Host Hotels & Resorts Inc (HST) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to the Host Marriott Corporation first quarter 2005 results conference call. As a reminder, today’s call is being recorded. At this time, for opening remarks and introduction, I would like to turn the call to the SVP, Mr. Greg Larson. Please go ahead, sir.

Thank you and good morning. Welcome to our first quarter earnings call. Before we start, I’d like to remind everyone that many of the comments made today are considered to be forward-looking statements under Federal Securities laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties, which could cause future results to differ from those expressed. We’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, adjusted EBITDA, and comparable hotel results, which we believe is useful to investors. You can find this information in today’s earnings press release, which has been posted on our website, and our 8-K filed with the SEC.

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

Thanks, Greg, and good morning, everyone. We’re pleased to report another strong quarter of operating performance. Greater pricing power during the quarter resulted in average rate increases that exceeded our expectations. In fact, average rate increases accounted for approximately 90 percent of our increase in RevPAR for the quarter and helped us reach our highest first quarter average daily rate in the history of the Company of approximately $165. Our results exceeded the high-end of our expectations for the quarter and early results for the second quarter have been strong. As a result, we are increasing our full-year RevPAR earnings and dividend guidance, which I’ll discuss in more detail in a few minutes.

First, let’s talk more specifically about our first quarter results. Diluted FFO per share was 19 cents for the first quarter, including a charge of approximately 4 cents related to costs associated with refinancing. Excluding these costs, diluted FFO per share exceeded the high-end of our guidance of 20 to 22 cents and exceeded consensus estimates. Comparable RevPAR increased 7.6 percent compared to 2004 levels, driven by a 6.8 percent increase in average room rate and a .5 percentage point increase in average occupancy. The 6.8 percent increase in average room rate is our highest first quarter increase since 1998.

Comparable adjusted profit margins for the quarter exceeded first quarter 2004 margins by approximately 100 basis points, and adjusted EBITDA was $192 million for the quarter, compared to $172 million for the first quarter of 2004, an increase of 11.6 percent. Demand remains strong in the first quarter of 2005, enabling our operators to significantly increase average daily rates, particularly in the premium and corporate transient segments.

Premium and corporate average daily rates increased over 12 percent compared to prior year results, and our overall transient average daily rate increased nearly 9 percent. We’re encouraged by demand trends in the transient segment, as net reservation volume continues to meaningfully exceed prior year levels. We expect that increased levels of transient demand will enable our managers to shift more business towards the transient segments over the balance of the year, and this shift, coupled with continued strong rate increases, should lead to both strong top-line and bottom-line operating performance.

Group demand remains strong, and as a result, our booking pace for the remainder of the year is up nearly 11 percent. The focus of our managers continues to be on strategically directing incremental group business to weekends and slower demand periods, allowing capacity for higher-rated transient business. The average daily rate for group room nights booked in the first quarter for the remainder of the year is up approximately 10 percent from prior year levels, indicating that our managers are able to be very selective about accepting group bookings.

Clearly, the 2005 outlook for both the group and transient segment is very promising. As we’ve indicated previously, we intend to take advantage of the current strong disposition market to recycle capital out of some of our non-core assets. Our guidance continues to be that we will sell an additional 150 to 250 million of these non-core hotels, primarily during the second half of the year.

We have finalized the previously announced transaction to sell approximately 85 percent of our interest in the Courtyard by Marriott joint venture for approximately $92 million, which provided us with a very favorable exit from this non-core investment. Although the acquisition environment for lodging real estate remains extremely competitive, we continue to evaluate opportunities to purchase assets that satisfy our investment criteria. Our guidance for the year assumes that we will complete between $300 and $500 million of acquisitions that meet our requirement of achieving a premium to our weighted average cost to capital on an unleveraged basis.

As we have previously discussed, we are increasing our investments and our existing portfolio in the form of repositionings and ROI capital investments. We’re in the final stages of planning for the repositioning of the 1,700-room Atlanta Marriott Marquis, which will improve its competitive position in the Atlanta marketplace. We expect our investment to be approximately $80 million. The investment plan includes the construction of a new 24,700-square foot ballroom, as well as alterations to existing space that create another roughly 25,000 square feet of meeting space, 3 new food and beverage facilities, a new health facility, and renovations to the existing ballroom, meeting space, and lobby. We will also be commencing a comprehensive rooms renovation this summer.

Additionally, we plan to invest $11 million in our Ritz-Carlton Amelia Island property to renovate and expand the property’s spa and pool areas to better position the hotel in the Florida luxury resort market by offering guests a comprehensive spa and health experience.

We continue our efforts on a number of value-enhanced opportunities within our portfolio, such as the previously discussed sale of the former Marriott Mountain Shadows resort to a residential developer, the sale of excess land at the Newport Beach Marriott to a high-end condominium developer, and the potential development of time-share units on excess land at the Hyatt Regency Maui. We will continue to update you on these and several other new exciting opportunities as we make progress.

