the third quarter, since we forecast a comparable hotel RevPAR growth will range from 6 to 8 percent with a roughly even contribution from rates and occupancy. As a result, we expect fully diluted FFO for the quarter will range between 9 to 11 cents per share, which includes the recognition of 1 cent per share related to the write-off of the costs associated with the repayment of our Class A perpetual preferred issue. This third quarter forecast represents a significant increase compared to last year's FFO of 3 cents per share.

Continuing a theme that began last year, we made meaningful progress towards improving our balance sheet during the second quarter. In addition to the repayment of senior notes indebtedness with the proceeds from the issuance of our exchangeable debentures, we also further repaid our Series B senior notes by 65 million, generally with the proceeds of asset sales.

During the quarter we also issued 300 million of equity in connection with the purchase of the Fairmont Kea Lani hotel in Maui, and also issued 100 million of 8 7/8 Class E perpetual preferred, which will be employed to repay our 10 percent Class A perpetual preferred next month.

As a result of these and other actions, over the last 12 months we have reduced our overall fixed charges by more than 75 million and reduced our debt as a percentage of total fixed assets by approximately 8 percentage points.

We finished the quarter with 771 million of cash, although we have since spent 355 million of this cash balance in connection with the purchase of the Kea Lani hotel. I will also deploy 104 million to redeem our Class A perpetual preferred. The remaining balance of roughly 300 million will be deployed for acquisitions, investments in our portfolio, other corporate purposes, and to maintain working capital which we expect to reduce to a approximately 150 million by year-end. We face no debt maturities for the remainder of year and continue to have 250 million of capacity on our credit facility.

As we have detailed today, operating trends are increasingly favorable. As the economy continues to improve, lodging demand in 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're now interested in answering any questions may have.

(OPERATOR INSTRUCTIONS). Bill Truelove with UBS.

Good quarter. Ed, I have two questions. I guess the first one maybe, Ed, you can handle here. We're thinking about changes in dividends going forward. I know that is obviously a taxable net income number that is this ambiguous number that we never get to see, but how can we think about modeling changes or anticipating changes in dividends from either an FFO basis or from a net income basis? What is a good way of gauging anticipated changes in that taxable net income number from your GAAP reported numbers?

I wish there was a simple answer to that question. As we have detailed over the last few years, taxable income for us is a fairly complex calculation. It not only takes into account the amount of FFO that we're generating, but it is also affected by the level of capital spending that is implemented, especially capital spending that may be implemented in a particular year. So I wish we had a simple guideline that we can give you that would enable you to model that a little bit better. I think at this point we're unfortunately going to have to wait and see how things develop over the course of 2005 and going forward.

I agree. I wish it was easier too.

Well, that is in part was why we're trying to give a little bit more visibility a little bit further out in time to try and help on that issue.

I appreciate that. And my second question maybe, Chris, you can address this is how much more extra RevPAR and margin punch can you really get as the large groups are on your books start getting repriced to more market rates, if you will? I know Marriott on their call said that some of the very large convention hotels had large groups that were almost at below-market rates because they were booked a few years ago, and that is understandable. Do you think that there's a lot of additional in your going forward outlook as you can start repricing these groups?

I think the answer is yes. Unfortunately, I can't be real specific because it is hard to sit here today and forecast out a couple of years and exactly where the rate profile of the group will be. Clearly our expectation is the rates are going to be higher. The rates are higher today on group business in most cases. But what is happening, as you would expect, is we have a lot of group business on the books that was booked back in '01 and '02 and '03 for '04 that are at lower rates.

So clearly if you look at the reasons behind the lag of the big hotels, that is one of the key reasons. And that is -- it is not an issue with the volume of group business. We're still at occupancy levels that are generally lower than our maximum efficient occupancy, so we want the group business, but what we want is to have it at higher rates, so it naturally cycles through. And it takes some time for the bigger hotels to catch up from a performance point of view, as we've said. But we ultimately think that they outperform and they stay performing at a high level for a longer period of time.

You also -- not only do you have -- you are kind of shipping out group for group at a higher rate, some of the more profitable groups in the business as the economy gets stronger tend to come back in a stronger way, and so obviously that helps. I mean the bottom line is the big hotels are lagging now. They ultimately, we think, are going to do great. But it does takes longer to be able to optimize the mix of business. You've got to have more group, more higher rated group, and have the opportunity to have a stronger economy and to book the longer lead groups at higher rates.

