Host Hotels & Resorts Inc (HST) 2005 Q2 法說會逐字稿

Good day and welcome to the Host Marriott Corporation second quarter 2005 results conference call. Today's call is being recorded. At this time for opening remarks, I would like to turn the conference over to the Senior Vice President Mr. Greg Larson. Please go ahead, sir.

Thank you and good morning. Welcome to our second 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 in today's earnings press release, which has been posted on our website in our 8K file with the SEC.

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

Thanks Greg. Good morning, everyone. We're pleased to report another strong quarter of operating results. The positive imbalance between supply and demand growth in the industry continues to lead to greater pricing power, which has enabled us to generate our highest RevPAR increase since 1997 and the highest margin growth in many years. The strong growth in RevPAR and margins helped produced results that exceeded the high-end of our expectations. Specifically, diluted FFO per share was $0.31 for the second quarter, including a charge of approximately $0.06 related to costs associated with refinancings and the repayment of the Class B preferred stock.

Excluding these costs, diluted FFO per share exceeded the high-end of our guidance of $0.34 to $0.35, and exceeded consensus estimates. Comparable RevPAR increased 9.8% compared to 2004 levels, driven by an 8.8% increase in average room rate, and a 0.7% point increase in average occupancy. Comparable adjusted profit margins for the quarter exceeded second quarter 2004 margins by 200-basis points, and adjusted EBITDA for Host LP was $258 million for the quarter, compared to $218 million for the second quarter of 2004, an increase of 18.3%.

As you know, we are not on a calendar quarter, as our quarter ended on June 17th. As a result, operations for the second quarter for our non-Marriott hotels included March, April, and May, and for our Marriott Hotels includes a period from March 26th through June 17th. On a calendar-quarter basis, our comparable RevPAR growth was approximately 11.6%.

Demand remained strong in the second quarter of 2005, enabling our operators to significantly increase average daily rates, particularly in the premium and corporate transient segments. Premiums and corporate average daily rates increased 14% compared to prior year levels, and our overall transient average daily rate increased nearly 12%. We are encouraged by demand trends in the transient segments as net reservations volume continues to meaningfully exceed prior year levels. We are also optimistic about the special corporate rate negotiations for 2006, which will begin shortly.

For 2006, special corporate rates are likely to be 7% to 10% higher than those in 2005. We expect that increased levels of transient demand will enable our managers to continue rate increases, leading to stronger top line and bottom line operating performance. Group business remains solid as well, with revenues in this segment up nearly 7%. In Association business, the highest rated segment within groups, recording the largest revenue increase during the quarter of approximately 11%.

Future group bookings are up modestly for the remainder of the year, reflecting our desire to shift to transient business. The average rate per tentative room nights for the remainder of the year is up approximately 15%, indicating that our managers are continuing to aggressively price short-term group business. Clearly, the outlook for the remainder of this year and next for both the group and transient segments is very promising.

As we have indicated previously, we intend to take advantage of the current disposition market to recycle capital out of some of our non-core assets. Our guidance continues to reflect that we will sell an additional $150 million to $250 million of these non-core hotels late in the year. Although the acquisition environment for lodging remains extremely competitive, we continue to evaluate opportunities to purchase assets that satisfy our investment criteria.

We're maintaining our guidance for the year, which assumes that we'll complete between $300 and $500 million of acquisitions that meet our requirement of achieving a premium to our weighted-average cost of capital. As we have previously discussed, we are increasing our investments in our existing portfolio in the form of repositioning and ROI capital invests. For example, at our Ritz-Carlton Naples property, we're building a beach-front pavilion. This new, two-story facility with great views of the Gulf of Mexico will enhance the hotel's ability to increase business, generated from small groups and social catering functions.

Each floor of the glass-enclosed structure will accommodate up to a hundred guests, and will be ideal for beach-front weddings. We expect our investment in the project to be approximately $4 million, with an un-leveraged IRR that is expected to exceed 20%. This is a small project, but with a portfolio of our size, there are a number of these small projects that add up to meaningful returns over time. This year we'll spend approximately $130 million on these projects, and we anticipate spending an additional $200 to $400 million over the next several years on these very high yielding opportunities.

We continue our efforts on a number of value enhancement 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 development of time share units on excess land at the Hyatt Regency Maui. We have a number of other exciting opportunities in the early stages of development, and we will continue to update you as we make progress.

As I mentioned on our last call, we've been working on an update of our detailed replacement cost analysis for our existing portfolio. Our results indicate that the replacement costs for our existing asset base is approximately $275,000 to $300,000 per key, resulting in a total replacement costs of approximately $15 to $16.5 billion dollars. The significant increase in replacement cost over prior estimates, is the result of substantial increases in the cost of materials, land, and labor.

The cost of developing a high-end hotel has increased 20% to 30% over the last two three years. Another reason for the increase is the asset recycling program we've had in place over the last several years. We've been selling smaller suburban properties with relatively low replacement costs per room, and using the proceeds to reinvest into trophy properties, with very high replacement cost per room, like the Hyatt and Fairmont properties in Maui.

The benefits of a large increase in replacement costs are: first, as replacement costs are high and continue to increase, it should serve to extend an already positive supply picture; and second, the inherent value our of portfolio is significantly greater. To put in perspective, the Company trades at a 20% to 25% Discount to replacement costs, with replacement costs on a per-share basis, estimated at $26 to $30 a share.

