Host Hotels & Resorts Inc (HST) 2004 Q4 法說會逐字稿

Good day everyone and welcome to the Host Marriott Corporation Fourth Quarter 2004 Results Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Senior Vice President, Treasurer and Investor Relations Mr. Greg Larson. Please go ahead sir.

Thank you and good morning. Welcome to our fourth 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, adjusted EBITDA and comparable hotel results which we believe is useful to investors. You can find this information, together with reconciliations to the comparable GAAP measure in today's earnings press release which has been posted on our website and in our 8-K filed with the SEC.

This morning, Chris Nassetta, our President and Chief Executive Officer will provide a brief overview of our fourth quarter results and then we'll describe the current operating environment and the Company's outlook for 2005. Ed Walter, our Chief Financial Officer will follow Chris and will provide greater detail on our fourth quarter results including regional performance. Following their remarks, we will be available to respond to your questions. And now here's Chris.

Thanks Greg. Good morning everyone. 2004 was a great year for Host Marriott. As I will detail shortly, we enjoyed our best RevPAR growth since 1997 and generated record FFO per share growth as lodging industry fundamentals improved throughout the year. In addition, continued strong capital markets created an environment that allowed us to make progress on several key corporate objectives.

Before I get to the detail of our 2004 operating results I'd like to highlight several of our accomplishments for the year. During the year, we completed over 500 million in acquisitions, purchasing the Fairmont Kea Lani; the Embassy Suites, Chicago Downtown Lakefront; and the Scottsdale Marriott at McDowell Mountains Hotels. The acquisitions added two new brands to our portfolio and continued our progress in acquiring new irreplaceable assets in high barrier to entry markets at yields that significantly exceed our cost of capital. The results thus far in each of these hotels, has exceeded our expectations.

Including sales in early January, we sold 13 of our non-core assets for total proceeds of 380 million. These asset deals are consistent with the Company's strategy of selling non-core assets that face slower growth prospects. Our intent with these acquisitions and sales is to continue to improve the overall quality of the portfolio, which can be illustrated by the fact that our average RevPAR for the entire portfolio improved by more than 11.5%, year-over-year.

As a result of our acquisitions and dispositions over the last two years, we have furthered our portfolio of mix objectives by reducing suburban and airport hotels as a percentage of our portfolio by 8 percentage points and increasing resort and convention hotels by 8 percentage points.

We also committed to the sale of 85% of our interest in the Courtyard portfolio for 92 million, providing a favorable exit strategy from the majority of our interests in this non-core investment at very attractive pricing. We made significant progress on a number of repositioning and value enhancement opportunities at some of our largest hotels, including the Newport Beach Marriott, the Mountain Shadows Marriott, Hyatt Maui and the New York Marriott Marquis.

We also continue to focus on strengthening our balance sheet. On that front, we've reduced our debt by over 450 million. We raised 300 million in common equity. We completed a 500-million exchangeable debenture financing and a $350-million senior notes transaction.

We amended our credit facility by increasing the available capacity to 575 million, extending the maturity to September 2008 and modifying the covenants. We refinanced our 10% classic preferred stock with 8-7/8 Class E preferred stock. As a result of these transactions, we significantly improved our interest coverage, we lowered our interest expense by approximately 54 million and we extended our maturities. In addition, confirming the solid improvement in operating results, in late 2004, we reinstated our quarterly common dividend at 5 cents per share.

Finally, our stock performed exceptionally well with an increase in price of over 40% for the second consecutive year. We're very pleased to have accomplished these important objectives and we look forward to another strong year in 2005.

Now let's review the results for the quarter and the year. Diluted FFO per share was $0.35 for the fourth quarter and $0.77 for the year. After excluding adjustments generally associated with debt prepayments of $0.17 per share for the full year, diluted FFO exceeded the consensus estimate by $0.05 and was approximately 45% higher than last year.

For the fourth quarter, our comparable RevPAR increased 8.6% compared to 2003 levels, while comparable adjusted hotel operating profit margins increased 2 percentage points. Our top line results were driven by 5.4% increase in average room rates combined with a 2 percentage point increase in occupancy. Adjusted EBITDA for the quarter increased over 20% from the prior year to 267 million.

For the full year, our comparable RevPAR increased 7.3% and comparable adjusted hotel operating profit margins increased 1 percentage point. The improvement in RevPAR was the result of an increase in average room rates of 2.9% and an increase in occupancy of 2.9 percentage points. Full year adjusted EBITDA was 790 million, up 11.4% from 2003.

Our food and beverage sales increased 5.9% in the fourth quarter of 2004 and food and beverage profits increased 13.6% as stronger group activity drove a significant shift to higher margin banquet sales during the quarter. For the year, food and beverage sales increased 5.7% with food and beverage profits up 7.6%. For the year, other revenues increased by 2.5% as strong increases in parking and spa were partially offset by decreases in telephone revenues.