Now, let me update you on the outlook for the remainder of 2005. With demand remaining strong and average rate increases exceeding our expectations, we now expect comparable RevPAR to increase 7 to 9 percent for the year, and comparable adjusted profit margins increase 100 to 150 basis points. Based on our current operating forecast and our assumptions regarding acquisitions, disposition, and financing activities, we expected diluted FFO per share for the year to be approximately $1.01 to $1.09, which includes 9 cents per share of expenses relating to costs associated with refinancing.

For the second quarter, we estimate that RevPAR will increase 8 to 10 percent and that diluted FFO per share will be 29 to 30 cents, including 5 cents per share of call premiums and financing expenses.

Adjusted EBITDA for Host LP for the year is expected to be $880 to $915 million.

Based on our continued strong operating performance and increased earnings guidance, we now expect our common dividend for the second quarter to increase by 1 to 2 cents, resulting in a common dividend of 9 to 10 cents per share.

In summary, we continue to believe that we’re in the early stages of a sustained recovery in the lodging business and that our portfolio is well-positioned to take advantage of strong operating trends over the next several years, which we expect to result in very strong earnings growth.

We are very pleased with the performance to date of our newly-acquired assets in Hawaii and Scottsdale, Arizona, 2 of the fastest growing lodging markets in the country. And our portfolio continues to benefit from its presence in the strong markets, such as New York, Washington, D.C., South Florida, and Southern California. We continue to invest in our irreplaceable assets, such as the New York Marriott Marquis, the Orlando Marriott World Center, and the Atlanta Marriott Marquis, and we expect to continue to benefit from the high various entry associated with those and many of our other markets. We believe we have the highest quality portfolio of assets in the lodging industry, and as a result, expect to achieve superior results during this recovery.

Thank you and now let me turn the call over to Ed Walter, our CFO, who will discuss the financial performance for the quarter more specifically. Thank you.

Thank you, Chris. Let me start by giving you some detail on our RevPAR results for the quarter. Looking at the portfolio based on property types, our resort convention hotels performed the best with first quarter RevPAR growth of 9.3 percent, as occupancy improved by 1.3 points and rate improved by 7.5 percent. This strong performance is driven in part by average RevPAR growth of more than 18 percent at our 3 Ritz-Carlton resorts in Florida. Our urban and suburban hotels experienced RevPAR increases of 7.4 percent and 6.6 percent, respectively, which reflected average rate increases of more than 6 percent. For the quarter, our airport hotels had both RevPAR and rate growth of 5.8 percent.

Turning to our regional results for the quarter, our top-performing region was the Washington, D.C. metro region, which enjoyed a 14.3 percent RevPAR increase. Although performance in this market was aided by high occupancies generated by the President’s inauguration in January, the market continued to outperform throughout the quarter, driven primarily by average rate growth of more than 11 percent. We expect continued strong performance in this market during the second quarter.

RevPAR in our Florida region improved by 11.6 percent, as our Miami-area properties enjoyed RevPAR growth in excess of 25 percent, resulting from strong transient and group demand and an earlier Easter holiday. The pace in Florida may moderate a bit in the second quarter, in part because our Orlando World Center hotel faces some tough year-over-year comps.

Our mid-Atlantic region had a strong quarter, as RevPAR grew by 11.1 percent, led by the New York Drake and the New York Marquis hotels where RevPAR increased by 18-plus percent, driven by average rate increases of approximately 10 percent. International demand also continues to strengthen this market, facilitated by the weak U.S. dollar. We expect strong performance in both the region and the New York City area to continue into the second quarter.

Our Pacific region had RevPAR increases of only 6 percent, as both our large convention hotels in San Diego and San Francisco suffered from the slow convention calendar. The San Francisco area suburbs had a strong quarter, led by our Burlingame Hyatt, which benefited from a 20-point gain in occupancy, leading to RevPAR growth of more than 40 percent. The Maui Hyatt, which just became a comp hotel this quarter, enjoyed a RevPAR increase of 19.5 percent. The Island of Maui is benefiting from a 20 percent increase in airlift capacity over the last 12 months, which is facilitating improved demand. We expect the convention calendar will improve at the big hotels in the Pacific region in the second quarter and the overall outlook suggests solid performance across all markets.

Although the Boston market continued its rebound with average RevPAR growth of 7.8 percent, the New England region, as a whole, had RevPAR growth of only 5 percent, as our suburban hotels underperformed. The South Central region experienced a RevPAR increase of 1.4 percent due to a softer Houston market and capacity limitations as a result of the rooms renovation.

And finally, our Atlanta region increased by approximately 1 percent, as the soft convention calendar impacted our downtown hotels. One bright spot in this market was the Atlanta Westin, which improved by over 36 percent in RevPAR as we began our second year under the Westin brand. The outlook for Atlanta is expected to improve over the course of the year.

As Chris noted, we were pleased to have sold the bulk of our investment in the Courtyard joint venture with Marriott International just after the end of the quarter. Our sale price for our interest represented an after-tax gain of $42 million, which will be reflected in our second quarter results. Since the Courtyard portfolio represented our most significant non-consolidated joint venture investment, you should expect, going forward, to see year-over-year reductions in our equity and earnings or losses from affiliates and partnership adjustment line items once the sale transaction has been reflected.