Thanks for the explanation. Good quarter guys. Thanks.

(OPERATOR INSTRUCTIONS). James Sullivan with Prudential Securities.

Two questions from me guys. First of all on capital spending, can you remind me what the full year CapEx number was, and where you are in actually spending that? And give us some preliminary guidance if you will for '05 as to your total capital spending?

Yes, from a CapEx point of view, Jim, we said we were going to spend about 255 to $265 million. 20 million roughly of that is going to carry over from last year. Year-to-date we have spent about $95 million. Now in addition to that we have said that we would expect to spend some amount of money this year and then see that increase at a pretty substantial rate on ROI CapEx. That number that we had been talked about in prior quarter was about $35 million of ROI CapEx plus or minus. And obviously over the next two or three years that number will grow as we continue to find very high yielding opportunities within the existing portfolio.

In terms of next year, I think that the typical spend for us -- this year is a little bit higher and we had carryovers somewhere on the order of plus or minus $250 million.

And that is before any additional ROI projects that you might desire?

That is before, yes. And that is a little bit higher as a percentage than the norm. And again we have said pretty consistently we would have a couple of years that would be a bit little bit higher. One, because we have a number of larger hotel rooms reduced that are cycling through. And, two, we had a little bit of deferral from the last three years when times were tough. And while it is not significant overall, it does add a little bit to the next couple of years -- the CapEx.

And then secondly, if you could also bring us up-to-date when you -- as part of your settlement with Marriott there were some positive changes made as far as Host Marriott is concerned regarding the management contracts. And as I recall, you had said that those savings were going to be phased in over a couple of years. Can you bring us up-to-date as to what percentage of the savings are appearing in the current run rate, and how much more is to be expected?

I think what we had said was that we were going to start out at about $8 million in savings, and that between '02 and '06, '07 we were going to get to about 25 million. I would say, and I don't have an exact number, at this point we're probably somewhere in the range of 10 to 15 million of that. And in the next couple of years we're confident we will be able to achieve the rest.

There is some of it that relates to how the performance goes, and there are parts of it that are basically -- a significant part of it relates to our -- the reduction in our IMF, incentive management fees, to Marriott. And there is a stated minimum amount of reduction that steps up over the year. This year that stepped up from $2.5 to 5 million, as an example. And it ultimately steps up to $9 million -- that component of it over the next couple of years.

So that piece of that it could be more significant than that depending on results, but that at a minimum will happen over the next years, and the rest of it depends on variables related to ultimate operating results. But we're still very comfortable with the range and result that we gave you in terms of it growing to $25 million in benefit. And I would say we're a good part of the way there at this point.

So it sounds like, Chris, you're about halfway through it. And this should show up in the -- in terms of the operational data this should show up in relatively favorable comparisons on that management fee line item in the expense?

Yes, as an example, if you look at our IMF for this year, the second quarter obviously our results were terrific, both RevPAR and margins were not as great as we would like, but margins going the right way. Our IMF was only up about 5 percent. And year-to-date our IMF is actually down 5 percent. And I think you can attribute a significant part of the reason that year-to-date is down to the fact that we had the additional step up in our minimum reduction in IMF in our deal.

Jeff Donnelly with Wachovia Securities.

Chris, can you talk a little bit more about your second half '04 same-store margin assumptions? It strikes me that your full year guidance for the year is a little conservative, once you figure in the upside you guys saw in Q2 -- with the raised RevPAR outlook was maybe a shift more towards ADR in the higher net acquisition volume.

I think what we have said, Jeff, is we think we will have 40 to 80 basis points for the full year, and 80 to 180 basis points for the second half of the year. Obviously that is a pretty meaningful improvement. And it is for all the reasons really Ed -- both Ed and I described, but Ed described in more detail.

We expect to have a much more balanced rate and occupancy story. We expect to have a pretty even split between rate and occupancy. We also have an expectation, and I think a reality is that the margin comparisons are just easier. I mean the second quarter, while we had some pretty decent margin benefit or margin growth, it was against some pretty tough comps, because our operators, particularly Marriott, had done -- which represents a large part of our portfolio -- during the war in Iraq, they had gone to four-day work weeks and done a bunch of other things to really make some dramatic changes on the expense side.