During the quarter, we continued to see improvement in our transient business mix as premiums and corporate segments were up approximately 11%. While lower rated special corporate and other discount segments continued to decline. While overall transient demand for the quarter increased only slightly, our average transient rate jumped by almost 8%, reflecting the benefits of the mix shift to higher price segments, which generated more than a $100 in average rates in the lower tier segment. This positive shift in transient business mix combined with a 10% rate increase in the higher rated segments helped produce the highest increase in average rate -- room rates this year.

All indicators for 2005 transient business continued to be positive. Our hotels are currently reporting strong leisure demand over typical holiday period with many hotels able to increase rates meaningfully. Our net reservation activity continues to trend favorably, suggesting further increases in the premium and corporate segments. The weaker dollar is also encouraging the return of international travel, which was up 10% in gateway cities over the last year. We expect that trend will continue.

Turning to our group business for the quarter, total group demand increased approximately 5% with the corporate segment up nearly 16%. Reflecting the general improvement in negotiating leverage for the hotels, we saw increases in average rates across all segments of our group business led by a 5.7% improvement in corporate rate. Overall group rates increased approximately 3% during the quarter.

The outlook for 2005 in the group segment is very promising. After running flat to slightly up for most of 2004, our definite group room nights for 2005 at our largest hotels increased in the fourth quarter and now indicate a 4% increase to last year. We're focused with our operators on strategically directing the additional business towards the slower demand period, thus allowing capacity for higher rated transient business.

We're also focused in certain higher occupancy hotels on lowering their overall group business, allowing them to capture more highly rated corporate and premium business. Approximately 25 to 30% of our group business is booked in the year for the year. We anticipate this number may shrink as the booking window starts to lengthen and as our general managers continue substituting in higher rated transient business. Overall, we anticipate a modest increase in group business for 2005 and a more substantial increase in transient business for 2005.

On the investment front, we continue to see opportunities to purchase assets that satisfy our investment criteria. We intend to remain disciplined in investing our capital, and our guidance for the year anticipates that we'll complete 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 that we intend to accelerate the pace of our repositioning and ROI investments in our existing portfolio.

For example, we recently committed to invest $60 million in the Orlando World Center Marriott, the project which involves the construction of 105,000 square foot exhibit hall will allow the hotel to better compete for larger group events that are seeking a single venue location. It will also optimize flexibility by accommodating more closely spaced group events without the loss of occupancy during the setup and takedown time. The unlevered IRR on this project is expected to be in excess of 20%.

In addition to exploring other meeting space additions at several of our larger hotels, we are also evaluating the addition or enhancement of several spas as well as other improvements. In the past, we've generated superior returns from these investments, and we are optimistic that we'll enjoy similar results in the future. We are also seeking opportunities to enhance the value of our portfolio by identifying and executing strategies that capitalize on potential alternative uses for excess capacity of our assets such as the development of condominiums or time-share units on excess land, the conversion of existing rooms to condominium or time share units, or the redevelopment of existing spaces to alternative uses.

As an example, we have negotiated to sell the land currently housing our tennis facility at our Newport Beach property to a high-end condo developer. The proceeds expected from that sale will help fund the comprehensive repositioning of the property. In addition, we are currently in the process of obtaining entitlements and negotiating a contract to sell the Marriott Mountain Shadows Resort, which we closed last year to a residential developer. Both of these transactions are expected to close in early 2006. We are also pursuing the development of 120 time-share units on a beachfront parking lot at the Maui Hyatt. These are just the few examples of many potential value enhancing projects the company expects to complete over the next several years.

As we recently indicated, we have seen strong market interest in our non-core assets, which represent hotels that we expect will generate lower returns than the remainder of our portfolio. We intend to take advantage of these market conditions during 2005, and anticipate selling approximately 150 million to 250 million in assets during the year in addition to asset sales that we've already announced. We generally expect that the proceeds form these sales will be reinvested in the purchase of luxury or upper upscale hotels, repositioning our return on investment projects, repayment of debt obligations or other corporate purposes.

Now let me spend a few minutes on our outlook for 2005. Due to strong fourth quarter results, combined with positive trends early this year, we are increasing our RevPAR guidance for 2005. We're expecting RevPAR to increase 6.5 to 8.5% for the year with margins increasing 1 to 1.5 percentage points. This operating forecast, combined with the dispositions and acquisitions mentioned earlier, will result in approximately $0.98 to $1.07 of diluted FFO per share for the year, which includes a $0.10 per share reduction due to certain adjustments, consisting primarily of call premiums and accelerated deferred financing of cost associated with debt prepayment.

Adjusted EBITDA for 2005 should be approximately 870 to 910 million. Due to our improved operating outlook for 2005, we are forecasting our first quarter dividend to be approximately $0.07 to $0.09 cents per share, an increase 40 to 80% from the fourth quarter dividend. To the extent our operations continue to improve, the dividend could increase in subsequent quarters.

I am pleased to say that the lodging recovery is continuing to play out as forecasted. The recovery remains in the early stages of what we believe will be an extended positive cycle. The business traveler is returning in force, the weak dollar should lead to an increase in international travel and supply in the markets over the next couple of years will remain at historic lows. The combination of strong demand and low supply should lead to a powerful and sustained recovery.