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 8% to 9% for the year, and comparable adjusted profit margins to increase 120 to 150 basis points. Based on out current operating forecast, we expect diluted FFO per share for the year to be approximately $1.05 to $1.09, which includes $0.09 per share of expenses related to costs associated with refinancing. For the third quarter, we estimate that RevPAR will increase 6.5% to 8% and that diluted FFO per share will be $0.16 to $0.17. Adjusted EBITDA for Host LP for the year is expected to be $895 to $915 million.

To finish up, we are obviously very pleased with our second quarter results and feel good about the remained of the year. We continue to believe that we're in the early stages of a sustained recovery in the lodging business, that we have one of the best real estate portfolios in the world, and that our portfolio is well-positioned to take advantage of favorable operating trends over the next several years. Thank you, and now let me turn the call over to Ed Walter, our Chief Financial Officer, who will discuss our financial performance for the quarter in more detail.

Thank you, Chris. Let me start by giving you some detail on our comparable hotel RevPAR results. Looking at the portfolio based on property types, our urban hotels performed the best, with second quarter RevPAR growth of 10.8%, as occupancy improved by 1.3 points, while average rate improved by 9%. Several of our large, downtown hotels experienced strong RevPAR growth, including the New York Marriott Marquis at 21%, and the Tampa Waterside Marriott at 19%.

Our suburban and airport hotels experienced RevPAR increases of 10.7% and 8.2%, respectively. Our resort hotels increased by 6.4% for the quarter. This reflected weaker performance at two of our Florida hotels, the Orlando World Center, and the Harbor Beach Marriott. Year to date, our urban hotels have performed the best, with RevPAR increasing 9.3%, while our suburban hotels improved by 8.9%. Resort hotels increased by 7.8%, and our airport hotels are up by 7.1%.

Turning to our regional results for the quarter, our top performing region was the D.C. metro region, which enjoyed a 16.7% RevPAR increase, driven by the continued strong performance of our downtown hotels, such as the Metro Center Marriott, which benefited from strengthening transient demand. We expect this region to continue to outperform during the third quarter. Our mid-Atlantic region also had a strong quarter, as RevPAR growth grew by 15.4%, led by the New York Drake's 25% improvement, and the Financial Center Marriott, where RevPAR increased by 18%,as both group, transient, and international demand were strong. Overall, the New York City market enjoyed as RevPAR increase of more than 21% in the second quarter.

The mountain region continued its strong rebound in 2005, as RevPAR improved by 15.2%, led by a 25% increase at our Denver Tech Center Marriott. We expect the region's solid performance will continue into the third quarter. RevPAR in our Pacific region improved by 11.6%, as our San Diego market performed quite well, led by the San Diego Marina Marriott, which generated a 14% RevPAR increase, as ADR improved by more than 12%, significantly in part due to the transient rates because up approximately 15%.

The Maui Hyatt also had another strong quarter, as RevPAR increased 14.6%. RevPAR in our Florida region improved only 7.2%, and strong performance in Tampa and Miami was offset by reduced group bookings in Orlando, and weaker results in Naples. The South-Central market rebounded from 2004's underperformance, with RevPAR growth of 6.8%, led by our San Antonio hotels, which experienced growth of 18%.

RevPAR growth in the Atlanta region improved by just 3.2%, primarily due to reduced convention and group bookings which impacted results in the downtown market. Eliminating our two downtown hotels, market RevPAR would have increased 7.3% for the quarter. Finally, RevPAR in our New England region declined by 1.1%, due to lower group and transient demand at the Boston Copley Marriott. Both the Atlanta and New England regions are likely to underperform in the third quarter, in part because of tough comps from 2004 as both markets had significant city-wide events last summer. Longer term, looking into 2006, we expect those markets to strengthen.

Year-to-date, the three best markets have been the D.C metro region with RevPAR growth of 15.6%; the mountain region with growth of 13.8%; and the Mid-Atlantic, where RevPAR improved 13.5%. The Atlanta region, with RevPAR gross of 2.1%, and the New England region, which grew RevPAR by just 1.1% were the weakest. As would be expected, strong RevPAR growths driven primarily by increases in average rate, resulted in excellent comparable hotel-adjusted margin growth of 2.0 percentage points for the quarter.

Room margins were up 0.7 percentage points, leading to rooms department flow-through of 84%. Food and beverage trends were also favorable, as our revenue increase of 4.8% resulted in departmental profit increase of 6.7%. Lower beverage costs were a major contributor to this margin improvement. Insurance costs also declined, reflecting our favorable renewal pricing, which was more than 7% below last year's levels. Offsetting a portion of these beneficial effects, support costs increased more than 5.5%, as utility costs were up 9% and sales and marketing costs were up 7.5%.

Our balance sheet continues to strengthen, as we redeemed our $100 million Class C professional preferred securities and deployed the remaining proceeds from our March senior notes offering, to pay down approximately $330 million in debt during the quarter. Reflecting the overall improvement in our credit position and the attractive fundamentals inherent to our sector of the real estate industry, we were placed on positive outlook by both S&P and Moody's. We finished the quarter with $404 million of cash, and full access to our $575 million credit facility, which collectively provide ample capacity for additional investments in new assets toward our new portfolio, even after retaining $100 million in working capital.