Our strong top-line growth, which was driven primarily by rate improvement, contributed to solid comparable hotel-adjusted margin expansion. Margin growth was driven by excellent rooms department flow-through, which exceeded 83 percent, and by continuing declines in insurance costs. Offsetting some of this improvement was weaker flow-through in our food and beverage department followed by lower top-line growth of just 3.5 percent and above inflationary wage and benefit increases. Overall, we are seeing payroll costs increase roughly 5.3 percent, which reflects hourly wage increases of approximately 4 percent and benefit cost increases of more than 9 percent, which were partially offset by a reduction in hours worked of 1.6 percent.

In addition, utility costs, which represent roughly 4.5 percent of total costs, increased by more than 10 percent, which impacted margins by 3/10th of a percentage point.

Finally, incentive management fees increased by approximately $2.7 million, or 27 percent, for the quarter. We note that (technical difficulty – no sound) low fee base in 2004 and we expect that this rate of increase will be the highest we will likely incur, as the growth rate should moderate meaningfully in 2006 and thereafter.

For the quarter, we completed approximately $50 million in CapEx, making significant progress on several major rooms reduced, including our New Orleans Marriott, the J.W. Marriott in Houston, the Boston Hyatt, and the Kansas City Airport Marriott. In several markets, we believe our occupancy growth was somewhat constrained by the lack of available rooms due to our construction efforts, although we were often able to recoup a portion of the lost revenue through charging higher room rates. We expect to spend approximately $250 to $270 million in maintenance capital improvements for the year.

We have continued to make meaningful progress towards improving our balance sheet. During the first quarter, we completed a $650 million, 10-year senior notes financing at an interest rate of 6 3/8th percent. The proceeds of this issue have been, or will be, employed to tender and/or discharge our $300 million Series E senior notes, which carry an interest rate of 8 3/8th percent, to repay $169 million of our 7 7/8th Series B senior notes and to repay the $140 million in 9 percent mortgage debt secured by our Ritz-Carlton and Naples and Buckhead, plus pay-related prepayment premiums. The net result of this transaction was an approximate $10 million annual pro forma reduction in interest expense. Last week, we also called our 10 percent Class B preferred stock issue, which will be redeemed on May 20th with available cash.

Our quarter-ending cash balance of $589 million did not reflect the use of $176 million, which will be expended to complete the debt repayment contemplated by our March financing transaction, nor did it capture the expenditure of the $100 million to redeem our Class B preferred stock issues. These expenditures will be partially offset by the $92 million in gross proceeds realized from the sale of our Courtyard interest.

Our cash balance, netted for the effect of these transactions, would have been roughly $400 million. The remaining balance will be deployed for acquisitions, investments in our portfolio, other corporate purposes, and to maintain working capital, which we are prepared to reduce to approximately $100 billion by year-end. We continue to have a $575 million of capacity on our credit facility and face no debt maturities for the remainder of the year.

As we have detailed today, operating trends continue to be highly favorable. As lodging demand and business travel continue to accelerate, we expect to see expect to see strong rate growth and improving margins. Our actions to enhance our balance sheet continue to improve our flexibility and position us to take advantage of the opportunities we expect to see over the next several years.

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

(OPERATOR INSTRUCTIONS) Joe Graff, Bear Stearns

As you look out into ’05, can you just give an update in terms of your room night’s basis on a mixed basis? I mean how much is related to group and how much is related to the business transient?

I mean if you look at the trend in segments, both of the kind of corporate, special corporate and premium, in the first quarter, it was up about a point and a half. Discount in the transient segment was down pretty significantly. It was down 5 to 6 percent. The group segment was up a little less than 1 percent in terms of demand. Obviously, if you look at it on a revenue basis, given the rate increases, the transient segment, overall, even with the discount being down, was still up about 7 percent, and group was about 5 percent.

Part of what was happening in the first quarter was we were really pleased to see, as it relates to kind of the group transient mix, is, as we’ve noted a number of times, we’ve been really pushing our operators, they’ve been pushing themselves, to kind of push for group business into weaker periods and weekends. And the results in the first quarter, we are hopeful and expect that the rest of the year will look good as well, suggested that we had some great success in doing that.

As an example, our demand in the first quarter on the group side was, while it was up overall, it was up mainly on the weekends. It was up 4 to 5 percent in terms of demand during the weekend period and it was down 1 to 2 percent during the weekdays, which is a good sign that we’re pushing group to the weekends and easier periods and it’s, while it maybe displaced a little bit of transient business, which is why transient didn’t grow a little bit more, it’s higher rated. The group on the weekend is a higher rated business than the transient on the weekend. So, it’s a great -- even though you’re having more group than transient in that particular shift-out, you’re getting it at a better rate with a higher spend, because the groups spend more money overall than the transient customers would spend.