Thank you. And now, I'm going to turn the call over to Ed Walter, our CFO, to cover the quarter and the year in a little bit more detail.

Thank you, Chris. Let me start by giving you some detail on the comparable hotel RevPAR results. As Chris indicated in his remarks, we had healthy improvement in RevPAR in the fourth quarter with increases in average daily rates contributing approximately two thirds of RevPAR growth. Both our suburban and urban hotels saw RevPAR increases of 7.8% for the quarter, which is predominantly driven by average rate growth of roughly 6%.

For the quarter, our airport hotels had the strongest overall performance with RevPAR growth of 12.7% and average rate growth of approximately 3.7%. Our resort convention hotels experienced RevPAR increases of 10.3% with 4% rate growth as our three Ritz-Carlton Resorts in Florida had strong quarters. Year-to-date, RevPAR at our airport hotels increased 12% and our resort hotels improved by 7%. Our urban hotels improved by 6.8% and suburban hotels increased by 6.4%. As evidenced by these statistics, in 2004, we enjoyed solid improvement across all property types in the portfolio.

Turning to our regional results for the quarter, our top-performing region was the Washington DC metro region, which enjoyed a 14% RevPAR increase. Our recently renovated Metro Center Marriott had an excellent quarter as RevPAR increased by 24%. We anticipate another strong year in the Washington metro area in 2005. Continuing a trend from the third quarter, our New England hotels experienced RevPAR increases of 12.4%, driven by strong occupancy pick up and average daily rate increases. Our Hyatt hotels in Boston and Cambridge continued to rebound well with RevPAR increases of more than 20%. We expect that the pace in New England will moderate slightly in 2005.

The Mid-Atlantic region also continued to perform well in the fourth quarter with RevPAR improving 12.4%, driven primarily by increases in average rates. Our New York hotels all had a great quarter with RevPAR increases averaging approximately 15%, which reflected average rate increases of more than 10%. We expect continued strength in the New York market in 2005, but the region's overall performance will be slightly constrained due to below average growth in the Philadelphia market.

RevPAR in our Florida region improved by 10.5% as the Tampa Waterside hotel improved by 25% and the Ritz-Carlton at Naples improved by 12%. Our results in Florida exceeded our expectations, as we were generally able to overcome the effects of the last two storms in the September hurricane season, which occurred during the first two weeks of our fourth quarter.

The Pacific region had a RevPAR increase of 7% in the fourth quarter, led by 15% plus gains in our Ritz-Carlton hotels in San Francisco and Marina del Rey, and a strong quarter by the Desert Springs Marriott. The 2005 outlook suggests solid performance across all markets in this region.

The Mountain region experienced a RevPAR increase of 5%, reflecting some improvement over results achieved earlier in the year. We expect much better performance in 2005 as operations in our Denver hotels begin to strengthen.

Our South Central region experienced our weakest quarter as RevPAR declined by 0.3%. The bulk of the decline was generated by a slow convention calendar in New Orleans and weakness in the Houston market. We expect this region to improve slightly in 2005 as convention activity rebounds in both San Antonio and New Orleans.

Year-to-date, the three best performing markets have been the New England region with RevPAR growth of 11%, the Mid-Atlantic region with growth of 10.7%, and the Washington DC region where RevPAR improved 9.2%. The South Central region was experienced a decline of 0.9% and the North Central region where RevPAR has been 2.2% year-to-date were the weakest.

Turning to our Courtyard venture with Marriott International, RevPAR improved by 10.8% for the quarter as occupancy increased by 2.4 percentage points and rate increased by 6.8%. For the full year, RevPAR for the portfolio increased 6.3%. Our sale of 85% of our joint venture interest in the portfolio continues to progress towards a closing in March. Although the portfolio did not generate any EBITDA for Host Marriott in either 2003 or 2004, it does represent roughly 5 cents per share of FFO on a full-year basis, which should be considered in comparing our FFO guidance for 2005 versus 2004 actual results. The FFO dilution associated with the transaction will be slightly offset by either the reinvestment of the proceeds in other hotels or by reduction of outstanding indebtedness.

As Chris highlighted, we were pleased with our 2.0 percentage point improvement in comparable hotel adjusted margins during the fourth quarter. Our margin growth was facilitated by RevPAR increases, which were predominantly driven by improvement in average daily rates. In addition our strong group business in the fourth quarter generated a meaningful pick up in catering business, which resulted in an approximate two-point improvement in food and beverage departmental operating margins.

Finally, our Insurance costs declined by roughly 25% and real estate taxes also declined slightly for the quarter. These benefits were partially offset by a 10% increase in utility costs and by higher G&A and marketing costs, which were driven primarily by increased sales. As RevPAR is increasingly driven by improvement in an average rate and F&B sales benefit from more corporate and association business. We expect to see further improvement in departmental operating margins in 2005. The expected improvement will be moderated by above inflationary increases in the utility costs and wage benefits. In addition as real estate markets stabilize and local jurisdictions being to increase tax assessments, we expect to see modest increases in 2005 in real estate taxes.

