Host Hotels & Resorts Inc (HST) 2006 Q2 法說會逐字稿

Good day and welcome to this Host Hotels & Resorts second quarter 2006 earnings call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Senior Vice President, Mr. Greg Larson. Please go ahead, sir.

Thank you and good morning. Welcome to the Host Hotels & Resorts 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 law. 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 second quarter results and then we'll 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 second quarter results, including regional performance. Following their remarks, we will respond to your questions. Now here's Chris.

Thanks, Greg, and good morning, everyone. Once again we're pleased with our results for the quarter as continued positive fundamentals in the business have translated into strong growth and topline revenues and earnings that significantly exceeded the high end of our guidance and consensus estimates. Our outlook for the remainder of the year continues to be very positive as well, which I'll cover in more detail in a few minutes.

First, let's talk more specifically about our second quarter results. Our FFO per diluted share for the quarter was $0.39, including charges of $0.04 per share related to costs associated with refinancing and non-recurring Starwood acquisition costs. Excluding those charges, our diluted FFO per share exceeded the high end of our guidance and the consensus estimate by $0.05. Comparable RevPAR growth for the quarter was 9.7% with the majority of the growth attributable to growth in average rate, which came in at 8.9% for the quarter. Comparable hotel adjusted profit margin growth was strong for the quarter with margins increasing 210 basis points which led to an increase in comparable hotel adjusted operating profit of approximately 16% versus the second quarter of 2005. The adjusted EBITDA of Host Hotels & Resorts L.P. increased over 33% from the second quarter of 2005 to 347 million. On a year-to-date basis, our comparable RevPAR increased 8.7%. Our comparable adjusted margins grew 230 basis points, and the adjusted EBITDA of Host L.P. was 559 million.

I'm sure that many of you are interested in the performance of the portfolio we recently purchased from Starwood. We have been very pleased with the performance of the hotels thus far, both on a top line and bottom line basis. Although we did not own the hotels for the entire second quarter, RevPAR increased 13% during the quarter, which represents the period of March through May for those hotels.

For the second consecutive quarter, our growth in comparable food and beverage revenue was strong at 7.7%. As a result of an increasing amount of higher-rated groups and a positive mix shift from outlet revenue to more profitable banquet and AV revenue, food and beverage profit margins increased 240 basis points during the quarter, which led to an increase of approximately 17% in departmental profit. We expect these profitability increases to continue as our group demand remains strong for the remainder of the year.

Overall group demand for the quarter was up modestly versus last year and our average group rate was up over 7%, resulting in growth in group revenue of nearly 9%. We remain encouraged about our group booking pace for the remainder of the year as room nights are expected to increase and rates are expected to remain strong, which we expect to produce growth in group revenues for the remainder of the year of nearly 10%.

Our transient segment remains strong in the second quarter as well, with transient room revenues up approximately 10% for the quarter. We expect these trends in the transient segment to continue, which combined with a positive trends in the group segment, to enable us to continue to see near double digit growth in RevPAR for the remainder of the year.

As you know, since our last earnings call, we have completed the purchase of five hotels from Starwood by our European joint venture. Four hotels, the Westin Palace Madrid, the Westin Palace Milan, the Sheraton Roma and the Sheraton Skyline in the U.K., were purchased on May 3rd and the fifth hotel, the Westin Europa and Regina in Venice, was purchased on June 13th. The Sheraton Warsaw, which we purchased from Starwood as part of the initial closing of the transaction on April 10th, was contributed to the joint venture on May 2nd, bringing the total number of hotels currently owned by the joint venture to six.

Finally, we just recently announced that Starwood will no longer be pursuing a consent required to transfer ownership of two hotels in Fiji. Therefore, Starwood will be retaining ownership of those assets. This action completed the Starwood transaction and brought the total number of hotels purchased as part of the transaction by either us or our European joint venture to 33. Since closing our joint venture and completing the purchase of hotels from Starwood, we have been focusing on establishing our office in Europe, which we expect to complete during the third quarter, developing relationships in the European markets and evaluating potential acquisitions, which has led to a good pipeline of attractive potential acquisitions.