Great. And could you just remind us, for 2005 group bookings, what percentage of that is booked with pricing that was more ’04 or ’03 pricing?

You know I said this on the last call. It’s tough to be really precise because you ultimately have to look at every single group booking at every single hotel, so you have tens of thousands of group bookings. But if we look at it, and we have looked at it pretty carefully, I would say to you that in 2005 the percentage of our overall bookings that relate to bookings that were done during a weaker time are about 15 to 20 percent. And when you look out to ’06, we think that that drops down to about 5 or 10 percent. So it becomes pretty diminished as we get to next year.

Great. And, Chris, do you want to comment, I guess, on the Essex House? I think it was reported in one of the New York papers here, you and Fairmont working on a joint bid.

Yes, we have a very straightforward policy, which is we don’t talk about deals that we may or may not be working on before something’s been done. So, obviously, that’s a deal that if we had done something you would know about it. And so I suggest we have done nothing.

Jeff Donnelly, Wachovia Securities

Actually Joe had some of my questions, but I’m just curious about your 2005 guidance. It seems a little conservative considering your results in the quarter and raised RevPAR growth expectations. I don’t expect you to tweak your guidance on the call, but, Chris, can you share with us maybe what’s your opinion on where you would expect to surpass your guidance. I mean do you think you’re being -- maybe keeping it close to the vest on margins or RevPAR or maybe your potential acquisition activity?

Well, your assumption is correct; I am not going to tweak our guidance in the Q&A. We, obviously, spent a lot of time working on our guidance, as I think I tell you on every call, Jeff, and we feel good about it in the sense of where we are in terms of group bookings and what we see going on with transient business and what we see, as we’ve described, going on with our group bookings going to weaker periods and weekends and what we see going on in rate, both in group and transient. We feel good about the guidance we’re giving at 7 to 9 on the RevPAR side. So, if you said to me is there some area that could play out where it’s better than that, I guess the answer is sure. But that’s the best estimate of what we think will happen.

On the margin side, I’d say the same thing. We’ve said that only 60 days ago or so when we did our fourth quarter year-end call that we thought it would be 100 to 150 basis points. There are a lot of things that are helping in terms of flow-through related to rate. There are also, as we described in the last call and we described today in Ed’s comments, there are a lot of things that are hurting in terms of wages and benefits costs, utility costs, etc. and some benefits from last year in the sense of insurance and real estate tax reductions that we can’t replicate this year. And so, yes, when we gave you that guidance 60 days ago, we felt like that was achievable, obviously, or we wouldn’t have given it. I say we feel better about that guidance today of 100 to 150 basis points because of the pricing power that is exceeding what our expectations were only a few months ago. But we still feel like that’s the range in which we should be.

I’ve had a number of people comment, even though you didn’t ask in your question, well, other people are 150 or 200 basis points higher margin and all I can say we’ve been thoughtful about it. We’ve worked through every, ground up in a granular way, through every property to kind of roll it up and just try, as best we can, in our forecast, to anticipate what we think will happen. If people think that margins are going to be higher and ultimately on the year they are, I would say we’ve been performing pretty well vis-à-vis the competition on the margin front. And if they’re right, and I hope that they are, and somehow margins are better, my guess is ours will be better. But that’s not to say I think that they will; it’s only to say I think that we’ve given you a forecast that we feel good about. But if something goes on in the world where margins are much higher, I don’t see any structural reason why ours wouldn’t be higher as well.

You successfully identified my next question.

No, I answered it.

You did. Thank you. I’m curious on labor costs. What are your managers doing to get a better handle on their costs? Is there something out there with better practices on that? And do you just, in general, see a time when maybe growth and labor-related cost subsides?

I do. I mean the main thing that they’re doing is trying to get additional productivity gains, which they’re doing in lots of different ways, just trying to be smarter in the hotels using labor management models with a new technological base that we’ve invested in with our managers over the last couple of years. And I think you are getting additional productivity gains. You are not getting 5 or 10 percent productivity gains, but you’re hopefully getting 1 to 2 percent kind of productivity gains, which will help, which offset some of these increases.

I do believe, and I can’t tell you exactly when, but I’ve said this many times, I do believe that both in the area of the utilities, which isn’t labor so much but clearly an expense that’s been hurting us, and then wages and benefits, particularly in the benefits side, that over the next 12 to 18 months you’ll start to see that be rationalized, not that they’re going to go down necessarily, but the year-over-year growth rates will start to be a little bit more reasonable than they have been, and as a result, will allow us to get some additional flow-through and some additional margin growth.

Related to that, is there any update on the union labor front?

Nothing that I think that’s worth commenting on. Obviously, in San Francisco there is still a back and forth going on. There’s not been a deal met. We’re not part of that multi-employer agreement, so we’re not in the middle of it. Because while we do have hotels that have union labor in that market they are on a different cycle, so we’re not directly part of that equation. We obviously pay a lot of attention to it. We’re watching it very carefully and hopeful that the two sides will come together. But the union representation overall in our portfolio is very light. And in those markets that are being affected right now we either don’t have unions or we’re on a different cycle.