So obviously that was most impactful in Q2, so it hurt us in Q2. That gets easier as the year goes on. In addition to the fact that we're -- we have been almost entirely occupancy driven, and we're going to get a much more balanced kind of 50-50 balance between rate and occupancy. So those are the reasons. We have obviously gone through and done it in a buildup by hotel. And gone through it with all of our General Managers -- their views on what we can accomplish for the second half of the year. And we feel pretty good about those assumptions.

Can you tell us how you're tracking third quarter thus far?

Not a lot of data. Unfortunately the timing of the call is such that if we had another day I would have our final RevPAR data for period 7, but I don't have that as I am sitting here. I would say generally going pretty well.

The first three weeks were going pretty well. We need to see how the fourth week -- we finished our period 7 last week, because we're not on a calendar quarter. So I will have that in the next few days. Unfortunately, timing is not great. But going reasonably well. If you look at non-Marriott hotels for period 6, or the month of June, which will be the first month of our third quarter for those hotels, they were very strong. They were up about 11 percent.

Okay, and just one last question. Actually going back to --.

I'm sorry, Jeff. Finally on -- I think you made a comment -- maybe not a question -- but you gave me an opportunity then to comment on it on our RevPAR guidance for the full year 5.5 to 7. Again, I think your comment was conservative. I don't think it is conservative. Obviously we would give the guidance. We have built it up by hotel. Obviously RevPAR comparisons get a little bit more difficult because we don't have the Iraq war comps. And still I think for the remainder of this year the big group hotels, given that business is already on the books, and the rate that the groups are on the books for are not going to be performing at the level that they will at a later time. So our guidance is really a function of those things and really obviously a function of a build up by property.

One last question is on the incentive management fees to Marriott can you share with us maybe where your hotels are positioned, maybe relative to being in the money on those fees. Are a significant number in the black I guess in paying incentive management fees, or how far are you away from those kicking in?

I can't get -- I mean I can give you a couple of stats that may be helpful directionally. Right now about 40 percent of our hotels are in IMF. If you -- this is not hard and fast, but if you ran a model that take you out several years and got you back to kind of levels that you were at from an EBITDA point of view in 2000, I think we would estimate about 55 percent of our hotels, somewhere in that range, would be paying IMF.

So some growth, but the fact of the matter is that a large number of our hotels are already paying IMF, which I think is the good news meaning it is not -- as things continue to grow, it is not as impactful. If you look at where we were -- at the peak in 2000 we were paying -- about 6 percent of our revenues were going towards fees. Right now we're about 4.5ish, something like that. So if you look at where things should be when we get back to peak levels, the fact of the matter is they should be lower than the 6 percent for a couple of reasons.

One, we have invested capital that creates a priority on a number of hotels that reduces IMF. And so that has an impact. The second impact is the one we already talked about today, which is we have renegotiated a large part of our contracts, particularly all of our Marriott contracts, but some others in the past few years so that our overall IMF obligations have been reduced.

So net net it should be a -- the arithmetic should simply state it should be better when we get back to peak levels that it would have been in the prior cycle. And we are already paying on a significant component of the portfolio today.

Jay Cogan with Banc of America.

I have got a few questions for you on the dividend. I was just not clear, are you saying this morning that the dividend will be maintained at that 16 to 24 cent range throughout 2005? And that we should not expect it to go higher than that given how the back half of this year plays out and into next year?

I think what we're trying to say to is our best sense is we're going to pay a 4 to 6 cent dividend in the fourth quarter of this year to take care of '03 excess taxable income. And we would have a dividend on a quarterly basis in that same range of 4 to 6 cents based on our expectations about what will happen next year.

Got you.

Through '05.

And what are those expectations right now? Do you want to give us your initial thoughts in regards to RevPAR or margins? Can you help us with that at all in terms of where you are in the outlook?

I was wondering when somebody would ask that. The answer is no. It is a little early for us to do that. Obviously we've had -- people have been very interesting and understanding where we were on our dividend, and so we're trying to give a little bit of visibility there. We obviously gave a range of result there, and the range is 16 to 24 cents to pick up variability. But we have not gotten to a point where -- we have had obviously some discussion with our operators -- we haven't even begun the process of doing a property by property buildup in terms of figuring out what we think will happen with RevPAR and margins.

So I would rather not get into it. Other than to say obviously we think '05 is going to being a great year. We think we're going to have good RevPAR growth. I wish I could be more specific, and obviously eventually will be. And we ought to have better luck on the margin side, because we expect to be able to have more rate-driven growth in our RevPAR next year than we did for this year.