Finally, after declining by roughly 22% in 2004, we also do not anticipate material savings in our insurance costs for 2005. During 2004, we completed approximately 206 million in maintenance capital improvements plus 44 million in major capital projects and repositioning our ROI expenditure. Our total maintenance expenditures fell somewhat short of the original target because we delayed some of our larger room renovations to take full advantage of our efforts to design a new room for our Marriott hotels.

In 2005, we expect to spend 240 to 260 million on maintenance capital items, which is consistent with our target level for the last two years. In addition, we will invest roughly 110 to 130 million in major projects, including repositioning and ROI expenditure. Major projects for 2005 include will the completion of the renovation of the Newport Beach Marriott, commencement of construction of the 105,000 square foot exhibit hall in Orlando as well as the total repositioning of both the Atlanta Marriott Marquis and the JW in Houston.

Based on improving market fundamentals, which enhances our ability to generate strong returns from these investments, we expect to continue to identify and pursue these value enhancements projects at a number of our hotels. Although our actual investment amounts will ultimately determine by the available opportunities in the portfolio, we expect that will invest 200 million to 400 million in these types of projects over the next few years.

We finished the quarter with 347 million of cash, which was increased by 125 million in proceeds from our asset sales in January even after deducting 100 to 150 million in ongoing working capital, we retained significant cash capability to fund investments in new acquisitions or in our existing portfolio. In addition, we have full access to our 575 million credit facility.

For the first quarter, we expect comparable RevPAR growth to range from 6 to 8% and FFO per share to range from $0.20 to $0.22. Please note that based on the FASB guidance issued last year, both our final 2004 results and our 2005 guidance reflect the fact that we are treating our senior exchangeable debenture debt issue on an if-converted basis, even though the conditions required to convert these securities from debt-to-stock have not been satisfied. As a result for 2005, we expect to add back 19 million of interest expense and deferred financing costs associated with the debentures and to increase our diluted share count by approximately 28 million shares. On a cumulative basis this change has had the effect of reducing our 2004 FFO by slightly more than $0.01 and our 2005 FFO per share by approximately $0.03 to $0.04.

The change in accounting treatment does not have an effect upon adjusted EBITDA and the transaction itself even with the change in accounting approach remains accretive. In addition in 2005 we expect that our convertible income preferred securities or QUIPS will also be dilutive for adjusted FFO purposes. This subordinated security, which is converted -- convertible into approximately 31 million shares becomes dilutive when FFO per share exceeds approximately $1.04. The interest cost which should be added back to FFO relative to these securities is 32 million.

Finally, we want to highlight one aspect of the press release in our reconciliation of net income to EBITDA and adjusted EBITDA. You will note that our financial summaries identify the adjusted EBITDA of both Host Marriott and Host LP our operating partnership. Host Marriott is the general partner of Host LP and owns approximately 94% of the operating partnership. Host LP owns all of our assets and is the obligor all of our unsecured debt.

The difference between these two EBITDA calculations is the amount of the distributions from the operating partnership, which are made to OP unit holders other than Host Marriott. These distributions are generally equal on a per unit basis to the dividend payments made to our REIT shareholders. The EBITDA for the operating partnership may be more relevant in calculating credit ratios for certain valuation measures. Although the difference between the two calculations is relatively small today, the gap will grow in the future as our dividend increases.

As we've detailed today, we are optimistic about the lodging environment in 2005, as the economy continues to improve, lodging demands and business travel should continue to accelerate, leading to further improvement in operating results. We are well positioned to take advantage of the opportunities to enhance the value of the company and to drive earnings growth in the future.

This completes our prepared remarks. We are now interested in any questions you may have.

Thank you. The question-and-answer session will be conducted electronically today. If you would like to ask a question, press "star, one" on your touchtone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, it is "star, one," if you have a question. And we'll pause for just a moment.

We will take our first question from Jay Cogan, Banc of America Securities.

Hi. Good morning, everybody.

Good morning Jay.

I have a quick question. Chris, just maybe you want to expand on the higher and better use for land and hotels and other assets that you own. Can you maybe just go a little bit more detail about some of the projects from a timing standpoint, maybe quantify the opportunity a little bit more, and maybe over the next couple of years what we can expect in some broad stokes? I think that would be helpful.

That's a -- Jay it's a good question. I mean, we gave you a few examples of some of the properties that we've advanced more than others. The way I would describe it, it's hard to dimensionalize it right now, because there are lot of things that we are working on and we can't be assured that all of those will come to fruition, although we are hopeful that many of those will and the oncs we described obviously today will. We would prefer to develop the ideas and move them down the track to the point, where we confident we're going to be able to deliver, before we start to try and dimensionalize it.

The thing I would say to you is there -- this is not going to get very specific and I know you want me to be. There's more than a handful of opportunities in our portfolio to look at these opportunities, which is these are conversion of certain hotels to condominiums or excess land parcels that we have like we did in Newport beach where there might be an opportunity to do a time share and or condominiums. I know that you would like to say over the next three years its x-hundreds of millions dollars or whatever we want to try to build that devaluation, but it's hard for us to do that because it's work in progress.

