Host Hotels & Resorts Inc (HST) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to this Host Hotels & Resorts conference call. Today's title is First Quarter Earnings Call. [OPERATOR INSTRUCTIONS] At this time for opening remarks and introductions I would like to turn the conference over to the Senior Vice President, Greg Larson. Please go ahead.

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

In this call, we will discuss non-GAAP financial information such as FFO, 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 in our 8 K filed with the SEC. This morning Chris Nassetta, our President and Chief Executive Officer, will provide a brief overview of our first-quarter results and then we will describe the current operating environment and the Company's outlook for the remainder of 2006. Ed Walter, our Chief Financial Officer, 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. Good morning, everyone, and welcome to our first earnings call as Host Hotels & Resorts. The first quarter of 2006 was another great quarter for the Company. Operations remained strong in the quarter as the industry recovery continued, which resulted in earnings that exceeded the high end of our guidance and consensus estimates. Our outlook for the remainder of the year remained strong as well, which I'll discuss in more detail in a few minutes. First, let's talk more specifically about the first-quarter results. FFO per diluted share for the first quarter increased to $0.27, which exceeded the high end of our guidance by $0.02 a share. Pricing power for our hotels remains strong due to the continued favorable supply and demand fundamentals, which led to a significant increase in average daily rate for the quarter of 7.7% for our comp hotels. Comp hotel occupancy was essentially flat for the quarter, decreasing one tenth of one percent, which led to comp Hotel RevPAR growth of 7.6% for the quarter.

Although these RevPAR growth results were near the midpoint of our guidance, comp adjusted profit margins for the quarter exceeded first-quarter 2005 margins by approximately 220 basis points, which led to our earnings exceeding our guidance. The adjusted EBITDA of Host Hotels & Resorts LP for the quarter was 212 million and our comparable hotel adjusted operating profit increased 17%, which is in excess of two times our comp RevPAR growth. In thinking about our RevPAR growth for the quarter, it's worth noting two points. The first is that adjusting our results to reflect a calendar quarter would add another 120 basis points to our RevPAR growth. The second is that our RevPAR growth for the quarter was affected by a major renovation at one of our key properties, the JW Marriott Hotel in Washington, D.C.

Near the end of last year we decided to accelerate a planned rooms renovation at the property to take advantage of what we expect to be a strong market for the remainder of 2006 and beyond. As a result, the hotel had a significant component of its rooms inventory out of service for the entire first quarter, which led to an occupancy decline for the quarter of nearly 30%. This reduced our RevPAR growth for the quarter by a full percentage point. Factoring for these adjustments, our RevPAR growth for the quarter would have been considerably higher. For the first time in a number of years, our growth in food and beverage revenue for the quarter was nearly on pace with our RevPAR growth, as comp food and beverage revenue growth was 7.5% for the quarter.

Food and beverage departmental profit was strong as well, up 200 basis points for the quarter as a result of a mix shift of 140 basis points from outlet revenue to more profitable banquet and AD revenue. We expect food and beverage profitability to remain strong as our group demand increases during the remainder of the year. As we had forecast for the quarter and considered in our RevPAR guidance, group demand was relatively soft during the first quarter as several of our key convention markets experienced either softer group bookings for the quarter or difficult comps to the first quarter of 2005. Total group room nights declined for the quarter versus last year, although group rates increased 4.5% for the quarter, led by a strong increase of over 6% in corporate groups. As we had also forecast, our group booking pace is strong for the remainder of the year and rates are expected to remain strong, which we expect to produce meaningful increases in group revenues for the year.

Our transient segment remains strong in the first quarter, with transient room rates up 11% for the quarter. We expect these strong trends in the transient segment to continue, which combined with the positive trends in the group segment should lead to higher RevPAR growth levels for the remainder of the year. As you are aware, we closed the majority of our acquisition of hotels from Starwood on April 10th, deferring the purchase of five hotels located in Europe and two hotels located in CG, pending the receipt of certain consents and approvals. We intend to complete the purchase of four of the five European hotels by our European joint venture on May 3rd, and at that time will contribute the Sheraton Warsaw in Poland for the joint venture as the majority of our equity contribution to the venture. Concurrently with the acquisition, the joint venture will close on an approximate 345 million euro loan, which will complete the first phase of the funding of our joint venture. We expect to open an office in Europe shortly, at which time we will be off and running on this new exciting phase of our growth.

Although we did not own the hotels we've purchased from Starwood during the first quarter and thus are not reporting any operating data or earnings from those hotels at this time, we are pleased to report that the hotels performed well during the quarter, with RevPAR growth to the North American hotels in the portfolio, up approximately 12.5%. And we expect the hotels to continue to perform well for the remainder of the year. In addition to completing the Starwood acquisition and our European JV, one of our major accomplishments so far this year has been executing on two of the large high multiple asset dispositions we have been talking to you about for some time by selling the Fort Lauderdale Marina Marriott and the Drake in New York. By selling these assets at very high multiples and redeploying the capital into the Starwood acquisition at a much lower multiple, we have transformed what was inherent real estate value in our portfolio into significant realized value.