Okay, last question, I guess for Ed. Just concerning the dividend in 2005, based on your 2005 FFO guidance and what you anticipate your pay rate to be maybe for Q2, would that fulfill your obligation for the dividend in 2005 or would you anticipate having to increase it further as the year progresses?

I think a lot of that just depends upon how the year progresses. As you know, we generally target, or our philosophy has been with respect to the dividend to pay out our taxable income. We indicated in the first quarter, or in our fourth quarter call, that we hoped that the dividend would increase over the course of the year. We, obviously, felt good about the dividends that we announced for the first quarter and feel comfortable that we should increase it now. But we’ll need to see how the rest of the year plays out to see whether it would go any higher.

Harry Curtis, J.P. Morgan

Going back to the discount mix question, can you, Chris, give us some sense of the customer value difference between the discount rated customer and the customer that is now going into the room, whether it’s a higher-rated group or a transient customer?

Yes, the differential at the low-end in the discount business and the high-end in the premium business is about $100 in rate. And if you look at the same kind of metric in the group side, which is looking at kind of the highest-priced group, which is association versus the lower rated discount group, it’s $70 to $80 in differential.

And there is some incremental revenue there, isn’t there on top of that, like food and beverage and --?

Absolutely. In the group side of the business, frankly on both sides of the business, but particularly in the group side of the business, the association groups not only pay the highest rate, but they’re clearly the highest spend. They spend the most in the catering area. And in the higher-rated transient segment, it’s fair to say that they spend more. The impact is much less because when you think about it it’s really more other revenues. Food and beverage out of the restaurant outlets, which aren’t particularly high-margin as compared to catering margins.

And the flow-through on that incremental value per customer is that similar to what you mentioned a minute ago – 80 to 85 percent?

Yes, it should be.

Okay. And then the second question I had is, going back to the investments that you’re making in some of your hotels, down in Atlanta for example, do you consider it sort of defensive catch-up spending or is the investment going to produce an ROIC?

We believe it’s going to produce a return on capital. And an IR on an unleveraged basis, that’s going to be very favorable, frankly more favorable than anything that we can achieve in the acquisition market. So in the case of Atlanta, we don’t view it as defensive. I mean you can always argue it’s defensive in the sense that you’re trying to position a hotel to better compete against competition. So, one could argue that there is some part of it that’s defensive. Our view is that it’s a very strong hotel now. It does very well. It’s a market leader in its market, but we think that there are opportunities for how it’s given its demand mix and how it’s being sold to optimize both revenues and bottom-line.

And the primarily thing that’s happening here, in addition to rooms renovations and bathroom renovations and public space renovation, is we’re changing the entire meeting space platform of the hotel so that we can be much more friendly to the large in-house groups, which we think can change our demand mix in a very positive way. So, we think in the end, and we’re in the final stages of doing a planning and underwriting of this, but preliminary underwriting of this is that it’s very, very, in the case of Atlanta, very strong overall yield.

In the case of like an Amelia Island where we’re repositioning it, adding, we have a very small spa. It’s an overstatement. We have an area with a workout room and a few treatment rooms, but we’re really creating a full-fledged spa that’s going to be a terrific spa. The resort needs it, clearly, we think, to be in the right competitive position, but there is just massive demand for it in that particular case. As a result, the unleveraged IRs on that will be phenomenal as well. 20-plus percent unleveraged IRs, which is a terrific premium to our cost to capital. So, as we’ve said many times lately publicly, because I keep talking about it, is a lot of these are less sexy than the big acquisitions you read about in reports or papers. But from a capital allocation point of view, they’re very intelligent investments for the Company. It’s where we get our best spread in terms of our returns relative to our cost to capital and we’re working hard to make sure that we find those good opportunities to invest capital in.

That’s helpful. Thank you.

Bill Truelove, UBS

Good quarter. In terms of your labor cost issues, are there differences between your managers in terms of how much labor cost is growing? Or is it a regional phenomenon? Can you give us a breakdown of how that looks?

I think that the short answer is it’s more regional than it is by operator. I mean every operator has a slightly different benefit package and a slightly different strategy for how they staff hotels. But if you look at it on kind of a comparable basis, apples-to-apples same-store, if you will, in the hotels, it’s driven more regionally than anything, than by operator.

Which regions are the problems on?

Well, right now it’s pretty consistently around the country, but I would say the coasts of the country are probably more problematic than anywhere else. The midsection of the country has not gotten, obviously, as hot from an employment point of view and as a result you’re still having increases that are above inflationary but not as much as you’re finding in the stronger coastal markets.

You mentioned earlier on the call that, a) you thought that this was an early phase of recovery, and b) that some of these costs for increases should moderate. Do you think that, given that kind of scenario, that you eventually return to your previous peak margins of the hotels? Or are the previous peaks just too high and will never get back there?