We will continue to update you on a quarterly basis on projects when we get to a point where we think even though it may not be done that there is real opportunity we'll continue to update you. I would say that it's meaningful. I know that you would like more than that, but it's meaningful and it's not an opportunity in a handful of assets. It's a more meaningful opportunity than that in the portfolio.

Okay. And maybe we are getting a little bit ahead of our skis here as well, but I asked this question before and I will keep asking it until you are able to give a definitive answer. But, on 2006 given the change in the mix of your asset profile and also just given the continued improvements on the group side that we should expect, do you have any indication -- early indication of where you think RevPAR trends might continue beyond '05 and into '06?

No. You can keep asking and I will keep refusing to answer. Obviously, we expect 2006, I will say to be a very good year and we would expect in 2006 to do even better from the standpoint of RevPAR growth being even more driven by rate. What we think if this year going to be about two-thirds rates for 2005, which matches up pretty consistently with what it was for the fourth quarter. We'd expect it to be a little bit better.

So we think RevPAR will be strong, it's premature to say where it'll be. We think if all continues on the path that we are on. It should be driven by rate so it’s continued mix shift but also continued rate improvement. And that should mean that we are to be able to get better flow through in '06 than we did in '05. But trying to be more specific than that, when we're in the first quarter of '05 and '06 is difficult. But hopefully that gives you at least some directional sense of what we're thinking.

Yes, it does. Thank you.

Yes.

And next, we'll hear from Will Truelove of UBS.

Hi, guys. I've a question about your CapEx assumptions. First of all...

I'm sorry. Will, we couldn't hear that. What was that?

I have some questions about your CapEx for 2005.

Yes.

In terms of the Marriott initiative with the Bedding program, are there going to be any incremental expenses to host Marriott from that regard?

The answer is yes. But we built it into the numbers, we gave you. I think, if you look at what we're going to do in beds, the cost for the Marriott Bedding programs is about $600 a bed. And if you look at it and we're going to do a large percentage of the portfolio. Not absolutely all of it in this year, but a very large percentage of it, and if you look at what that will cost us net of the incentive that Marriott is providing, it's about $18 million, something, plus or minus 1 million. I would say -- and that's built into the numbers that we've given you. We have been very active with them on the -- in developing the new bed over the last 6 or 12 months, probably really 12 months plus. And we think it's probably singly one of the more important things that we can do in the room from the standpoint of customer satisfaction and customer loyalty.

Now of course, in addition to that, we've been working very diligently with them on the room product beyond just the bed. And I think what we are jointly doing there is going to be very powerful in terms of the overall room product, which will start to rollout a little bit later this year. But the beds are a jump-start on that program and something that we are very supportive of.

Is that part of your maintenance CapEx of that 240 to 260 or is that part of your ROI CapEx of the 110 to 130?

Well, I think they're probably is an ROI component to it honestly it is not -- it's part of the maintenance CapEx. It's built into our maintenance CapEx.

All right. And my last question is going to be on the Marriott World Center in Orlando. You are adding 105,000, and that would bring you, I think, a little over 300,000 in terms of square feet, which puts you pretty close to the Gaylord property, which I think has around 400,000 square feet. Were you seeing some sort of competitive pressures with Gaylord having so much more meeting space near your Orlando World Center? And what kind of benefits and timetables are we looking at in terms of that being completed?

I think, the answer is, you're right on all fronts that we will have over 300,000 square feet, being said. We think we will have in the market, the state-of-the-art exhibit hall. And column free, and soon as the designs that are done, we'll be actually starting work on that, very shortly. And I think, it will be -- it will put Orlando World Center at the top of the list in terms of world-class convention facilities for very large in-house groups.

There's no question that from a positioning point of view, not just getting to related to Gaylord, but related to a couple of properties, two or three properties in the Orlando market that we felt like we needed to do this from the stand point of continuing to appeal to the largest groups, one and two. To allow us to really maximize our market share and our occupancies by not having so much disruption around the set up and breakdown of the large groups that we are currently housing. So it's obviously from the standpoint of return, a very positive 20% plus unlevered IRR. So we think, we're going to get rewarded very well for it and it's the right thing to do to position this property. And no question, part of the positioning of the property, has been influenced by competitive forces in the market.

All right. Thanks a lot.

Harry Curtis of JP Morgan has the next question.

Good morning. Chris, you mentioned the mix of transient business improving and having a dollar amount impact on your ADR. I want to make sure that I got the number, right, I believe, it was $100 difference per occupied room night but correct me, if I'm wrong? And then, what I'm trying to get a sense of is in early 2004 you guys loaded up on the some of these discount groups and I'm trying to get a sense of what percentage they represented now of your occupied room nights -- I'm sorry -- back in 2004? And as we look ahead over the next 6 to 12 months, what that percentage is likely to decline to?

Yes. I mean, there's a -- the first stat was — the $100 was the disparity between the rates on the higher rated segments of our transient and versus the lower rated segments. So you got that stat right. In terms of overall transient business, you are right. We were a little bit more grouped up last year than we would have liked to have been. And we've had obviously a lot of discussion with our operators on that issue and part of that was the fact that some of the big group hotels that we have that drive our results are longer lead times for some of those groups.