We continue to work on many other opportunities to capitalize on the inherent value of either under utilized or non-income producing assets in our portfolio. And expect to announce sales on at least two of the opportunities we've been working on by the end of the year. In addition to these value enhancement dispositions, we continue to take a disciplined approach to recycling capital out of assets that do not fit our core profile and will likely have lower growth rates over time. During the first quarter, we completed the sale of three of these assets, the Albany Marriott, the Chicago Marriott Deerfield Suites and the Marriott at Research Triangle Park for approximately 110 million. In total we have completed approximately 700 million of dispositions thus far this year, recognizing gains of approximately 385 million. We're in the process of coming to the market with our next batch of dispositions now and our guidance for dispositions for the remainder of the year continues to be 2 to 300 million.

As I'm sure you are aware, the acquisition environment for lodging and real estate remains extremely competitive. However, in addition to being actively involved in several potential acquisition opportunities for our European joint venture, we continue to evaluate opportunities to purchase assets in North America that satisfy our investment criteria. Thus, we are maintaining our guidance for the remainder of the year of between 2 to 300 million of acquisitions. On the capital expenditure front we remain focused on executing an ROI and repositioning projects within our existing portfolio. And over the remainder of the year our asset managers will be working diligently to identify similar opportunities in the Starwood portfolio. We are well underway on a number of major projects and continue to evaluate many additional projects of varying scales.

In addition to the 250 to 260 million we expect to spend on these projects this year, we expect to spend several hundred million dollars on these projects over the next several years. We continue to believe that these projects are an intelligent way to allocate our capital, particularly at this point in the cycle, and expect to create a tremendous amount of value doing so. Now let me update you on the outlook for the remainder of 2006. With fundamentals expected to continue to improve throughout the year, we now expect RevPAR to increase 8% to 10% for the year. And while we face several challenges on the expense side that Ed Walter will cover in a few minutes, we believe we can continue to drive incremental profitability and strong flow-through and thus are maintaining our guidance for a comparable adjusted margin increases of 140 to 175 basis points. Based on our current operating forecast and our assumptions regarding acquisitions, dispositions and financing activities, we expect diluted FFO per share for the year to be approximately $1.47 to $1.55, which includes $0.03 per share of expenses related to costs associated with refinancing.

Adjusted EBITDA for wholesale LP for the year is expected to be a 1.235 billion to 1.275 billion, which is a modest increase from our prior guidance, taking into account the removal of the Canadian assets from the Starwood portfolio. It is important to note that our forecast does not represent a run rate contribution from the Starwood assets, as we obviously will not have owned those assets for the entire year. Based on our continued strong operating performance and increased earnings guidance, we expect our common dividend to continue to increase modestly throughout the year. In summary, we are very pleased with our earnings results for the quarter, we continue to believe that the current recovery in the cycle will be sustained for at least the next several years. And we're well positioned to take advantage of the strong operating trend that will result from the positive supply and demand fundamentals that are expected in the industry over that time frame.

We remain very excited about the prospects for the Starwood portfolio to enhance our already strong growth rate and continue to believe that our disciplined approach to capital allocation will reap meaningful rewards to our shareholders in the years to come. Thank you and now let me turn the call over to Ed Walter, our Chief Financial Officer, who will discuss the financial performance for the quarter in a little bit 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 during the first quarter our suburban hotels performed the best with RevPAR growth of 11.6% as occupancy improved by 1 percentage point while average rate improved by 10%. Our airport and urban hotels experienced RevPAR growth of 8.3 and 7.9% respectively. Our resort hotels increased by only 3.3% for the quarter. This generally reflects the anticipated impact of softer group bookings at several of our larger resort convention center hotels. Turning to our regional results for the quarter, we saw some lagging markets begin to outperform. Our top performing region was the north central region, which saw 20.9% RevPAR growth as the anticipated strong group activity in the downtown Chicago market drove average RevPAR growth of over 30% at our three urban hotels. And market compression generated an average RevPAR growth of 20% in the suburban airport market.

Although growth will moderate in the second quarter, our Chicago area hotels should continue to do well. The Atlanta region also enjoyed a great quarter with a 14.3% RevPAR increase, driven by strong city-wide and in-house group demand. Our Buckhead and mid-town hotels performed extremely well during the quarter, especially our luxury hotels, which averaged almost 20% RevPAR growth as occupancies increased significantly. We had anticipated a strong first quarter as group bookings have picked up in the Atlanta market and part as a result of the business that relocated from New Orleans. We also expect a strong second quarter from this market. RevPAR growth in our New England region also rebounded at 12.9%, as the downtown Boston market had very strong transient demand. Our two Boston area Hyatt Hotels had exceptionally strong quarters with RevPAR growth averaging more than 30%. Given strong group bookings for the market, the second quarter also looks good in the New England region.