On the domestic front, as you are likely aware during the second quarter, we announced the pending acquisition of the Westin Kierland Resort and Spa, a three-year-old, 732-room property located in the Kierland commons area in the Phoenix, Scottsdale market for $393 million. We believe we are purchasing this property which is located on approximately 250 acres of sea simple land that includes 27 holes of golf and an excess development parcel at a very attractive price and we're very excited about furthering our relationship with Starwood in a market with such strong growth prospects. We expect the acquisition to close in the third quarter.

Going forward, while we're always interested in good opportunities that leverage our relationships to execute single asset acquisitions on an off-market basis or to use the benefits of our structure to complete efficient M&A transactions, in the near term we'll continue to focus on investing in high yielding ROI projects and executing on value enhancement opportunities in our existing portfolio. From a capital allocation perspective, we believe these to be among the highest-returning investments we can make at this point in the cycle, particularly as the market for acquisitions that fit our target profile have become increasingly competitive. As a result, we are not forecasting additional domestic acquisitions for the remainder of the year.

As we have communicated to you in the past, we have been and will continue to invest substantial amounts of capital in ROI and repositioning projects in our portfolio, including our new Starwood assets and have a number of value enhancement projects at various stages of development. We have discussed with you in the past the complete repositioning of the Newport Beach Marriott Hotel and Spa which was completed early this year. The pending sale of excess land at that property for condominium development, the closing and pending sale of the Marriott Mountain Shadows property for residential development, the complete repositioning of the room, meeting, and public spaces at the Atlanta Marriott Marquis and the ongoing timeshare development at the Hyatt Regency in Maui, which we believe is one of the most attractive timeshare development opportunities available in the United States today.

Additionally, we have over a half dozen additional time share or condominium opportunities in our portfolio that are in various stages of evaluation. As you know, we typically do not discuss these projects publicly until we are confident they'll be moving forward and it is appropriate strategically to do so, but we're confident that there is substantial value embedded in these opportunities.

On the disposition front, as you know so far this year, we've completed approximately $700 million of dispositions, including two high multiple value enhancement dispositions, the Fort Lauderdale Marina Marriott and The Drake in New York, which we sold for combined proceeds of approximately 586 million and had a combined EBITDA multiple in the mid-20s. In total, we have recognize a gain of approximately $385 million on the sales we have completed this year.

Moving forward, we remained focus on recycling capital out of lower growth assets and are maintaining our guidance that we will complete 200 to $300 million of dispositions over the remainder of the year, bringing the total amount of dispositions for the year to nearly $1 billion.

Now let me update you on our outlook for the remainder of 2006. Based on continuing strong fundamentals, we expect comparable RevPAR to increase 8.5 to 10% for the year and while we continue to face several challenges on the expense side, we believe we can continue to drive incremental profitability and flow through and thus are increasing our guidance for comparable adjusted margin increase for the year to 160 to 200 basis points. Based on our current operating forecast and our assumptions regarding acquisitions, dispositions and financing activities, we now expect diluted FFO per share for the year to be approximately $1.49 to $1.55, which includes $0.06 per share of expenses related to costs associated with refinancing and non-recurring Starwood acquisition costs. Adjusted EBITDA for Host L.P. for the year is expected to be a billion 250 to a billion 285, which is a modest increase from our prior guidance, despite not purchasing the two Fijian assets from Starwood. Based on this increased earnings guidance, we expect our common dividend to show good growth for the remainder of the year.

In summary, we are very pleased with our second quarter results and feel very good about the remainder of the year. We are confident that as we look into next year, the fundamentals in our business will remain strong and will continue to deliver strong growth. Thank you and now let me turn the call over to Ed Walter, 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 second quarter our resort hotels performed the best, with RevPAR growth of 10.8% and several of our Florida resorts had very strong quarters. Our suburban and urban hotels both experienced RevPAR growth of 9.5%, although our average daily rate growth is over half a point stronger at our urban hotels. Our airport hotels increased by 8.9% for the quarter, as strong rate growth of more than 10% was offset by our occupancy reductions.