Our quarterly results reflect the impact of the very favorable sales of a majority of our interest in the Courtyard joint venture. This sale, which generated cash proceeds of approximately $90 million, resulted in a book gain net of tax of $42 million, which was reflected in our calculation of net income. This gain had no effect on either FFO or adjusted EBITDA.

As we have detailed today, we had a great quarter. Operating trends remain very favorable, and the new supply outlook continues to be modest. Provided that economic growth remains stable, lodging demands and business travel should continue to accelerate, leading to continued improvement in our operating results. Our actions to enhance our balance sheet have improved our flexibility and positioned us to take advantage of the opportunities we expect to see over the next several years.

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

[OPERATOR INSTRUCTIONS]. Our first question will come from Joe Greff of Bear Stearns.

Good morning, everyone. Good morning, Jeff.

Could you just comment on a calendarized basis in the second quarter what the operating -- what the comparable operating profit margin improvement would have been?

The answer is -- I can't give you a precise number because it's very difficult for us to calculate, because that's not how all of our brands would have reported to us. It's obviously a lot easier to calculate the top line. But suffice to say, we would be somewhat over the 200-basis points with 11.6 gross versus 9.8. We would have crested over 200-basis points in margin growth.

Okay. And then with respect to your third quarter outlook, I know you really didn't offer a margin improvement target there, but is it fair to say that 3Q should be down relative to the growth in the 2Q, and the 4Q should be above the 3Q? Or do you just want to give a range for the 3Q?

We typically don't get specific on the margins quarter out. Let me -- commenting on the second half guidance and Q3 guidance, there are a couple of notes to make. First of all, I think if you look at Q2 -- excuse me -- second half versus the first half rather than Q2, I think what we're saying from a RevPAR basis is it will be roughly comparable. I mean, we were at 8.8 for our first half of the year, and we're saying 8 to 9 for the full year. So, I mean, if you do the math, we're saying we're kind of in the zone of being generally comparable.

Q3 on a RevPAR basis is expected to be lower at 6.5 to 8, and it's really driven somewhat by period 9, which was expected to be weaker, relative to hurricane impact, fear of people traveling during that period because of all of the hurricane impact of last year, as well as just an overall lighter group booking period. So that's driving period 9 down, which is impacting RevPAR, frankly, and margins in Q3.

Now, if you look at the RevPAR for the Q3 estimate, we just this morning got the top line RevPAR growth numbers for period 7, and they, frankly, were a little bit better than we expected. We just are sitting here kind of looking at that, literally a half hour before we walked in to have the call. So that's a little bit better than we expected, so I think it gives us that much more confidence that the range we've given for Q3 on the RevPAR front is good, and we feel very good about it. On the margins overall, obviously, at 160 year-to-date, and saying 120 to 150 for the full year, we do have an expectation that we won't get the same kind of margin growth in the second half of the year as we did in the first.

And I think it's really related to two things. One is period 9, which I already covered for the same reasons. RevPAR is being impacted in period 9; margins are going to be impacted. And that in period 13, or at the end of our fourth quarter, in 2004 we had a lot of credits and rebates that came out of our operators for a lot of central charges and systems and purchasing credits, and they have done a much better job, at our request, of having those flow out [inaudible] over the year. And although it's not perfect, it's a little bit better than it had been.

And so instead of getting a big credit at the end of the year -- we'll probably get some credits at the end of the year, but we don't expect to get the same kind of credits that we got in 2004. So while we expect a good result, it won't be on a year-over-year basis as good a result from a margin point of view. And that's why we have given the guidance that we have on RevPAR and margins. Now, obviously we're hopeful, as we always are, that we can do better. And period 7, at least on the top line, did look better than our expectations.

Great. And then one final comment on the margins, given where real estate values are now, what are your expectations for next year in terms of real estate property taxes? And can you just comment on what percentage of expenses relate to real estate property taxes?

It's a pretty light percentage overall. Ed will look that up. I think our expectation is that they're going up, but we don't expect them to go up at a huge rate next year. I think maybe at inflationary growth, generally. And as it relates to the percentage of the overall, it's --

Probably about 3% of revenue.

-- I was going to say 3% of revenue, something like that.

Great. Thank you so much.

Yes.

Our next question comes from William Greene at Morgan Stanley.

Yes, good morning Chris. Can you talk at all about the supply in your specific markets? We know that it's growing industry wide at just under 2% for '05 and '06, but I'm wonder if you looked that up from your specific markets, is it notably less than that?

Yes, I think the answer is yes. We think that supply in our markets for product that is competitive with our products, so upper end, kind of four and five star, is hovering in '05, '06, and probably '07, one or a little bit more than one; so pretty significantly less than the overall industry numbers.

Okay. And then can you also talk about the pricing trends you're seeing in the hotel transaction market? Have you seen valuations for the properties you've at least looked at go up meaningfully since the beginning of the year?

The answer is it's real competitive out there and it's hard to pick a moment in time. I think that prices have moved up over -- certainly over the last 12 months. Whether they've moved a lot since the beginning of the year, I would say probably not a lot, maybe a little bit. But if you look at where cap rates for the best hotels are today -- of course heavily dependent on the growth expectations in the market -- but ideally where cap rates are today vis-a-vis where they were a year ago, they've come down. I mean, for the best hotels at the high-end of the business, in the best markets, meaning the expectations of the market growth is very high, cap rates are probably in the 6.5 to 7.5 range, and I think over the last year have probably moved down at least a half half a point.