Our mid-Atlantic region had another solid quarter, as RevPAR increased 9.7%. Our New York City hotels continued to outperform, generating average RevPAR growth of 14% plus, which was offset slightly by softness in the suburban New Jersey markets. Our Philadelphia area hotels had a slower quarter as group activity was up only modestly. New York looks to be strong in the spring, while Philadelphia will need better transient demand to offset lower city-wide activity. The South central market had RevPAR growth of 9.6% in the quarter, led by our Houston hotels which experienced average RevPAR growth of more than 30%. The Houston area clearly benefited from business resulting from FEMA's extension of hurricane-related rooms into January and the city's hosting of the MBA all-star game in February.

The Florida region underperformed as RevPAR growth was only 3.5% due to a combination of weaker group bookings and weaker transient demand at several of our large resorts. In particular, RevPAR at our Orlando World Centre Hotel was down by 1.6% due to lower group bookings. This subpar performance at Orlando, our largest hotel, reduced the overall portfolio's RevPAR growth by 0.5%. The rest of the year looks much stronger in Orlando and the region should improve in Q2. As anticipated, the Washington, D.C. metro region had a very weak quarter with RevPAR declining 6.1%. The market suffered from difficult comparisons to last year's inauguration festivities, a slow convention calendar, and an overall decrease in congressional activity as congress was in session for 40 fewer days than last year, which contributed to reduced transient demand. As Chris detailed, the region's performance was also affected by the accelerated renovation at the JW Marriott.

We expect operating results will improve in Washington in the second quarter and for the full year. As Chris highlighted, we were very pleased with our 220 basis point improvement in comparable hotel adjusted profit margins in the first quarter. The 7.7% in average daily rate contributed to solid rooms profit flow through. The continued shift in F&B revenues toward catering business resulted in more than 50% flow through in that department and generated a 16% increase in food and beverage profit. An enhanced ability to charge meeting room rentals contributed to this strong flow through. Offsetting these strong results, wage and benefit costs increased 4% and utility expense increased by 16%. Our insurance expense declined for the quarter by 13%, consistent with our experience from last year. This trend, unfortunately, will not continue as the insurance markets have been considerably more costly after last year's difficult hurricane season.

For the full year, we expect that insurance costs will increase in the range of 40%. Insurance costs represent approximately 1% of our overall expense base, so the incremental impact of this increase on margins will be roughly 30 basis points. During the first quarter we spent $82 million on maintenance capital expenditures and 37 million on ROI repositioning expenditures. Our total investment for the quarter reflects solid progress on our 2006 capital plan and represents more than a 90% increase from 2005 levels. As Chris referenced with respect to the first-quarter results for the JW in Washington, D.C., the timing of these investments in our portfolio may occasionally result in some additional disruption to our business. Long-term these investments are designed to improve the performance of these assets and the value of our portfolio. Our current guidance fully captures the expected impact of these efforts.

Over the last three years, we have been clear that we intend to significantly improve our balance sheet to better position the Company from a financial flexibility perspective. Over that time, we have made considerable progress on this objective. And now, as a result of closing the initial phase of the Starwood acquisition and the expected benefits of the various associated financings and asset sales, we have the strongest balance sheet in our Company's history. Given that a number of transactions, including the Starwood closings, happened after the end of the quarter, we thought it might be useful to summarize certain key aspects of our balance sheet to reflect the post quarter-end adjustments, including the expected effect of completing the remainder of the Starwood acquisitions. From a debt perspective, our quarter ending debt balance of 5.064 billion should be increased by the 800 million 6.75% series P senior notes offerings and for the $77 million of debt we assumed in the Starwood acquisition.

Our debt balance will be increased by an additional 31 million upon completion of the acquisition of the two Fiji assets. And it will be reduced by the payoff of the outstanding 136 million of Series B senior notes, which will occur on May 15th. We did not draw any amounts on the bridge fund to fund the acquisition. Upon completion of these transactions, our debt balance will be approximately 5.84 billion. On the equity side, we have called the entire 150 million class C perpetual preferred issue effective May 19th. After repayment of the class C issue, our preferred stock balance will be reduced to $100 million. Additionally, we finished the quarter with 387 million shares and 19 million partnership units outstanding. In connection with the Starwood acquisitions, we have issued 133.5 million additional shares. Accordingly, our total outstanding shares in units today are approximately 539 million. Finally from a cash perspective, we finished the quarter with $481 million.

After adjustments for the Drake sale, the senior notes issuance, the initial Starwood acquisition, the series B senior notes payoff, the class C perpetual payoff and our first-quarter dividend distribution, we will have 590 million in remaining cash. Adjusting this amount for the remaining 115 million to be deployed towards the final elements of the Starwood acquisition and for maintaining our normal working capital of 100 to 125 million, means we have approximately 350 to 375 million available for investments in our portfolio or for new acquisitions. We also have full capacity on our 575 million credit facility. Looking at the second quarter, we expect that RevPAR will increase by 8% to 10%. Diluted FFO per share will range between $0.34 and $0.36 per share, after reduction for $0.02 per diluted share related to costs associated with the prepayment of debt or perpetual preferred stock.