And so they were -- you had groups that were on the books that were booked during weaker periods at lower rates. And then, you had a strategy with some of our operators frankly, where at the end of 2003 and into the beginning of 2004. They were very focused on grouping up even with lower rated groups and in the business that they were booking in the year for the year. And that had the result of taking some of the capacity that we had at some of our high demand periods that would have otherwise been filled with higher rated transient and had the results of kind of elbowing that business out because you didn't have the capacity to do it.

What I said in my comments and what we are really aggressively doing with our operators is focusing on really doing the inverse. And at some of our hotels, some of the largest hotels, we still need to build additional group base, but we are obviously focused on building higher quality groups. And we are focused on getting those groups oriented in a way that they are in weaker periods so that we have the capacity to take on the transient -- higher rated transient business, which has a $100 incremental rate benefit in terms of the shift in mix.

There are a number of hotels in the portfolio that are very high occupancy, and I give you an example. Like the New York Marriott Marquis, where we're actually trying to lower the group selling. I mean, there are some of the big group houses, where we need more group, we just need it positioned better and there are some, where we just need less group. And as a result, we are pushing to lower the group and leave more room for transient. When you net all that out, unlike last year, where in 2004, you had basically flat in terms of room night demand, you had flat transient -- transient was just very modestly -- grew at a very modest level. And the group side grew at 5 -- I think roughly 5%. You're going to see it flip around, where you still are going to see some growth in group for the reasons, I described, but you're going to see higher growth in the transient and lower growth in the group.

To be maybe a little more specific, do you have a sense of what the -- what percentage of your occupied room nights was dedicated to the discount groups in 2004 and will there be a 100, 200 or 500 basis point decline just in that discount group segment?

I don't have that stat handy, in my head. We will have to follow-up with you on that.

Okay. Very good. Thank you.

We'll take the next question today from Joe Greff, Bear Stearns.

Hi, guys. Most of my questions have been answered. I just have a quick question for you on your '05 EBITDA guidance. One of the assumptions that you make with respect to '05 is $400 million worth of acquisitions. Do you have contribution to EBITDA from those acquisitions in that 864 to 904 range?

Yes, I think, what we've said, when -- do you remembered what Ed had described, if you look at the Host LP but that’s really 870 to 910.

Right.

And I think that's a fair way of looking at it relative to the fact that the -- only the difference between the two is the amount we -- that effectively the dividend, we pay our OP unit holders. That's just a function of the structure of the company. But obviously the OP owns all of our assets. And -- but so it is -- I think it's 870 to 910, is what I said in my comments. And it builds both the dispositions and the acquisitions in. So what it anticipates is the dispositions that we highlighted, which includes what we have done to-date, which is roughly 125 million plus another 150 to 250 million in dispositions. And in addition to that it assumes the sale of Courtyard and then on the buy side, it assumes $400 million in acquisitions, roughly centered on that -- focused more on the later part of the year.

So that's how much of that EBITDA range is derived from acquisitions, 60 million, 50 million?

It's 15 to $20 million.

Okay. Great. Thank you.

Yes.

David Anders of Merrill Lynch is up next.

Okay. Thank you. I missed the forward-looking commentary on the food and beverage. You said, the economy has improved, people are spending more. Did you quantify that for '05 or is that going to grow inline with RevPAR or below RevPAR, could you comment on that please?

Yes, we did. And I think that the short answer is the way, we are forecasting it now and talking to our operators is -- is going to be less than RevPAR. And we'll have to see. I mean, I think, as the year progresses, we are hopeful that we can do better than that.

Okay. And with respect to kind of the real estate transactions, the condos and the timeshare, with respect to timeshare, do you bring in a manager there, as well to just manage the sales process?

Yes. I think if you look at how we will do timeshare and we are working on one actively now which is at the Hyatt Maui, that we'll do it most likely in a joint venture structure with a timeshare operator and developer.

But the condos are out right sale of the land? And you just profit from that.

Yes, the condos, of course, we can do them ourselves or sell them, the ones that we described and the likely approach, we’ll have -- is more to get entitlements in place and kind of create the value, if you will. And then, either bring somebody in to do it with us or more likely sell it to a third party that does that every day and knows what they are doing and we’ll have created the value by getting the entitlements in place.

Great. Thank you.

Yes.

We'll now hear from Bill Crow of Raymond James.

Good morning guys, nice quarter. Just a couple of housekeeping notes. The 10-cent charge related to debt repayment, how much of that is in the first quarter?

None.

None in the first quarter.

Okay. Chris, you mentioned that the dividend, which you have elevated here in the first quarter may be increased, as the year goes on. You have always said that you payout the minimum amount you're required to. Would that imply that you need to exceed guidance to raise that dividend or what would be the driver there?

Not necessarily. And it's -- and I don't mean to hide from the question, but it's a complex, taxable income is a complex equation has a lot to do with what we buy, what we sell, how much we invest from a CapEx point of view, what of our -- actually gets spent on our maintenance CapEx, what within our ROI repositioning gets spent, and exactly when it's placed in service. That can have a big impact on our taxable income.