Year-to-date, our suburban hotels have performed the best with RevPAR increasing 10.4%, while our urban hotels improved by 8.8%. Our airport hotels have increased by 8.6% and resort hotels increased by just 7.4%.

Turning to our regional results for the quarter, our top-performing region was the New England region, which saw 26.2% RevPAR growth as the downtown Boston market has very strong transient and group demand. Our two Boston area Hyatt hotels had an exceptionally strong quarter with RevPAR growth averaging more than 35%. Given the outlook for strong group bookings for the market, the third quarter looks good in the New England region.

The Atlanta region also enjoyed a great quarter with a 21.7% RevPAR increase driven by strong citywide and in-house group demand. All of our hotels in this market had a solid quarter as demand increases resulted in a 5.7 percentage point improvement in occupancy. With strong demand forecast for the third quarter, we expect this market will continue to outperform.

Our north central region had another solid quarter as RevPAR increased 15% due primarily to continued strong group activity in Chicago, which has increased occupancy by an average of 8 percentage points. The Chicago area is benefiting from a 50% increase in citywide events in 2006, which has led to average RevPAR growth of nearly 22% in the quarter. Although growth may moderate slightly in the third quarter, our Chicago area hotels should continue to do well.

Our Florida region rebounded in the second quarter as strong group bookings and improved transient demand at several of our resorts generated RevPAR growth of 10.5% and food and beverage revenue growth of 17%. In particular, RevPAR at our Orlando World Center Hotel increased by 19% as a result of strong group bookings. Subject to how the hurricane season plays out, the rest of the year looks very positive in Orlando and the region should continue to do well in the third quarter.

Performance in the mid-Atlantic region reflects a tale of two cities. The first, New York,enjoyed its 9th consecutive quarter of double digit RevPAR growth as RevPAR increased 12.6%. On the other hand, our Philadelphia area hotels had a slower quarter as the decline in group activity partially offset strength on the transient side, leading to RevPAR growth of just 4%. Group activity in Philadelphia appears to be picking up this summer, which should help improve results in this region.

As expected, the Washington, D.C. metro region rebounded from a very weak first quarter with RevPAR growth of 5.6%. Our results in the quarter were slightly affected by the completion of the accelerated renovation at the J.W. Marriott and to a greater extent by softer transient demand due to decreased congressional activity, as well as weak group demand. We expect that this market will continue to underperform in the third quarter and for the full year in 2006. Longer term, we remain confident in the strength of the D.C. market and expect improved operating results from our portfolio in 2007.

The Pacific region also underperformed with RevPAR growth of just 4.1% as hotels in three of our four major markets had weak results. RevPAR in San Diego declined by 2.9% and citywide fell short of last year's pace, reducing group activity. Stronger transient demand in San Francisco, especially at the airport, was offset by a flat quarter at our Marriott, leading to a market RevPAR growth of just 1.9%. Finally, the L.A. market improved by only 4.7%, as group demand was off slightly and the Marina del Rey Ritz Carlton was completing a room renovation. On the positive side, our two large resorts in Maui continued to perform well with RevPAR growth averaging more than 12%. Overall trends suggests the third quarter will be better in the Pacific region as group business picks up.

Year-to-date, the three best markets have been the New England region with RevPAR growth of 21%, the Atlanta region with growth of 19%, and the north central, where RevPAR improved by 17%. The Pacific region with RevPAR growth of just 5.9% and the Washington, D.C. metro region, which grew RevPAR by just 1% were the weakest.