I think it will get back there. I think it’s the question of when. I mean we kind of look at where we will be versus ’98, ’99 kind of margins versus 2000. And I think our view is we’re going to get there in ’07, ’08. That’s not to say, there is probably a point difference between the two. We’re probably, in ’05, about 3.5 points off of our ’99 margins, ’98, ’99. I’d probably say we’re 3, 2.75 to 3 points off. So, we think we’re going to get there. We’re not going to get there this year, probably not next year, but ’07. We’re still 4.5 points off of 2000. So we think it’s just -- it’s not that you couldn’t get there, it will just take longer to get there.

William Greene, Morgan Stanley

Can you talk at all about international travel and how it’s affecting either percent of demand in the portfolio or how it’s changing year-over-year?

Yes, we think international travel -- there are lots of stats out there. The best we can see is it looks like it’s up 10 to 12 percent, kind of in that range. And while it’s hard to decipher exactly, just in terms of how business gets coded into our system, what the pickup is in individual hotels, our sense is that it’s obviously helping us. It’s helping us a lot more in the major gateway cities. Washington, New York, Boston, San Francisco, Orlando would be probably the prime markets that is helping us.

Okay. And then also, do you have a sense, given all the changes you’ve made in the portfolio in the last few years, where the replacement costs per key would be estimated at?

Yes, we’re working on actually an update of that right now, but I think it’s fair to say that we think it’s in excess of $250,000 a room. And exactly how much in excess of that, we do an update on this periodically. Land costs have gone up. The cost of materials, particularly concrete and steel, has gone up very rapidly. The cost of building one of these big hotels over the last 2 or 3 years has probably gone up 30 percent from a materials point of view, in addition to what’s going on in the land side. So, we’ll continue to give you an update as we refine that, but I think it’s fair to say it’s over $250,000 a room.

Jay Leupp, RBC Capital Markets

Jay Leupp here with Brett Johnson. Chris, the 7 to 9 percent RevPAR assumption that you’re making, can you give us a little more color as to what you are assuming in terms of a high-end business traveler, growth in that segment versus the higher-end vacation or leisure traveler? And then also talk a little bit about that 20-point gain in your Hyatt Burlingame. Is this maybe a precursor that the Northern California market, which you talked about earlier as being soft, is actually starting to make a comeback?

Yes. On the demand side, I think the simplest way to look at it is we think overall demand within the transient segment is going to be up a couple of percent, maybe 2 to 3 percent overall demand, and the group segment is only going to be up probably a percent. Now, rates, obviously we expect both categories to be up significantly. And then that split between the two is simply again the fact that we’re trying to really leave more capacity for the higher-rated transient demand. So when you look at the overall increase in the higher-rated segments, I don’t have the number in my head, but it’s a lot higher than the 2 to 3 because there is a substantial decrease going on in the discount side. So it’s probably, on the demand side, a rough order of magnitude of 3 to 5 percent kind of increase in the higher segments and a reduction in the lower segments.

Similar thing is going on in the group side in the sense that you’ve got the corporate and the association going up. You have the other groups, which are lower-rated groups, generally going down a bit. The net result of it is we think that group will be up a bit for the year. Obviously, group booking pace right now is up 11 percent. You’d say, well, gee, that’s kind of pacing towards a much higher increase than you’re talking about, and the fact of the matter is the reason it’s up now is we’ve been pushing real hard to fill in weak periods. And we’re filling in those weak periods. As we get deeper into the year, obviously there’s not going to be as much capacity in the weak period and we’re trying to capacity available in the stronger periods and during the weekday, in general, for the higher-rated transient business. So what you’ll see is that group booking pace should move down over time as a result of good work that’s been done early in the year.

I hope that answered your question. I think it answered your question.

In terms of Burlingame, I think that is a sign of things to come. San Francisco, obviously, has a long way to go to get back anywhere near where it was, but we are seeing some pretty nice growth in San Francisco, generally, year-over-year. A long way to go, but still nice growth. And we are definitely seeing growth at San Francisco Airport. The traffic in and out of San Francisco Airport has grown a pretty meaningful amount. The international flow into that airport, which has traditionally driven a good part of the traffic there, it’s picking up in a substantial way. And our belief is that it is a good sign and that it is a sign of things to come in terms of the San Francisco Airport market continuing to pick up.

Okay. And then just one follow-up, either yours or Ed’s comments about asset sales. I think you made the comment that you were anticipating about $150 million of sales this year. And just to clarify, would that also include what you’re assuming in terms of sales of excess land for either residential development or timeshare development? Also, how much of that do you think will actually take place this year in your portfolio?

The answer is no. We’re $150 to $250 million more in sales, so beyond the $100 million we did in the first quarter, beyond roughly $92 million for Courtyard, we’re saying an additional $150 to $250 million of non-core asset sales. That does not include any value enhancements, sales, if you will. And the expectation is that -- I think if any of that gets done this year it would be really late in the year. The likelihood is it’s more next year. Just given where we are in sales of (technical difficulty – no sound) timeshare, but we won’t be under construction there probably for another year and a half, plus or minus, given how long it takes to get entitlements, which is a good news/bad news story.