So until we get deeper into the year and have some of those variables fixed, it's hard to give you a real specific guidance. Obviously, we are saying 7 to 9 cents, and I can tell you that our intention would certainly not be that would be lower than that. And my expectation could be depending on how things played out, if we are at the upper end of our guidance then depending on the CapEx and other variables, that the dividend that could in fact be higher.

Right. You indicated that you are seeing acquisitions that meet your criteria, could you just remind us what is that criteria based on? Is that accretiveness to NAV is that IRR? What is that hurdle that you are looking for when you make the acquisition?

That hurdle where we are -- I mean we're looking at a bunch of different things, obviously, but where the rubber meets the road for us is straightforward, which is we're trying to get 200 to 300 basis points in the form of an unleveraged IRR, typically over a 10-year holding period, over our long-term weighted average cost to capital. So, yes, we look at whether it's accretive or dilutive to earnings and NAV etcetera, and we look at the cap rate going in. We look at everything that anybody would look at. But the real driver for us is 200 to 300 basis points over our long-term weighted average cost to capital. If we are doing that, we are creating value long-term for the Company in our opinion.

Right. One final question. The assets you sold thus far this year, can you just give us maybe the EBITDA multiple on those sales on average?

You know I mean, Kind of – if you look at the average, we’ve sold at kind of plus or minus the 7 cap and over a 10 times EBITDA multiple.

Right. Thank you, guys.

Jeff Donnelly of Wachovia Securities has the next question.

Good morning guys, just a few follow-up questions. Since most have been answered. On dividend policy, Chris, what was your dividend payout in '04 versus your taxable net income, and I guess, can you share with us, what -- maybe what level of taxable net income is implied by your '05 guidance or at least what that payout ratio might be, if you maintained that Q1 dividend?

It's a great question, but I'm not going to answer that specifically. We don't really get into disclosing exactly what our taxable income is? But suffice to say, our policy remains the same, which is over time, we are trying to distribute 100% of the taxable income. There is an ability within the REIT rules that carry over from one year to the next on a limited basis, and we have availed ourselves of that on many occasions over the years. And so we may have availed ourselves of that to some degree in 2004, but we really don't get into the disclosure of our specific taxable income.

Have those carry forwards burned off?

Yes.

Okay.

If you're talking about net NOLs?

Yes.

Talking about carry forwards on dividends.

And then, I guess, as a follow-up, is it fair to say that though that you are -- the run rate you are expecting for your dividend in Q1, if that was sustained that would, that meets your 100% payout objective?

I think you are trying to ask a question I can't answer. What we...

I have to try.

We said 7 to 9 cents in the first quarter. And obviously we are not intending to reduce that and I have also said depending on how a lot of variables play out, even within the range of guidance that we have given, that the dividend could be higher, but it's premature for us to judge that. We'll give you an update every quarter, we'll have to make a dividend declaration every quarter, and we'll also give you guidance, as to at that point, if we think it's going to be higher. But for now given that we are in the first quarter of the year, and there are so many variables that go into it, 7 to 9 cents is where we are and there is some potential for it to be higher, if things continue to improve generally. And we do intend to maintain our policy, which is to distribute all of our taxable income and there will be occasions, where consistent with the REIT rules of year-to-year, we can carry over small amounts of dividend.

And just two last questions. First is just, an incentive management fee, I was wondering, if you could tell us, what payments you have to make in '04? What's your expectations and your guidance for 05?

The total IMF is -- I know, it was up about 7% in '04 versus '03. And we expect '04 IMF total was about 36, 37 million in our comp hotels. And we expect that it's going to go up about $10 million to $15 million in '05 versus '04.

Okay. And then lastly, I was wondering, if you could share your outlook and thoughts on Chicago and San Francisco, obviously, Chicago has been weak and I think, in the past you said the convention center bookings were weak in San Francisco. I wanted to get your take on that -- those markets in '05.

Yes. I think for '05 in Chicago it's going to be a better year. '06 is going to be a big year. So, we expect things to improve directionally in '05 there, but be a heck of a lot better in '06. And that's what we have been anticipating for some time. San Francisco, we had a pretty good year and we expect continued improvement, a similar kind of year in that market.

Is it that did you guys see a turn in your bookings later in the year, just leading you to just to think that recovery is coming?

In general or in San Francisco?

Either Chicago and San Francisco?

We had good bookings. I’d say we had good bookings frankly, at all of our large convention hotels in the fourth quarter, which is why we went from kind of flat to up 4% in our definite booking pace. And so we had -- in the fourth quarter it was a healthy booking quarter across the country.

What I mean, I should say on advance bookings. Is that leading you to...?

Yes.

Expect a change?

Advanced bookings.

Okay. Thanks, guys.

Yes.

And just a reminder, if you would like to ask a question, it is "star, one". We'll next to David Loeb, FBR Investment Bank.

Hello. That's a fancier name than I heard before. Chris, I think we all agree that supply growth is pretty tame, but could you talk about where you are seeing new construction in your major markets and what's behind that construction?