Great. Thanks for your help.

Yes.

We'll go next to Bill Crow at Raymond James.

Good morning, guys. Nice Quarter. A couple of questions. Chris, how much of your concerns over the 9th period are based on what you're seeing in reservation and how much is just kind of a hedge based on last year's hurricane season?

It's based on forecast. It's largely based on what we see on the books. Now, obviously there's a lot of business that there's still a decent amount of business that could develop in the transient side of the business, but it's largely based on what we see on the books for the groups side of the business. And we have, at this point, we have a pretty good sense for that. Period 9 is always, as we've gone through the year, period 9 has always been a period we expected to be weak, so this is not a surprise for us and I don't think it's indicative of some other problem in the business because, as I said, what we're experiences right now has actually been very strong. I think from a RevPAR point of view in period seven we'll probably be somewhere in the -- again, we're still studying the numbers -- but somewhere in the 9% to 10% range. So I don't think it's indicative of any issue other than it's a weaker group period and somewhat, I think, some of that is driven just by all of the hurricane issues of last year.

All right. And then your comment on cap rates, 6.5% to 7.5% for the best, highest quality assets, you care to venture a guess on the average cap rate on your portfolio, if someone were to do that?

No.

All right.

Very low. I would say -- let's put it this way, we're going to be -- we're the highest quality portfolio, I think, in the business, and have a unbelievable growth rate expectation as a result of the major markets that we're represented in. So I'd say it's a very low number, but I wouldn't venture a specific guess.

Fair enough. And finally, on the dividend, you've increased it a couple of times here recently. Any thoughts on where it has to go by the end of the year to make your statutory requirements, or any philosophical thoughts here on the dividend over the next three, four quarters?

That's a good question. We didn't comment on it specifically, so thanks for asking it. Obviously, as I've said on every call when people ask, it's not a simple equation to calculate what our taxable income is. It depends, obviously,y heavily on the operations, but it also depends heavily on the capital spending and when that capital -- when the spending gets placed in service. An so it becomes, as a result, more complex than you would think to figure out exactly what that would be. And so that's why we haven't given specific guidance, but I can give you kind of a philosophical view of it, which I think will give you a very good sense of where we are, which is, say we started out at $0.05 and at this point we've doubled, in a few quarters, our dividend.

I think the expectation ought to be that the dividend is going to continue to grow but not at that rate; that the third quarter dividend, I think, will potentially be higher, but very slightly higher; so maybe a penny higher, but not -- so going up, generally, as operations continue to improve this year for the rest of this year and into next year, based on our expectations of what we think is going to happen next year, which we think, well, we we can't get specific yet. Obviously it'ss going to be a very strong year, as well, but the growth rate, meaning it doubling over a couple of quarters, you won't have the same kind of growth rate that had you had as we were starting out.

Right. Thank you.

We'll go next to Jeff Donnelly at Wachovia Securities.

Good morning, guys. I'll maybe try and ask one of Bill's questions a different way. Could you just speak, Chris, maybe in broad strokes, about the depth of the market for large deals and how Host might look to undertake a billion dollar transaction? I ask just because you guys have been quiet on the deal front, there's certainly been a lot of transactions that are fairly large over the last 12 to 18 months and continued talk about more out there, and it tends to be one of the arenas where you guys play.

Yes, well, that is a different plan on the question, Jeff, I give you credit for it. The short answer on acquisitions, as I said, it's competitive out there. There's lot of money chasing every form of real estate, and as a result a lot of money chasing lodging real estate. We do have pretty good pipeline, deals that we're looking at, both single assets, both large and small, I would say. And we are continuing to try and focus on what our competitive advantages are, which is that we can do bigger deals, we do have a structure and liquidity in the stock, and other advantages that I think not everybody in our space has.

And so we're trying to take advantage of that. And I would say to you we've given you guidance that suggests that we're going to get $300 to $500 million of deals done, and so as best we can tell you today, that's what we think we're going to do. And obviously, we're not going to comment on specific deals we may or may not be working on, other than to say we're clearly working on a whole bunch of them and while we haven't gotten any done yet, that does not mean we don't think we're going to get any done. And think if and when we do get them done and announce them, I'd like to believe -- we certainly will believe that we're doing deals that are going to add a lot of value over time to the Company.

And that the fact is we're not looking for volume, we're looking for the right deals that fit within our portfolio from a portfolio management point of view, and that ultimately can be bought at yields that significantly exceed our cost to capital. We do think we'll deliver some of those. We do think they'll be very favorable deals when we do them, but we're doing them in due time as we work through them to find the right transactions, rather than just doing transactions for the sake of volume.

Okay. And just one or two other questions. One was on union labor. They seem to be getting their wish to align labor contracts for renegotiation '06. I know it's early, but are you concerned that that could be a material risk on the front for '06 and do you have any expectations you can share with us?

Well --sorry -- we're always concerned about the union issues and watch it very carefully. Of course, we're very light union in our portfolio today, and so the shorter-term impacts that some have seen haven't really impacted us. In fact, to some degree, we've probably benefited, if anything, from it because of the fact that we've been non-union, or on a different cycle in the case of San Francisco, where we are union, but in our contract didn't come due -- doesn't come due until next year. So we're watching it. We're, of course, cautious about it. I think from the standpoint of direct impact on us short-term, or frankly, long-term, we don't view its as something where we're going to see a material impact in either case.