It is worth noting that the timing of our Starwood acquisition, in conjunction with our standard reporting periods, has the effect of understating our FFO per share on the second quarter. As most of you know, our fiscal quarters reflect the timing employed by Marriott International, which uses 13 four-week periods for a fiscal year. Our first three quarters are based on 12-week periods, which is slightly shorter than a calendar quarter. Because our second quarter will end on June 16th, we traditionally include operations from hotels that report on a calendar month basis for the month of March, April, and May. Since we closed on the Starwood acquisition on April 10th, we will only include the prorata share of EBITDA earned by the Starwood portfolio in April and a full month of May operations in our second quarter FFO, with no second quarter benefit from operations in the month of June. However, our share counts and interest costs will include the first 16 days of June, consistent with our normal practice.

The timing difference between these items limits our ability to show earnings growth in Q2. But it will not affect full-year results as we will have a corresponding benefit in the third and fourth quarters. As we have detailed today, we have accomplished a series of important objectives during the first quarter. Operating trends remain very strong and the new supply outlook continues to be extremely favorable. We are optimistic about the remainder of the year and are well positioned to take advantage of the opportunities we expect to see over the next several years. This completes our prepared remarks. We are now interested in answering any questions you may have.

Thank you very much. [OPERATOR INSTRUCTIONS] Our first question today will come from Jay Cogan with Banc of America.

Yes, hi. Good morning and congrats on results and the outlook.

Thanks, Jay.

I got a few questions for you. As you look at the Starwood portfolio and think about opportunities with the assets you just acquired, Chris, can you maybe lay out maybe some of the opportunities? Just give us some perspectives on some of the things you might be thinking about and whether or not it includes dollars, I don't know. But just kind of curious where you see some of the opportunities to continue to add value with those assets? And then a couple other quickies. One, I was wondering if you could just confirm you said that those properties did 12.5% RevPAR in North America for the first quarter? Any comment on the union renegotiations given you're now owner of a couple big assets in New York and Boston that I would guess would be involved.

Yes. Jay, I'll cover all those in the order you asked them. The Starwood portfolio obviously we're just closed on it. But given the length of time it took to get the deal done and all of the due diligence that was done and the span of time between signing and closing, we've had a pretty good opportunity to have our asset management folks in reviewing those assets. While we're not all the way through the process, we have obviously been through all the assets on a initial strategic plan for all the assets. And I'd say it's difficult to kind of give you a general response to that because it's asset by asset. I think that, depending on the assets, we think that there's still opportunities in all areas of these hotels. They're going to be revenue opportunities, we think, throughout the portfolio in a number of different areas.

On the expense side, obviously with the benefit of benchmarking that we can do as a result of having a incredible diversified portfolio of hotels and trying to take best practices from all the various markets and hotels that we have, we think that there will ultimately be opportunities on the expense side as well. And then on the capital side, and where it does involve some dollars as you alluded to, we do think that selectively throughout the portfolio, like we found in our existing portfolio, we're going to find opportunities to invest in ROI, repositioning to some of these assets that could add meaningfully to the value of these hotels. So I know that's a very general answer. I think at this point that's probably the right place to be. And obviously as every quarter goes by, as we've done with our existing portfolio, you're going to hear more and more about those specific assets and various projects that we're going to be pursuing to enhance the value and enhance our growth rate. And obviously you're going to see, as those get blended into our overall earnings, you're going to see the benefits of what we're talking about on the revenue and the expense side relative to benchmarking.

You're right on question number two, that we said approximately 12.5% RevPAR growth in the portfolio for North America for the Starwood asset. And I don't think there's a lot more to say than I've already said on the union renegotiations on the last couple of calls. And I would say probably in short form I think there's a lot of discussion going on, there's certainly a lot of dialogue generally in the market about it. Our view has been, and continues to be, that in the end analysis the parties are going to be rational on both sides and ultimately there will be a deal cut that will make sense both ways. It probably, honestly, is going to take some time because the complexity, the number of markets and the complexity of the situation and the complexity of any negotiation like this ultimately requires some time to kind of sort out. But given the still relatively low percentage of our portfolio, even after Starwood, that's represented by the unions, we do not expect it to have a material impact on us.

Okay. That's helpful. Thank you.

Yes.

Our next question will come from Harry Curtis with JP Morgan.

Good morning.

Good morning, Harry.

A couple of quick questions, please. Chris, you mentioned that group pricing in the first quarter was up 4.5%. What do you expect group pricing to look like for the balance of the year, particularly given your comments about group demand accelerating for the balance of the year?