As Chris highlighted, we were very pleased with our 210 basis point improvement in comparable hotel adjusted profit margins in the second quarter, which resulted in better than 50% EBITDA flow through. The 8.9% improvement in average daily rate and improvements in productivity contributed to solid rooms profit flow through of more than 80%. The continued shift in food and beverage revenues toward catering business, which helps reduce food costs as a percentage of sales, and the increased meeting room rental revenues resulted in more than a 60% flow through in that department. In addition, support costs, other than utilities, increased by less than 1%.

On the negative side, despite moderating from the prior quarter, utility costs were still up by 12% and insurance costs increased by more than 30%.

Looking forward, we continue to expect above inflationary cost increases in both real estate insurance costs and utilities as well as in wages and benefits. We are also expecting real estate taxes to increase more significantly as assessments begin to reflect the impact of improved operating results and increases in value.

During the second quarter, we completed $59 million in maintenance capital expenditures and $63 million in ROI repositioning expenditures, which represents solid progress on our 2006 capital plan. For the year, including our expenditures in the Starwood portfolio, we expect to spend 275 to $285 million on maintenance capital expenditures, and 245 to $255 million on ROI or repositioning expenditures.

With the Starwood transaction and the associated financial activity now complete, the improvement in our balance sheet is fairly apparent. Further ratification of this success was evidenced by S&P's upgrade of our corporate senior notes ratings in June. We completed the quarter with cash of $524 million, but expect to deploy $260 million of this amount to complete our purchase of the Westin Kierland later this quarter. The remaining cash of approximately $265 million will be used to maintain working capital of roughly 100 to 125 million, as well as fund additional investments in our portfolio, acquisitions by the Company or the European JV, or for other corporate purposes. We also have full capacity on our $575 million credit facility.

Looking at the third quarter, we expect that RevPAR will increase by 9 to 10%, diluted FFO per share will range between $0.26 and $0.27 per share.

As we have detailed today, we are seeing great results on both the top line and bottom line leading to very strong EBITDA and FFO growth and operating trends remain very strong. With a strong balance sheet, we are optimistic about the remainder of the year and are well positioned to take advantage of the opportunities we expect to see.

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

Thank you. Our question and answer session will be conducted electronically. [OPERATOR INSTRUCTIONS] Our first question will come from Will Truelove with UBS Warburg.

Hey, guys. Good quarter.

Thank you.

As the operators start getting ready for negotiating for 2007 corporate rates, have you indicated to your operators what you would like them to ask for as that comes up?

We've started that conversation. It's kind of a dynamic conversation, Will. And I think the long and short of it is we expect demand growth to be very strong next year as it has been this year and we expect supply growth to be anemic next year, as it has been this year as a result of what we see going on in corporate America with corporate profits. Our expectation is in general we should getting significant rate increases in the corporate side, and in fact on the special corporate negotiations, which is what you're really talking about, we still believe that we have a long way to go and that, in fact, given what's going on with the traditional corporate and premium business and the growth we see there that we can be pretty darn aggressive on the special corporate again next year. We were pretty aggressive this year, have seen great increases and at this point, again, it's early and we're still in the midst of having that conversation, but we would hope to be able to see, given what we see in the overall fundamental situation similar kind of growth in year-over-year in that category.

All right. And I know you're not giving any specific guidance for '07 yet, but can you --

That's absolutely right.

Unfortunately. Can you talk about maybe on the cost side, when many of the large cost increases such as insurance and that happened, when did those cost increases anniversaryize, or when did they sort of become easier comparisons, in which quarter would be anticipate that happening?