Okay. Just one last question, it was on FNB revenues. They've been weak for a little while in this business, and I was curious what your experience was. Is this typical of the stage of the recovery we're in and could you maybe frame for us the potential for them later in the recovery, either what they ideally could be per night or as a percentage of revenue, and maybe today versus where they were the last peak?

Well, if you look at it as a proportion of our RevPAR growth, which is one way of looking at it, you'll see --and what I've been saying, I said on the last couple of calls -- you'll keep seeing an improve to where you won't probably get to a point where you'll haven't alignment, meaning that your FNB growth is the same as your RevPAR growth, but you'll get it a lot closer. I mean, the proportion of FNB to overall RevPAR growth will grow over time, and I I think we've been seeing that. I mean, if you look at the last few quarters, you've seen that; if you look at the first quarter and second quarter you've see that.

We have every expectation in the second half of the year that you'll see that. If we look at the groups that we have on the books for the second half of the year and we look at the expectation of catering revenues, which is really what we wants to see, because that drives the highest margin business; it drives better profitability, not just growth in FNB, but growth in top line and growth in bottom line. We're very of optimistic about the second half of the year in terms of what's going to happen with catering revenues. So I think you're already starting to see it, even if you look at Q1 to Q2, I think you look at first half versus second half, you'll see an even more dramatic shift. I don't think -- [inaudible] in the to positive.

I think this is typical; I don't think we see anything out the norm in terms of where we are now versus a normal recovery. I think it times for the group business to season, for you to change the mix of business from lower rated groups to higher rated groups and to get the higher spend groups in, the bigger groups in that spend more. And as the economy and the business continues to recover, have people loosen the purse strings; even those that are higher spends will spend more as time goes on.

And I think -- a long winded way of saying we're seeing those things and we should all watch carefully in the second half of the year, but our expectations are pretty good. If you look at the groups, and we've gone through it with our operators for the second half, we have a higher expectation of catering growth as a result of those groups. And we think as next year plays out, you'll continue to see that gap narrow; or said another way, the percentage of FNB growth as it relates to RevPAR growth to be a higher percentage than it's been.

Thanks.

We'll go next to Harry Curtis at JP Morgan.

Hi. Good morning.

Hey, Harry.

A couple of questions. First of the all, if you could address if your managers are seeing any significant or any customer resistance to higher prices, particularly in markets where you've been able to price up significantly over the last 18 months?

The answer is not really, surprisingly. We've had those conversations very aggressively over the last week with our operators to make sure that we're not missing something, or not as a group we're not pushing rates too fast while, obviously, rates great, we get better flow through, we want to have optimum equation to maximize bottom line cash flow. And so in some instances you could back off of pushing rates to get a little bit greater occupancy and improve your bottom line, but the facts, basically, with very few exceptions -- and there are always some exceptions in some hotels where I think maybe rates have been pushed a little too much.

But if you look at it generally across the country, we do not think we're losing any business as a result of pushing rates this hard. And so in some markets, maybe a little bit, in other markets, maybe the rate of increase has been a little bit too fast. But as a general matter, we are not seeing a lot of turn-downs related to price. And so that's great news for the rest of this year, and great news for next year.

I think, obviously, it's premature to start to give RevPAR guidance for next year and so we won't, but we feel really good about it based on what we're seeing, based upon what we're seeing in all segments. I mean, transient, we've got great strength and great growth this year, we think that will carry over to next year. We think there's some additional mix opportunities with fewer special corporate accounts and more corporate and premium accounts. So both rate improvement as a result of mix, as well as rate increasing, we think there will be more transient businesses as a volume matter.

On the group side, we think there will be additional volume as well, so meaning greater occupancy overall in the portfolio. And a significant opportunity on rates from the group side, because we're going to continue to burn off a lot of business that was booked in '01, '02, '03 and '04. I mean, one of the things that's kind of interesting is when you think about '04, now, you really have to categorize '04 as maybe bookings that were in a weaker time, when if you asked me a couple of quarters ago, well '04 was pretty good year and we didn't view it as that weak.

The fact is rates have moved a lot, and so a lot of the bookings that were done in '04, really, while they were good, they were a heck of a lot better than '01, 02, and '03, they weren't as good as they are now. I mean, you look at the tentative rates that we're saying were up 15% for our tentatives for the remainder of the year. So when you look at that, there's a pretty good chunk of business that would -- for next year that's going to burn off in terms of business that would have been booked as compared to this year in '01 through '04.

And so as a result, we have -- we're pretty optimistic about rate expectations on the group side, as well as a little volume. So again I'm not quite there in terms of putting all of that together because we haven't done the granular asset by asset, but from a macro point of view, I tell you with what we see right now we feel pretty darn good about going into the budget season with our operators. And we're going to be pushing real hard for some good results next year.

What percentage of your portfolio is at or through their prior peak, do you think?

What percentage of our -- in what -- by what metric?

In RevPAR.

I would say a low percentage.

Yes, I mean we're not -- we're still slightly short of 1999 levels [inaudible].

There are some hotels, but I would say it's a minority of the hotels.

Okay. And my last question related to assets that have been under renovation, what do you think the -- to what extent to do think the second quarter was impacted, negatively impacted, by assets that are being renovated? How much of the portfolio is being renovated, really, for the balance of this year? And I'll stop there.