I think the short answer is we expect it to be a little better for the rest of the year. It was pretty good -- 4.5 was pretty good but the truth is, as we'd expected and as we just reported, our group pace was off in the first quarter. It's up Qs 2, 3, and 4. We will be -- the rates on groups that are being booked in the year for the year and in the quarter for the quarter are much higher than the 4.5% rate. They're more than double that in a lot of cases. And so I think as fundamentals -- as we get deeper in the year and fundamentals are continuing to improve, demand is continuing to improve, pace is up and you'll see the rates will be higher.

And so you think you'll be able to get up closer to your system-wide number?

Which system-wide number are you -- ?

The 8% to 9%.

I think that's probably a little heavy for the group. It'll be higher than 4.5 but I wouldn't go that heavy. I don't have the exact number in my head, but I would say somewhere maybe a point to a point and a half higher.

And -- I'm sorry.

No, go ahead.

The second question is you also mentioned that wage and benefits were up about 4%. What are you baking in for wage and benefit increases for the full year?

Wage and benefits for the quarter, Ed, rounded were actually 3.8%, so around 4. We think for the rest of the year it's somewhere probably 4.5 to 5.0. And, thus, you can see why we, in part, between what we expect in wages and benefits, what we expect to see, as Ed already described, in insurance which is very impactful, and what we expect to see in real estate taxes, which were essentially flat in the first quarter but given the recovery we've seen over the last couple of years we don't expect that it's going to continue to be flat throughout the year. When you combine those three things, you get to where we are in our margin guidance at 140 to 175 and those are the reasons why, even though in the first quarter we had very favorable margins and we're very pleased with that, those are the reasons really, those three primary reasons, why we have not moved our -- even though we have trimmed the bottom side of our RevPAR up, we have not moved our margin guidance. And we think that the guidance we've given is a reasonable place to be given what's going on in those categories.

That does it for me. Thank you.

Thanks.

Jeff Donnelly with Wachovia Securities has our next question.

Good morning, guys. Chris, a few of the major markets have had soft occupancy growth in the first quarter and Host, maybe for asset specific reasons, did see some flat occupancy. Is that perhaps, I guess in your mind, an early indication that expectations for growth may either be too high, or RevPAR growth that is, or pricing perhaps is being impact from demand a little bit?

No. I couldn't hear the first part of that, but we trimmed up the 7 to 10 to 8 to 10 for obvious reasons. And that is that we had confidence that we would be able to deliver that based on what we see. There are some market anomalies, but I think they are for a lot of specific reasons. The two biggest, frankly, are DC and Orlando, which Ed described. DC is going to be a long stronger. Was driven by a bunch of factors, including first-quarter inaugural comps being difficult, a weaker group booking pace, which improves throughout the year, and then the impact of the JWDC which was huge. We were minus 6 in DC and if you take that hotel out we'd have been plus 2, plus 2 to 3. So there was a big impact from, I think, quarter-specific kinds of issues. The same thing in Orlando. Very weak group, as well as the fact that Florida generally did not get a benefit because the northeast weather was so moderate this year.

And when the northeast weather is moderate, Florida doesn't get as many people trying to get out of the cold weather to get to the warm weather, so it impacts the transient business. So I do not see those markets or in general a early warning sign of trends that are negative. Obviously with our moving our guidance up a little bit at the bottom end, I think that's a show of confidence that we feel good about where things are going. The last comment I would say generally, in terms of occupancies is in addition to those markets, it's really to do with as much as anything driven because the transient business volume was up. What was down was group and it was what we anticipated because of the weaker group calendar for the first quarter. That is not carrying out, as we have all the group bookings taking place, obviously, for Q2 and 3 and 4. We had them when we reported fourth quarter of last year in '05 numbers. So we expected this slow down in the first quarter but it does not carry over into Q2, 3, and 4. So we expect to see much greater strength based on both the transient business and then the group booking pace.

So, it's a long-winded answer, but I think worth going through to suggest we've tried to be very thoughtful about where we think we'll end up for the year. And I think what you've seen in terms of some weakness in some markets, or in general in the group business, were really more driven by first-quarter issues than any kind of systemic issue or problem.

Okay. And just -- thanks. And actually just two other short questions. One is just on your ROI capital investment pipeline. Is it fair to say that the roughly $250 million for this year's a reasonable run rate for future years? And can you remind us of the types of incremental returns on capital you generate on those dollars?

Yes. I think that that's -- the 250 that we're going to spend this year is probably not a run rate for many years. Those are big dollars. I would suggest that our best sense of it right now is in the next couple of years we'd spend another several hundred million dollars and that could go up. And by the way I think we should all be happy if that goes up. The reason I'm being a little bit vague on it is simply because we're just really diving into the Starwood portfolio in ernest, as I mentioned, on those types of opportunities. And we may find more than we're thinking right now.