Well, I mean, it's spotty across the country, obviously, but in general we think it's kind of plus or minus 1% for the next two you know, at least the next couple of years. If you think you know, you go around the country, you are not seeing a lot of supply in the Mid-Atlantic region really. You're seeing a little bit of supply in the Northeast. Midwest you are seeing, you’re not seeing a whole lot of supply. The Southwest, you have seen some, because you had some big like in Houston, Dallas, you’ve had some big additions to supply and the Florida markets you've seen some, particularly focused on South Florida. And a lot of luxury product that has been delivered. Las Vegas, obviously, you have seen a lot of supply. The West Coast not so bad. So, I mean, I would say probably the biggest pockets have been the Southwest and the Southeast.

How about from proposals to build major convention hotels. For example, do you expect that will have much of an impact on you? Washington, I guess, among your top markets would have one of the larger?

There is not a lot of them there you know, that frankly, we think are out there and really going to get done. DC is one. I'm not going to comment specially on Gaylord's project there. But I think in terms of the types of hotels we own and the locations we have in the DC metro region, we feel fine about where we are. We don't really have a major convention hotel in the market. I mean, our hotels are really, the demand is driven by kind of a different type of customer in our DC hotels. So, they are not really, in our opinion going to be too directly competitive with us and certainly from a locational point of view, particularly our Downtown DC assets, I think -- we think we have got superior locations to just about anybody. So, and other then that, I mean, there are proposals scattered around the country, San Antonio there are things going on. San Diego, there are things going on but the truth is I think those are probably two to three and maybe even four years off before they're in the competitive supply.

So, for new stuff that none -- we've none of us have heard about, is that 4 to 10 years off? I mean, if somebody really wanted to build another behemoth hotel in one of your core markets?

Four or seven years, I mean, figure it would take them at least a year. If they have -- if they just starting to think about them at least a year, if they are just starting to think about it, it would take them a year -- a year would be aggressive -- more like two years to get a shovel in the ground and then two to three years to build it. So, and that's assuming that they are doing it right now. So, I would say four years of very aggressively you know, seven on the other end.

Perfect. Thanks very much.

Yes.

We'll take the final question today from Jay Leupp, RBC Capital Markets.

Hi. Good morning. Here with Brett Johnson. Chris, can you give us an update on your June acquisition of the Fairmont Kea Lani, and how the fourth quarter looked and what you're seeing so far in the first quarter, if it's performing in line or not with the expectations you made when you underwrote the acquisition?

Yes. I -- it's doing great, Jay. The hotel is exceeding our expectations and our underwriting both in the fourth quarter and we owned it for the fourth quarter. And in '05 it's meaningfully exceeding what we had underwritten it for it to do -- the truth is, everything we have bought and I made that comment in my prepared comments is exceeding what we had underwritten it for. And in fact, if you look at the full year 2004 as if we had owned them all and this is probably a conservative way of looking at it versus our underwriting for 2004. If you look at everything we've been buying since the fall of 2003, we are over 13 to 14% on our underwriting. The actual results are 13 to 14% better than our underwriting.

Okay. And then a follow-up on the comment you made about your underwriting criteria being 2 to 300 basis points over your weighted average cost to capital for acquisitions, what currently do you estimate your weighted average cost to capital to me -- to be at this point. And also going-forward, a follow-up on the airport hotel, the RevPAR growth of 12 plus percent. Is that a return of the business traveler and how price sensitive is that airport hotel customer?

I'm sorry, I missed the last question. What was that?

Just on how price sensitive is that airport hotel customer. Is that basically -- could that be a source of strong RevPAR growth going-forward?

On the airport customer, I think obviously, they are more price sensitive. The airport hotels in general have been so beaten up in the downturn, from '01, '02 and '03 that's why you saw such a strong result. I think we expect to continue to see a pretty good result. Longer term, other than hotel -- airport hotels that have a real unique competitive advantage, it's probably not where we're going to be focused as a company, but we have sold only one and we'll and that's at DFW Airport because it actually performed pretty well over time. And while we're going to continue over time to probably lighten our load in the airport segment of the business, we do think there is pretty good growth potential and so we want to pick our timing carefully. Because we think we're going to continue even with the price sensitivity in that customer that the cash flows and the EBITDA and cash flows, RevPARs have been so significantly impacted there we think there is pretty good short-term growth there. In terms of our long-term weighted average cost of capital, it obviously, moves around.

Sure.

Day by day, but I say it's somewhere in the area of 8.5 to 9.5, depending, I mean, it could -- where we are today, it's at the lower end of that range.

Thanks

And at this time, I would like to turn the conference over to Chris Nassetta for any additional and closing remarks.

We have kept you long enough and we appreciate your time. We are coming up exactly on an hour. Thanks for joining us today. We obviously feel great about the fourth quarter and full-year 2004. We are feeling very good about where we are going in 2005. We are confident. We're going to get a lot done and advance the ball and create a lot of value this year. And we look forward to catching up with you again after the first quarter in a couple of months. So, thanks for your time and we will talk with you soon.

That does conclude the conference. And we would like to thank you all for your participation. And have a great day.