Great question. I think there's some impact in Q2. Probably for the year the greater impact is in Qs 1 and the second half of the year, which is, in fact, part of what's built into our guidance for the second half of the year. We do have more properties under renovation generally this year than we did last year, not so much, as I said, in Q2, and not a whole lot more in Q3, but a decent amount more in Qs 1 and 4.

Okay. Very good, Thank you.

Thanks, Harry.

We'll go next to Jay Leupp at RBC Capital Markets.

Good morning, Chris and Ed. I'm here with Brett Johnson. Can you talk a little bit, Chris, with the movement in cap rates you've seen, your appetite for asset sales or monetizing non-strategic assets through the balance of the the year, if you'll do some more of that. And then secondly, with the time share development that you were talking about, when will you have a feel whether or not that's going to meet with reasonable success and if it does, do you plan on rolling it out to other properties soon?

Okay. On the -- relative to the market being so robust, what are we doing on the sales side. I think, obviously, we're trying to take advantage of that, and that's why I think for the full year we're selling 400 -- we've already sold a couple of hundred million, and we're saying mid-point of our guidance is another couple hundred, so that's 400 million. So I think, basically, that's reflective of our desire to take the low end of our portfolio, which is largely older, suburban Marriott Hotels that may have been inherited when the company split and disposing of those, because we think we can put that capital to a better use. So we're doing a decent amount of that.

We are trying to maximized it, obviously, and so while it's a very robust environment, some hotels that we might want to sell over time, frankly, have so much growth that even though cap rates look great, multiples look great, there's so much cash flow growth that it's worth a little bit of risk to capture some of that before we sell it. So I think we've got a -- we're doing, I think, what we need to do, in our opinion, to kind of take advantage of the current environment with the program we have in place.

And obviously we're trying to find ways through our agreements, particularly with Marriott, that allow us to, over time, take certain assets and terminate either the flag or the management and convert to franchise to get the maximum price possible. And that's how we got a lot of the deals we've been doing have been getting done. And obviously we need to stage that over time, relative to our agreements with them. So I think we're doing the right things there, and that's why you see us stepping up our sales this year as compared to prior years.

On the time share in Maui, we're working real hard on that. It's a good news/ bad news story. The good -- the bad news is good news. The bad news is it takes time to get the entitlements. I am pretty confident we're going to get those. We're in the process of doing that, but it takes time. From start to finish, it's probably a couple year process and we're into that process, so I'm certainly hopeful that next year sometime we'll have those entitlements. And nothing that we've seen so far suggests that we're going to have a problem getting that, it's just a matter of time.

So that's -- the bad news is that it takes time, The good news is it takes time, because nobody else can get it either. And we've got, really, the only, I think, high-end beach front opportunity for time share that's left there, that is in Maui. And that particular section of Maui is probably the high hottest time share market in the country, if not the world. So it's worth the time, and it takes time, and we're working diligently on it. I would hope by next year we'll have more to say any that.

In terms of the other value enhancement projects we talked about, I think those are probably in the first half of next year. Again, those are both --excuse me -- an entitlement and they probably don't take as long in California and Arizona, but they do take some time. We're making very good headway, in our opinion, on both of those. And we've got a whole bunch of others we're working on.

But our attitude is, obviously, we want to talk about those when we've matured those to a point where we think that they're really real, rather than talking about them before they're real. One and two, some of them are very sensitive in terms of entitlements, et cetera, and it really just doesn't make a lot of sense for us to talk about them publicly because it would impair our ability to ultimately achieve our objectives.

Okay. And then just one follow-up, and it's more power level thoughts here.

Do you have any thoughts as to what $60 a barrel oil meant to your business in terms of holding back your RevPAR growth during this quarter? And if we should see a reduction in fuel and travel costs in the back half of the year what it may mean for your outlook and guidance? I have to say, I've talked to everybody, all of the hotels and all of the major holes and our operators and read everything I can read on it, I don't feel like we had a lot of impact in the results, year-to-date, as a result of the rise in the price of oil. And so I think as a result, I don't so that if oil goes down to $50 a barrel that it's a particular boon for the business.

I just don't think for the types of hotels we own that, at least at this point, they've been impacted. Now, if oil goes up even higher and stays high for a protracted period of time, I think the impact is more that it slows the economy, which slows our business. But, obviously, the economy is still doing pretty well in the face of these high oil prices and I think there is an expectation that they're going to moderate. So no big impact so far on the down side, and as a result I don't think necessarily a big impact on the upside if they come down.

Thanks, Chris.

We'll go next to [Will] Truelove of UBS.

Hi, great quarter guys.

Hey Will.

Question for Ed. How much debt can you pay off for the second half of this year without incurring any pre-payment penalties?

We have -- there's probably about $250 million in debt that we could pay off without incurring significant pre-payment penalties, and that is we work our way into next year, we probably have another couple hundred million of secure debt that will mature in '06.

And can you walk us through some of your cash flow assumptions on a full year basis? Are you still looking for roughly, call it 250 to 270 in CapEx, with a $100 million in new invests and $140 million in dividends, roughly?

I would say that you're right with respect to the capital that we would expect to spend. I think the maintenance CapEx for the year will be plus or minus $250 million. As Chris indicated in his remarks are investments from a standpoint of repositionings and larger CapEx projects add a little bit north of an incremental $100 million.