And then maybe as a last question. When you say when we get back to peak levels at the hotels from a cash flow standpoint, a few years away. What do you mean by a few years? How long do you think it is going to be until we get back to peak levels given the better-than-expected RevPAR trends we have seen thus far and your optimistic expectations for '05 and beyond?

Isn't that, in fact, a way of asking me what I think our RevPAR margin growth assumptions are? Again, I think it is a little premature to say. We are obviously doing a lot better this year than we expected, and the trends are good. We haven't sat down to figure out next year. So I think it is a little premature to give you an exact date on when we think we would be back to peak levels in terms of cash flow or EBITDA. But suffice it to say, it is not going to be this year or next.

Harry Curtis, J.P. Morgan,

A quick question on expenses. You touched on them, and I'm wondering if there are any expenses that are continuing to increase year-over-year at a fairly high-level that you expect to moderate that might help you margins going forward in '05?

I think that is a great question, Harry, and the answer is yes. We still have -- the primary expenses that have been growing at greater than inflation are wage and benefits, which were up over 10 percent. And utilities, which were up only about 3.6 percent in the quarter. So they have moderated, but year-to-date they are still growing. Year-to-date they are about 5 percent, so they are still growing greater than inflation.

Of course we don't control any of these things. But certainly our expectation is over the next year or two that you will see both of those expenses moderate. You have seen a little bit of it in utilities already. Now that can jump around obviously depending on what is going on in the world and what is going on with oil production and oil prices. But you have seen a little bit of. We're pretty confident over the next couple of years you will see some stabilization there. And you'll get back to normal -- more normal kinds of increases.

And the same in wage and benefit. You have already had a couple of years of pretty extraordinary growth in that expense. It is obviously the largest expense we have. It represents about 50 percent of our expense base between wages and benefits. So our expectation on the benefit side is that over the next couple of years you will see some moderation there. So it is a great question because I think those -- as we get into '05 -- I think less so '04, other then maybe utilities -- but as we get into '05, '06 margins could certainly be helped by some moderation in those areas.

The second question I had related to more on the leisure transient side, a less important part of their business, but in the resorts it is important. And we have seen, at least in the month of June, some moderation in consumer spending. Did you see that in those resort markets, and how is July looking?

I would say our leisure business is looking pretty good. I mean it depends -- it is all asset by asset. Overall that is a growing percentage of our business, but it is still less than 15 percent of our overall business. In the couple of deals that we have done recently, the bigger ones like the two in Hawaii, we're doing great. I mean that market is on fire, as I described in my comments.

If you go around the rest of the portfolio, I think we're doing fine. You look at resort as a component outside of the ones we just bought, because they're not really in our comps -- they are not in our comp set yet -- resort in terms of overall RevPAR growth has lagged some other sectors.

Part of that is not from what we see in our hotels necessarily a lack of business, it is simply an issue of comparability. And that is to say that leisure has held up pretty well. So when you look at airport and suburban doing great rate right now, there is a reason for it. It is because they absolutely hemorrhaged over the last couple of years. So I think that our resort overall are doing fine. Our newer resorts are doing incredibly well. Over the next several years we think that the resorts -- frankly over the next 3, 5, 10 years we think resorts are going to perform quite well from a -- if you look at demographics.

In the short term, some of the resorts because they have held up better, won't show the same kind of growth. But that doesn't mean they're not performing well, they just didn't get as hard hit.

But you didn't see any air pockets just in the last month, month and a half?

No, nothing discernible.

Hasad Kasim (ph), Reef (ph).

I will ask a few questions. The first one, if you could give me a sense of what the non-comp margins are on a year-over-year basis in the second quarter? And then secondly, going back to Jeff Donnelly's question, if I looked at the guidance it implies the high end. Are you going to do the same amount of EBITDA that you did in the first half of this year with improving margins going forward?

And more coming from rate -- and if I take a midpoint of your EBITDA guidance -- of your RevPAR guidance, sorry -- and supply the -- apply the increase in margins based on what you had in the second quarter -- what you got from rate -- I think you had almost 2 percent increase in margins. So could you help me reconcile why that is so, especially when you bought a $350 million asset that you'll get earnings from in the fourth quarter?