And frankly, as I say, I hope we do. Because these are the types of opportunities where instead of on an acquisition where we're probably getting and trying to get 2 to 300 basis points premium to our long-term weighted average cost of capital, we're getting 6 or 800 basis points or more in terms of our underwriting of these types of opportunities vis a vis our costs of capital. So in fact, while they're not sexy and people don't get real charged up about them when you talk about them, they are the best place that we can put our capital, all things considered, in terms of ultimately our growth rate and shareholder value. So we hope we find more, I think, for now and we'll obviously update you as we get deeper in the Starwood portfolio. In addition to the 250 we're talking about this year, I think my best sense is we spend several hundred million over the next couple years and if that is moving up, obviously, as we get more into the Starwood portfolio or other opportunities in our portfolio, we'll certainly let you know.

Okay. And the last question was just on Starwood. I know that these assets were excluded from guidance, but I guess had you owned them for comparable periods and given what you're budgeting, would you expect they would be additive to your revenue and profit growth guidance for '06?

Yes. Well, I mean we haven't run it through because it's non-comp, but it would certainly, based on the expected level of performance, make you feel better about more -- being more towards the upper end than the lower end.

Right. Let's say your RevPAR growth would be higher, maybe your margin growth would be higher.

Yes. I think that both of those would be true.

Thank you.

Next we'll hear from William True love with UBS Warburg.

Hi, guys.

Hi, how are you doing.

Doing all right. Let's see. You mentioned in your call that the group business was down in the first quarter but that the food and beverage and profits were strong. I'm a tad confused on how that works. I thought the strong group business would have related to stronger food and beverage revenues.

That's a darn good question. Group business was off 4% to 5% in terms of volume. Again, I don't need to say it for 20th time, just as it related to the cycle of group bookings in the first quarter. Food and beverage revenues actually picked up a bit. I think it has to do with a couple of major things. One, a lot more social business in the hotels, local business as opposed to being driven by necessarily the groups in the hotels. The groups that are being driven out of the market surrounding the hotel.

And that we've had a lot more success in charging for meeting rooms. Because of the strength of the group business now, we can charge more often and higher rates for the rooms. Where in a weaker period of time you effectively will give the rooms away or you will charge very little for the rooms in order to get the overall business in to get the people to book the rooms and have the catering revenues, you give the charges up or you discount the charges. So I think you ought to view that as a terribly good trend. And as the group booking pace is picking up in Q2 through 4, there ought to be a nice trend that we see because we obviously will continue to work hard on the room rentals for the rooms. Some of the local business, obviously, will get displaced by the group business. So you won't continue to be able to house both of those, because there's just only so much capacity you have.

But I think that the bottom-line on what's going on in food and beverage is very good and I think very consistent with what we've been articulating, that as you get a little deeper in the cycle and as you get more seasoning of the kind of group business and you keep shifting your mix to the higher rated, higher spend groups, you're going to start to see that flow through in the form of greater revenues and greater profitability in the area. And I think that's what we're seeing.

Great. And then, also, you took the Canadian assets off the table on the Starwood acquisition. Any interest in purchasing Canadian assets going forward or not?

Sure. For the right price and the right spread to our cost of capital, we're interested in Canadian assets. Obviously, those were excluded for the simple reason that we didn't get a tax -- Starwood didn't get a tax ruling that they needed to make that deal work from a tax point of view. And that's simply stated why those were excluded. We've looked at -- we own a number of Canadian assets. We have looked over time at adding to our Canadian portfolio. And if we could get the right spreads, the right yields, we would certainly consider doing that in the future.

Great. And one last question, then. Was there any material differences between the brands in terms of the improving margins in the first quarter?

Yes. We're not going to get into brand specifics. I would say there are some differences where you saw the higher RevPAR is where you saw -- generally is where you saw the higher margins and obviously we didn't own the Starwood asset. But if you look at the fact that they were 12.5 RevPAR versus some of our other brands, you should assume that the margins there would be higher, as I've already suggested. I think if you look at the Hyatt portfolio we had very, very strong RevPAR growth in a number of those assets and as a result margin growth would have been higher there.

Great. Thanks so much, guys.

Yes.

Our next question will come from Bill Crow with Raymond James.

Good morning, guys. Chris, a couple of theoretical questions. As you sit around with your management team, anything surprising you all out there on a fundamental basis?

No. No. Not really. I mean, I have to say that we sat down the last week to kind of review the quarter in detail with our whole team, including all of our asset managers. And while there's always things to talk about in the quarter and we've discussed them all here really with you today, none of those were in any way surprising to us or concerning to us. The first quarter played out pretty much as we thought, obviously a bit better than we had thought. With what we see on the books in terms of group pace, net rev activity, all the things we look at, they're all moving up.

And so all of the things that we thought about and talked about in our expectations that we set with the market at the 2005 year-end call, a couple months ago, all I think are kind of playing out in line with what we would have thought. I think the fundamentals remain really strong and we don't certainly see anything disrupting that in the short to intermediate term. Obviously there are two things that can impact it, real simplistically, and that is a bunch of supply, which we don't see really changing any time soon, the data's very good on that. And then on the demand side would be something shock to the economy. But the economy seems to be chugging along at a fairly good clip. And we've got a great differential between those two and I think that's the simplistic thing that's driving our positive results. And we just don't see anything that is particularly surprising or concerning at this point.