I don't know that -- I think that from a standpoint of available cash for investment, as I indicated, we have $400 million of cash left, or we finished the quarter with $400 million in cash. We'd like to retain another $100 million for working capital. And my guess is that when you filter everything else through, we have at least $200 million that we could look to devote to new investments out of that $400 million.

Including additional purchases of assets; correct?

That's correct. Yes, in fact, I'm really focusing -- in that $200 million number, I'm focusing primarily on incremental investments.

Okay. And then maybe for Chris, could you talk a little bit about Boston? And you are expecting a recovery in that market for next year, can you talk about how the Copley Plaza area is going impacted by the new convention? And can you talk about the trends that you're seeing in the two convention centers? Is the Copley Plaza still able to hold up in the face of the new convention center? Can you give us a little color on Boston?

Yes, we feel great long-term about Boston. Boston's having a tough year this year, not surprisingly, and Boston, in every cycle I can remember, is always a late comer to the party in terms of recovery. And I think this is similar to the experience that we've typically seen. In term of looking at more intermediate long term, we feel great about Boston. It's a great diversified economy. It's going to do well. It going to increasingly join the party in terms of what's going on. In terms of the overall economy, we think that expectation is that next year that's going to start in a more significant way.

And in terms of Copley itself and Heinz versus the new convention center, the Copley market is a great market. I mean, the back bay market of Boston is a very, very strong market. It's a very strong business location; it is now and, I think, will be forever. It has obviously been assisted by the Heinz Center and the group business associated with that. There's a lot of debate, as everybody knows, going on relative to Heinz and what the long-term prospects of that are going to be.

I think -- and we're obviously deeply involved in that, as are others. I think that the long-term results will be there will be some -- there will some space there. There will some ability to utilize Heinz in one way or another, either in current form and ownership or new form in ownership, to be able to help drive group business. Actually, Heinz, for next year, has great bookings, so that's part of what -- in addition to the Boston economy picking up, our expectation of Boston being better next year is partly driven by just the bookings at Heinz, which are very good.

Obviously, the new convention center has had a bit of a slow start and seems to be picking up some steam. They need some hotels down there and as they get more hotel product in that market and as their bookings increase over time, I think that will become more and more of a competitive convention center. I think it's got a ways to go. I think it's years, not quarters, before it really hits stride, and I think Boston, as an economy and as a market, is strong enough to support both.

We feel good about our investment in Copley, both what is going to be happening over the next year and what is going to be happening over the next five to ten years just because of the overall Boston economy and the strength of the back bay market. So that would be my overview on Boston, and hopefully it answers your question.

And one last follow-up to that. How much does Boston represent in terms of your total EBITDA?

About 5%.

Great. Thanks so much guys. Good quarter.

We'll go next to [Steve Rose at Carion Securities].

Hi, good morning.

Good morning.

My question, you mentioned weakness in Orlando and Atlanta a couple of times. So besides your concerns about September, is there anything else going on in Orlando in terms of large conferences that have cycled out, or do you feel like you're losing share our of some of the newer, more meeting-oriented space in that market, or -- ?

I don't think there's thing going wrong, from a fundamental point of view, in Orlando. I think its just the evident flow of groups and conventions in the market. Obviously -- and in terms of market share are we losing I out? I think the answer is not right now in any meaningful way, but we are adding an exhibit hall, a major exhibit hall that we discussed a couple of quarters ago, I think, that is basically under construction or shortly will be under construction. And that is, in our view, to allow that hotel to be competitive, not just for the next years but for the next decade or two in terms of it's groups meeting platform. I think it's one of the best platforms in the country now, but with this exhibit hall --

When does that open?

Planned to open in about 15 months from start, so say early -- late '06, '07, early '07.

And is there any --

I don't think there's anything -- I think Orlando's fine. The fundamentals are good. I think the investment we're going to make in that hotel we think we're going to get a terrific yield on. We clearly do think it will help position that hotel for the next decade or two, and that's it's something we should do, but we're also going to get, we think, rewarded for it very heavily in that sense of the yield. And we like Orlando, long term, as a market.

And then, I guess, kind of the just same question on Atlanta. Are you renovating there? Was that a reason for some weakness or is it just also the [inaudible]?

Yes, well, I mean, part of it we were just starting the renovation, and that is part of the -- if you slice and dice Atlanta, Atlanta has been reasonably strong except for the downtown market. We've got two hotels downtown, the Atlanta Marquis and the Ritz. Both have been weaker. Part of that is just convention cycles. It's a very weak year. We do not see Atlanta as -- Atlanta has become a bit of a second tier conventions market, but that doesn't mean it has to be bad.

We think it can be very very good, because Atlanta has terrific air lift and is a cost alternative. Atlanta is a cheaper market than a lot of the first tier markets. So with the investment that's going on the in Georgia World Congress, the aquarium, and there's billions of dollars being invested in downtown Atlanta with the air lift, the cheap airlift going on in that market and all the alternatives for activities in that market, we feel fine about that market longer term, even intermediate term.

In the short term, it's suffering from a lack of convention business, which will turn around, and we are suffering specifically from the standpoint that we're in the early stages of a major repositioning [inaudible--microphone being moved] of our property there, the Atlanta Marriott Marquis. And so our ability to book groups round that, when we're recreating the entire meeting space platform, is obviously hindered. So we're going to be working through that over the next 12 to, really, 18 months, and as a result, over that time frame in Atlanta, particularly downtown Atlanta, we're going to be impacted.