In the case of Mountain Shadows, again, we’re in the middle of entitlements. I just don’t think we’ll get through those in a timeframe that will happen this year. It’s probably more likely the first part of next year. And at Newport Beach, similar, probably the first part of next year, because it will take a good part of this year to get through the entitlements there. There are a bunch of others that we’re working on that we’re not prepared to comment on yet for a number of reasons. One, they are not done; two, they are a little more sensitive from a competitive point of view. But as we make progress on those, we’ll give you more detail. If any of those we think are going to occur this year we’ll obviously give you an update on that. But at this point, I would say -- our assumption is that they will not.

Jim Sullivan, Prudential

Chris, first question for you, back in the fourth quarter call you had talked about your anticipation that the RevPAR gains going forward would be about one-third occupancy, two-thirds ADR, and the first quarter, obviously, was more skewed toward ADR, which is always a good thing in terms of margin. I just wonder if you still think occupancy gains will account for as much as [compared] [ph] to RevPAR gains for the year.

I think it could. If I were to say today, answer the question there, I’d probably say it’s more likely two-thirds to three-quarters. I would take these over on the over/under, meaning that it will be closer to three-quarters than it would be two-thirds in my opinion, based on the first quarter experience and our sense of what’s going from a yield management and pricing power point of view. We do expect to get some occupancy gains clearly, and we are seeing some of that now.

So given that shift and given that you actually raised your RevPAR guidance for the year, has the fact that you’re not boosting margins a little bit more, that’s because costs are running ahead of expectations?

I don’t think it’s that costs are running much different than what we had expected, maybe in the utility area they are. They are a little bit higher. We had hoped for a little bit more moderation. But as I said in my earlier comments, one, I’m not going to tweak our guidance on margins, but we have more confidence and we feel better about the range in the margins than we did 60 days ago, and that’s in part why.

Okay, secondly, can you give us an update on where you think pricing in the investment market has moved over the quarter for hotels that you might be either buying or selling?

Over the last quarter, truthfully, I don’t think pricing has moved. I mean there are a lot of pundits out there talking about things are moving by the day, but I can’t see any discernible difference in the last quarter. Certainly over the last year or 2, it’s gotten much more competitive. The world is awash in money and real estate is awash in money and lodging is also a victim of that. And so there are fewer deals than there are dollars chasing them. So, as a result, overall yields have come down. Cap rates have come down. But I think that’s been a phenomenon we’ve been experiencing for awhile. I know it’s hard to define awhile, but I don’t see any discernible difference.

And, Chris, at the margin, in terms of buyers for hotels or interested in doing condo conversion, in selective markets, we keep hearing that prices continue to rise. Are you seeing that?

Yes. That is true. But that’s not a phenomenon that you see generally. I’m answering the question in a more general sense of what we see across all the major markets in the country. The phenomena of hotels being pulled out of inventory for condo conversion is a very select phenomenon. I mean predominantly it’s a New York experience. Now, there are some other markets where you have a little bit of that going on and there are some markets where you have condos being built with hotels associated with them.

New York is the prime example of a market that you’ve got hotel inventory coming out being converted into condos because it’s a higher and better use in today’s world. But you can’t extrapolate from that. And as a result, New York pricing has moved. I mean I don’t know, I can’t slice and dice it enough to say has it moved in the last 60 days since we talked to you. It might have, but I think it was pretty competitive before and the condo conversion phenomena has not occurred on the last quarter in New York but really something that’s been occurring over the last half a year or a year.

We, obviously, are working on a lot of different transactions. And while it’s competitive, we’re still suggesting to you and building into our guidance that we’re going to do $300 to $500 million of acquisitions. We still believe that we’ve got some competitive advantages in terms of our scale and focus on encumbered assets and the structure that we have that allows us to do some things that not everybody can do. We still think we can allocate some capital, invest capital, on acquisitions that will be rewarding from a value point of view, meaning that we’ll get a significant premium to our weighted average cost to capital.

Having said that, they’re not easy to do. I mean we’re obviously turning down a heck of a lot more than we’re doing, particularly given that you haven’t seen us announce any deals this year. But we’re working on a number of things and I think we’ve got a reasonably good pipeline of opportunities and we’re going to invest when and if we think we can find the right opportunities that fit our portfolio where we think we can get the long-term growth and we’re going to get premiums to our cost to capital so that we’re adding value per share. And if we don’t think we do that, then we don’t invest. But having said that again, I do think you will see that we’ll find some opportunities to be able to do that this year.

Okay. Then a final question from me. This is for Ed. Ed, I think you nudged up slightly the maintenance CapEx budgets for this year in your prepared comments, but I didn’t hear kind of a summary of what the discretionary CapEx number would be for the year. Can you give us a total number on that for this year and maybe for next year, if you have it?