All right. If you were to allow yourself to look ahead to 2007. I know you won't give guidance. But if we just thought that we're going to lap the higher energy prices later this year, we're going to lap the insurance increase early to mid-next year, is it possible that flow through actually increases for the industry next year even if RevPAR's a little bit lower?

Yes. I think the answer's yes. If you do the math, I think the short answer is yes.

All right. And then finally, you have talked openly in the past about your belief that the portfolio's worth maybe 25 to $30 per share on a per key basis, as you do that analysis. Any changes pro forma for the Starwood portfolio?

No. I think it's roughly comparable and we're in the process, I mean this is going to sound funny because it seems like now we've got to do it about every quarter, but we're in the process of looking at what our replacement cost analysis would be. But as we looked at it as we were doing the Starwood deal, vis a vis our own, we think that it really is in that way roughly comparable. The thing that's really a little bit different and maybe going back to your prior question, would say that it did surprise us a little bit but in a positive sense is that, from the standpoint of everything that we own, is that construction costs just keep going up at a very, very rapid pace. You are really starting to feel, particularly in the southeast, the impact now of Katrina and all the rebuilding that's going on in New Orleans. And the labor that's being sucked out of the system to go to that part of the country. All of the supplies and materials that are going to that part of the country.

And so the fact is when you look at the assets we own, the replacement costs for those assets continues to go up at a very stiff clip, in my opinion. And so vis a vis the Starwood, to answer the specific question as I did, vis a vis the Starwood portfolio and blending that in, I don't think that in and of itself is different because it's a very comparable, in our view, kind of a comparable portfolio to what we had in terms of replacement costs. The overall replacement costs of everything that we own, including those assets, is continuing to go up. And obviously we believe that we bought those assets --- at the time we bought them at a 25 to 30% discount to their replacement cost. And that differential as cost goes up in that portfolio and our own portfolio continues to widen.

Okay. Thanks for the insights.

Yes.

Next is Joseph Greff with Bear Stearns.

Hi, good morning, guys.

Hi, Jeff.

Chris, at the outset of your opening remarks you had mentioned that your adjusted EBITDA guidance is not indicative of a run rate because of the timing of some of these assets coming into the portfolio this year. What is a current market-to-market run rate of annualized adjusted EBITDA?

It's probably 1.3 to 1.325, something like that, if you look at the benefit of ownership for a full year of Starwood. Call it a 1.3 billion.

Okay. Great. That's it. Thank you.

Yes.

David Anders of Merrill Lynch has a question.

Great. Ed, maybe you can comment a little bit on your forward guidance and on the RevPAR it went up. Was that partially because of the Starwood -- the portfolio, the inclusion of the portfolio, that's number one. Number two, does that also explain, perhaps, the difference between your forecasts at comparable margins versus GAAP margins? That's it.

As it relates to the RevPAR part of the question, Starwood is not included in our RevPAR guidance. That's just for our existing portfolio.

Okay.

And so I think what you're just seeing is that we do feel much better about the last three quarters of the year. The strong group business that is already on the books, from our perspective, means that when you combine that with what we can expect to be a continued strong transient demand is we'll just have a better last three quarters than we did in the first quarter. So that's what's affecting that part of it. Speaking about Starwood in general, as Chris mentioned, we would see that performing at the upper end of the guidance that we're giving for our existing portfolio. And on the margin side -- of the operating margin side, the GAAP operating margins, actually that's only provided in the press release to allow us to include the comparable operating margin. So I would -- the GAAP operating margins include things like depreciation expense and other things that aren't in the comparable hotel operating margins. So it focused on those comparable hotel margins versus the GAAP margins.

Okay. Thanks.

Yes.

Next we'll take a question from Smedes Rose with Calyon Securities.

Hi. You talked about Orlando a fair amount already but I just wanted to ask you a little more. Do you attribute the sort of weak trends in the first quarter all to just kind of the calendar shift and less transient business due to the milder weather? And I guess just going forward, it sounds like there are a lot of folks that are investing more capital in that market. I know Sunstone's going to fix up its Renaissance there and you've got another Hilton property opening at the convention center at some point. Are you concerned at all about your property losing share at all to those? Do you think Orlando as a market is losing share given -- with new rooms coming in, can it keep pace? And also are you done with your investment at that property now?

Yes. Let me take those one at a time. I do think our sense is that Orlando's weakness is a group calendar issue. And obviously with what we see on the books for, particularly, Q2 but for overall for the rest of the year, we think it's going to see a great deal of improvement. In terms of new rooms coming in and our competitive position, we feel very good about where we are with that hotel. We are in the process, as we've talked about, in adding a major exhibit hall to that property, which we think will position that property as well as it can be positioned, vis-a-vis the competition. So we do not expect to actually lose market share with that hotel as a result of that. We're doing it because we expect actually to be able to gain market share. And we're pretty confident that we will.