Okay. And then just one follow-up on the group business. You talked about bookings in 2001 through '04, and just kind of burning through that, what sort of percentage do you think is still on the books of your forward group bookings that you'd like to work through so you can replace it with higher price business?

You know, it's a very hard number to get your hands around. We've been asked this before and given numbers, and the numbers I'm going to be suggest right now, first, I would say are growth. Meaning it's hard to be really precise, but these are directionally, I think, pretty good. The difference in the approach, or maybe when we talked about it before, is that I'm including '04 bookings for the reasons I've already described, which is to say maybe when we were in '04 we didn't think it was so weak, but when you look back in '04 relative to where rates are going now, it does look like '04 was pretty weak, particularly from a rate point of view.

So in '05 just to maybe put it in a broad perspective, we -- if you look at everything that was booked in '05 that would have been booked in '04 or before, it was 50% to 60% of our group business. We think next year, for everything that will have been booked in '04 or before -- so weaker periods by the definition that I just gave you -- is probably 25% to 35%. So you've got -- you still have a decent amount on the books by that standard because you have all of the '04 bookings on, which aren't as bad as the prior years, but still not as good as what we're seeing today.

But I think the focus and the reason that I gave you what I thought were pretty optimistic views towards our group pricing and the like for next year is that the delta between the two is obviously pretty big. I mean, it's 25 or 30 point -- 25% of 30% of our groups business is going roll out from having been booked in a weaker period than now being booked in a stronger period. So that delta is pretty good, and as a result makes us feel pretty good about what we'll be able to do with our mix of business and overall rates for next year. Great. Appreciate it, thank you.

We'll go next to [Jake Hogan] at Banc of America Securities.

Hey, good morning. I've got a couple quickies based on some of the earlier commentary. First, on the group rates, just to follow up on that last one, could group rates next year, Chris, be us as much as special corporate rates?

I don't think so. I mean, we haven't pin pointed it yet in terms of where we think. I think if I had to estimate it right now for everything, average group rates, I don't think they would be in the 7 to 10, which is where we thought special corporates. But if we're at 5 -- let's say we're at 5 in the second quarter for group rates, on average, I think it could be better than that. I think it's going be to somewhere between there and where the special corporates are.

Okay. So better than five but not as high as the high end of the special corporates. And what gives you the confidence on the special corporates at this point in time, especially since, if I remember correctly, most of those special corporate rates I thought were as a percentage of the best available rate in a hotel on a particular night. So help me just get a little better understanding on the visibility.

The reason that we feel so confident is because we've had a lot of conversations with our operators about what they're going to negotiate in these deals in terms of rate increases. They actually will negotiate for a lot of these alliance accounts and special corporate accounts specific rate increases off of the rates from this year.

And the truth of the matter is while we like the the special corporate accounts and we've got a lot of them, we're going to be -- our operators, with some guidance from us, are going going to be more selective about it. And so the fact is we have enough room -- we want some more room for the premium and corporate business in any event, we want more capacity, which allows us, or our operators rather, to be more aggressive on being selective on only the best special corporates and having greater rate increases.

Got it. So the mix continues --

They still have to go out and do it, but when you can reduce capacity in that -- or you reduce the volume in that business to increase capacity in another area, it allows you to be much more agressive about rate increases because you're prepared to lose some of those accounts.

Got you. So we'll have a continued mix shift next year as well.

In fact, we've had good rate increases this year. I mean, our year to date increase in special corporates, I think 80%, so --this year. But, of course, they were off of -- it was off of lower numbers. Now the numbers are starting to move up.

Got you. And then on another topic, just getting back to the M&A discussion from before, you had mentioned, among other things, the liquidity of the stock, and vis-a-vis thinking about larger transaction, potentially. Could -- theoretically, I mean, as you guys are looking at this stuff, could -- if you were to enter into a meaningful portfolio of transaction, could it actually be a leveraging enhancing event for the company? Meaning --

Leverage enhancing meaning credit enhancing?

Exactly. Well, supposedly a reduction, a meaningful reduction, in your leverage ratios.

Well, I think the answer is it certainly could. I mean, you have to define "meaningful." The truth is we're a big company, and so to move our credit, you have to do big things. But clearly, as we approach any transaction, large or small, but particularly any larger transaction as we look at it, we're looking to do a deal that creates value for the company, obviously; that would be accretive earnings of the company and would be accretive to the credit.

How accretive it is to the credit, obviously, depends on it -- how low leverage of the specific deal is and how large the deal would be relative to the scale of the company, But we're a big company, if you just do the math --

Sure.

-- it takes a lot to move, given your starting from a very large base. But, clearly, when we look at all of these opportunities as we're out there, we view it as something that we would be trying to get all three of those things: value creation, earnings accretion, and credit accretion.

Perfect. Thanks a lot.

Our next David Anders at Merrill Lynch.

I'm all set, thanks.

With no other questions holding at this time, I would like to turn the conference back to Mr. Chris Nassetta for any additional remarks.

Well, we appreciate your time today. Obviously had what we thought was a great second quarter, and I think we have great momentum going into the second half of the year. We feel really good about next year, as I discussed in a couple of the comments in Q&A. We'll look forward to speaking with you after the third quarter, and I hope everybody has a great remainder of the summer. Thanks again for your time.

Ladies and gentlemen, that will conclude today's teleconference. We do thank you for your participation and you may disconnect at this time.