We’re in the process now of starting work on the 2006 numbers, so we wouldn’t have anything to add on that point. If you are talking about the portfolio repositioning and ROI CapEx number, Jim, we’d still put that in the same $110 to $130 million that we had identified on the prior call. And you are right, we split the CapEx number for the full-year is up probably about $10 million from where we were on the fourth quarter call. That really just reflects the fact that, as we started to do some longer-term planning for our capital program, we determined that it may make sense to accelerate a couple of rooms [reduced] [ph] that might have happened in the first quarter of next year into the fourth quarter this year so that this business disruption would be minimized by having the construction work happen. So not a big move, but a subtle change.

Bill Crow, Raymond James

Three quick questions for you. First of all, it’s pretty well understood that Easter was negative on the first quarter. Is that true for your portfolio, given the cut-off in the Marriott calendar, as well as your exposure to leisure?

Yes, absolutely. Period 3 was very weak because of all the holiday noise. Obviously, I think we ended on the 25th, so it ended on a very, very weak note.

So how is April shaping up?

April is shaping up good. I would say April is shaping up right now at the higher end of our guidance for the second quarter.

All right. Chris, I think most of us are expecting RevPAR growth to decline maybe 200 basis points next year, whatever the magnitude is. Is there any reason to suspect that maybe your portfolio, because of the heavy reliance on the group business, because of some of your asset sales and the reinvestment in the portfolio, could buck that trend and you could actually see next year being kind of a peak RevPAR growth year?

I think it’s too early to tell, Bill. I mean we haven’t started going through the process of really on a property-by-property basis figuring out what we think is going to happen next year. But I have said, I think I said on the last call, probably on the call before that, I think while ’05 is going to be a very strong year, and ’04 was a good turnaround year, I still think some combination of ’06 and/or ’07 will be our best years from a bottom-line cash-below-growth point of view. And that’s a combination of, one, continuing to get additional pricing power, obviously, and it’s a result, in part, of the way we’re going to get that pricing power and that lift is that we are a little bit later cycled in terms of some of the big-box hotels. We do think their performance is turning and it’s going to continue to move the right direction.

Right. Okay. And then one final question. Any thoughts on leisure travel during the summer season? Any trends that you’ve been able to detect, whether the consumer is as strong as they were a year ago, for example?

It looks strong right now. I mean as we get closer to it, we’ll know. But everything we can -- talking to all of our operators and looking at our net RES activity, which reflects what’s going on, particularly right now, it looks good. In fact, in the last few weeks it’s spiked up, which is an indicator as we’re getting closer to the summer travel season that the trends there are very good.

David Anders, Merrill Lynch

Chris, could you comment on the growth rate that is for food and beverage? It seems like your occupancy, should we say it’s peaking out or do you have another year to modest occupancy gains, but can your food and beverage keep up with RevPAR growth then or should it be decelerating?

I think our occupancy is clearly not peaking. We think that we’re going to continue to get occupancy over the next probably 2 or 3 years, getting closer to where we thought, you know kind of ’97 through 2000. And I think F&B is on a lag, particularly given the types of hotels we have. I mean we’ve got these big boxes that are slowly but surely going to be turning the corner where you’re starting to get the association and the corporate business in that are higher-spend groups. People that continue to have the economy season a little bit are going to loosen the purse strings. And so our belief is that food and beverage will close the gap. Whether we are going to exceed the RevPAR group, I wouldn’t say that, but we clearly would expect that food and beverage revenues and thus margin benefits in food and beverage will be far greater than where they are today, as we season this recovery in the business a little.

Chris, could you refresh my memory. At the midpoint of the last cycle, towards the end of the cycle, did food and beverage exceed the growth rate of RevPAR or did it kind of trend in line?

I think it trended in line generally. I would have to go back. I think it trended generally in line or a little bit less. But it was better, much tighter spread than what we’re dealing with now.

Jay Cogan, Banc of America

Just a quickie on the convention calendars around the country. I missed a question or two, so I apologize if this was asked and answered. But when you look at some of your major markets next year, without asking specifically about your ’06 RevPAR guidance, what are some of the markets that are looking particularly good, just from a calendar standpoint, and what other markets are looking somewhat weak, if at all?

I don’t have all that in front of me. From off the top of my head, Atlanta, I think, has a pretty good calendar next year; Chicago has a very strong calendar; San Diego picked up a bit; San Francisco picked up, it’s going to have a little bit weaker second half of this year and picks up next year a bit. I think those are the ones that immediately come to mind and represent some of our biggest convention markets. New Orleans is going to be a little bit better than this year, but still moderate.

So nothing to the downside that you can tell from a calendar standpoint that’s meaningful?

Not at this point. Nothing material that’s on the horizon right now.

That does conclude today’s Q&A session. At this time, for closing remarks, I’d like to turn things back over to Mr. Nassetta. Please go ahead.

Thanks for joining us today. Obviously, we’re pleased with the results we have in the first quarter. We’re really pleased with the momentum that we’ve seen in terms of pricing power and rate growth in all our segments of business, demand growth as well, and we think we’re carrying over nice momentum into the second quarter and the rest of the year. We, obviously, look forward to speaking with you again after the second quarter to go through our results. So, again, thanks, and have a great day.

Once again, that does conclude today’s conference call. Thank you all for your participation and have a great day.