Is that open, the exhibit hall, or -- ?

No. It will be open at the end of next year.

Okay.

And in the meantime, the hotel seems to be performing well. But it really is, we think, a very significant strategic move and a very good investment in terms of overall returns for that particular hotel. In terms of the overall market share in Orlando, I think we feel fine about the market share in Orlando. With what they've done with their Convention Center, certainly with the Hiltons going in at the Convention Center, but there's a lot of demand that's going to be induced as a result of what they've done with their Convention Center. While there are other rooms coming into the market, the Orlando market has seen very strong growth over time and we think will continue to see reasonable growth. So I think we feel fine about that market. There're major convention destinations around the country that have held their own pretty well and Orlando's one of them. In part because they have one of the largest exhibits halls and Convention Centers in the country. So what I worry about more in terms of losing share in a material way is secondary and tertiary kind of convention markets, vis-a-vis the Orlandos and Vegases and San Diegos and San Francisco.

On that could you maybe just talk a little bit about Atlanta and the positive impact from business that moved out of New Orleans? And just kind of where do you see New Orleans now in its recovery process as we anniversary Katrina now in August, kind of what you're seeing on that front?

Atlanta's having -- had a great quarter in the first quarter. We expect it to have a pretty darn good year in general. I mean even before Katrina I think Atlanta was going to have a better year in terms of overall group bookings. With Katrina, Atlanta gets that much better. Longer term we feel fine about Atlanta. Atlanta's not going to be as strong a convention market as some others, including Orlando, including Las Vegas, including San Diego, including San Francisco and others. But it will be reasonably strong. Atlanta is really in some ways a price alternative for groups, very large groups that want an ability to get in and from an air-lift point of view at a reasonable cost and the Atlanta Hartsfield Airport has massive air-lift at very reasonable cost. And they have a collection of very large, nice convention center, sizeable convention center, and large convention hotels that are more reasonably priced than some of the other destinations that I noted.

So I think Orlando has its niche, which is a little bit different than -- excuse me, as I say, Atlanta has its niche vis-a-vis the Vegases of the world and Orlandos of the world, which is a little bit more of a price alternative, but still a very good niche. And I think a niche in which we can do very well with our assets down there. We have one large convention hotel in the market in the Atlanta Marriott Marquis. We just finished a major renovation of all the rooms. We're getting ready to redo all the meeting space platform and add a ballroom. And we think we're going to be very well positioned in that market to capture a lot of demand. And there is going to be a continuing increase in demand in that market for the niche that it plays in. So we feel good about it. New Orleans is making its way through the process but I would say the overall recovery of New Orleans is several years off. We're actually doing a little bit better than we would have thought. We're still obviously in the time frame where we're protected by business interruption.

But I'd say New Orleans is kind of a two to four-year plan in terms of really having the opportunities to garner -- to gain back the large groups. There are some that are coming this year. I think in June of this year they're going to have their first major group event, which is big news for the market. They've got sporting events that are coming back, major sporting events. So things are starting to move in the right direction but I think there's more time and more investment that needs to occur before it gets back at a level of operations in overall group business that it had before.

Okay. Thanks. So have you guys already started getting, I assume, getting insurance proceeds still or still receiving them?

Yes. Well, we got some last year. We have not received any additional proceeds. There are no insurance proceeds built into our first-quarter numbers. We are hopeful that there will be some of that that will come in the second and third quarter.

Okay. Thank you.

Celeste Brown with Morgan Stanley has our next question.

Hi. Can you speak to just the in general what you're seeing in the market in terms of the delta between replacement costs and the costs to buy assets today?

Yes. As I mentioned earlier in my comments, we're not really sure exactly right now what replacement costs are because they've been moving so fast. You can hardly keep up with them. But I would say by and large, and it's so case by case, but by and large we're seeing it anywhere from 15 to 20% would be my guess. Now, there's some cases, obviously, where we can do better than that. But in general, if I had to pick a number, I'd say 15% to 20%. And probably on the rise only in the sense that I think that while price -- it's very competitive out there, my sense is that in the acquisition market prices are relatively stable and yet replacement costs are going up. So my sense is that that delta is getting a little bit wider, not getting narrower for that reason. At least for the time being. Obviously that can change at any time.

Great. Thank you.

Thanks.

And that does conclude our question-and-answer session. I will now turn the conference back over to Chris Nassetta for any closing or additional remarks.

Thanks, everybody, for joining us today. We're pleased with the first quarter. We're also even more pleased with what we see coming for the remainder of the year. And we'll look forward to talking with you after we finish the second quarter. Hope everybody has a great day and thanks for participating today.

And that does conclude today's conference. Thank you for joining us.