I will take them in the order you gave them. In terms of our non-comp margin improvement, I think if you do the math it is about 130 to 140 basis points. And obviously what is happening there on a non-comp basis is we got -- that we've got margin growth in general on a comparable basis as we described. But as we continue to recycle assets and sell the smaller more suburban secondary and tertiary market assets with a lower growth profiles and lower overall RevPAR, those assets also have much lower margins. And what we have been buying are higher growth, higher RevPAR and higher margin assets. So what you're seeing in the non-comp is the benefit both of absolute growth in margin, as well as the benefits of recycling out of the lower margin assets into the higher margin assets. So 130 to 140 base points.

I think the second question, Hasad, I would love to answer it. It is a little tough. The basic question is, is our guidance too conservative? And I guess what we would say is we gave the best guidance we could based on all of the information that we have, relative to talking to all of our major -- our operators and all the major -- General Managers at all the major hotels.

So we are expecting RevPAR comps to be a little harder. We are expecting margin comps to be easier and margins to be better for the reasons we described. And the result we get is the range in EBITDA that that we gave you. Obviously thus far this year we have managed to exceed our expectations. I can't say that I think we will, because we have given you the best guidance we can. I can certainly say that we hope that we well. So I would probably leave at that.

Bill Crow.

Congratulations on a great quarter. Two questions real quick, if you could. First of all, did you see any shift in the composition of RevPAR growth as the quarter proceeded? Did you see maybe period 6 where you got increased contributions from ADR?

A little bit, yes. Not a massive shift but a little bit of sequential improvement throughout the quarter.

Okay.

And we would expect that to pick up in the third and fourth quarter.

Right. Could you talk about the booking window as you look out? Maybe the group business on the books right now for '05 and how it compares to where you were a year ago? Are you seeing a lengthening of the window at this point?

Not discernible truthfully. We have been talking to all of our GM's about that. Intuitively you would expect to see it happening. And I guess on the edges you're seeing it with some of the moderate sized groups. But still with the mid-sized, smaller groups the booking window is very, very short.

Obviously as time goes on and as the economy strengthens, that will change just because there will be no options, because the hotels will be booked enough where people will be trained to have to extend the booking window or they won't be able to book their meetings.

In terms of '05 bookings, I would say right now the latest information we have is that '05 bookings are slightly ahead, kind of breakeven to ahead where we were at this time last year for '04 bookings. And that is about where we want to be in the sense that we clearly -- we want to have more group business, because we want to build occupancies, but we want to have higher rated group business. And we clearly are getting to a point with the strength in the recovery and in the business and in the economy where you want to make sure you got adequate room in your inventory to sell to the transient side of the business, because we can get better rate there and kind of a better overall mix of our business to end up with a better result.

We are kind of -- we're break even, a little bit ahead. And that is my guess is about where it will stay relative to where we are trying to get the results with our operators in terms of having enough capacity to take advantage of some transient opportunities.

And, Chris, as you talk into those General Managers, are you having to push them on raising rates or are they gaining the confidence to do it on their own?

And a I guess a second part of that question is could you talk about their shift -- their mind shift towards Internet distribution that you have seen, if any, over the past 6 months or a year?

I would say they are certainly gaining confidence. It is case by case. Our asset management team is terrific, and where they have need to they have pushed General Managers. But I would say increasingly they are starting to push themselves. They are gaining confidence. They're testing rate increases successfully. And it is just building momentum. And they're talking to each other and getting more optimistic, and so all that is good.

In terms of the Internet strategy, I think to the extent -- I think that they are utilizing them. Again, Marriott and all of them have made their deals with the merchant models. And I think to the extent they have excess inventory, obviously they have a lot less of it these days, but to the extent they have it, and now that they can control pricing and inventory, and they have a reasonable markup, they are utilizing those channels.

And frankly we want them to. We think net net in the end that is a real positive for us. It is another very efficient distribution channel and it is at a reasonable price now because of the new deals that have been cut. And if you have excess inventory you're not going to sell otherwise we can make money doing that. So less of it, but to the extent you have down periods or excess inventory it is certainly a way to take a perishable commodity and make some money that you wouldn't otherwise make. So I guess that is probably the comment I would make on that.

That does conclude our question and answer session today. I would like to turn the conference back over to Mr. Chris Nassetta for any additional or closing remarks.

We appreciate your time today. We were certainly pleased with results we had for the quarter. I would also say we're very optimistic about the rest of the year as you can tell from our comments. And for that matter we are optimistic about the next several years.

So thanks again for joining us. We look forward to talking with you in the fall after we finish the third quarter. Take care, and have a great rest of the summer.

That does conclude today's conference call. Thank you everyone for your participation.