If you look at the various pieces of it, I think insurance is obviously a big impact for this year and insurance we're April to March. So it would be -- you would start to get easier comps next year -- of course, depending on what happens in the hurricane season, assuming that you don't have a major problem in the hurricane season and things stabilize in insurance, I think you'd start to see the comps become easier in the second quarter of next year. As it relates to utilities, obviously this year we expect in the second half of the year to get some benefit as a result of the huge surges in utility costs related to increases post-Katrina. But in the first and second quarter of next year, you ought to have in theory easier comps on the utility side. Again, of course, it goes without saying that it's dependent upon what happens in the world with oil policies and utility costs overall. But all things being equal, from a benefit cost point of view, I think you will at time wages and benefit, I think there's current cross currents going both ways. It's a little early for us to judge that, but my sense is depending on where you think you'll end up in occupancy, that you'll have maybe some moderation in wage and benefit overall, but obviously you've got pressures in some markets related to the union that are going to drive wages and benefits up a little bit more. I think it's a little early to judge wages and benefit at this point, but I would suggest to you -- I wouldn't expect that to change a whole lot from the standpoint of year-over-year.

And then, of course, there are a whole bunch of other expenses, real estate taxes, which are starting to pick up based on operations being as strong as they are and valuation being as strong as they are and that probably will continue to pick up steam. The net of all that, we could go through the entire income statement, but I think the net of all that is some of the big drivers that have driven this year in terms of expense increases, we are certainly hopeful that they'll moderate a bit and we are certainly hopeful that as a result of that, if we can get strong RevPAR growth next year, which I think at this point our belief is that we will, is that we'll be able to continue to get reasonably good margin growth.

It's a little early to start trying to give you a sense of RevPAR margins because we have really just begun. To say we've begun is an overstatement. We've had some very preliminary discussions with our operators about what they're thinking for next year. Obviously, as we get deeper into the summer and early fall, we'll really start the budget process in earnest. The fact of the matter is, in my opinion, is something we're trying to do with the operators. I'd rather have a budget process that's later in the year because I think you have a heck of a lot more visibility into the following year than trying to come up with a budget in the summer or the early fall of one year for the coming year. I think what happens is a lot can play out through the fall and early winter that can affect our views on what can happen next year. If we do the budget, if we go through the budget process too early, I don't think you get the benefit of the best thinking in terms of ruling up a budget and kind of having the right expectations at every individual hotel. So we're going to certainly get into it in the fall. I want to make sure we get all the benefit of all the operating experience we can of this year and a sense of everything we can from a fundamental point of view later in this year to judge what's going to happen next year, but without giving specific guidance, I certainly implied in my comments and I stand behind, we expect there to be a meaningful imbalance certainly at the upper end of the business and in the markets that were represented, meaning there's going to be more demand than there is going to be supply by a pretty good margin, which is going to continue to allow us to have pricing power, so we expect that we're going to have pretty healthy growth in RevPAR and in margins as a result of the ability to drive flow through by virtue of the fact that we continue to think that we'll get meaningful growth on the rates. Hopefully have some growth in occupancy and we expect to, but we expect still more of it to come in the form of rate, which will drive pretty good flow through, which should drive pretty good margins. Exactly where that ends up and whether it's better or worse in this year, which is what I think you're trying to get at, it's just a little bit early for me or for us to judge. But I don't think it's too early to say that where we sit today, we think we're going to have strong RevPAR growth and we're going to have reasonably good margin growth and we'll try to refine that obviously in the fall for you.

Thanks so much.

[OPERATOR INSTRUCTIONS] We'll now hear from Harry Curtis with J.P. Morgan.

Good morning. I wanted to ask you a question about your group business. The group business that was booked in 2006, how much of that , or is on the books for 2006, how much of that was actually booked in '05 and '04? What I'm trying to get at, is there any range of RevPAR and EBITDA that you believe it's really cost you that might be an opportunity looking ahead for 2006?

I think the answer is yes. Let me give you the stats. I don't -- I can't say sitting here I have a sense of exactly how much RevPAR or EBITDA it's cost us, kind of if you're trying to calculate a run rate with earning off. I just don't have that in my head, but I can tell you and I do have the stats in my head, that if you look at the business that we're going to have this year that was booked kind of pre-mid '04 and before, which is kind of how we've defined weaker times, it's somewhat arbitrary, but looking at all the data, that's when we kind of defined weaker times. It's probably, of our group business, about 30% of our group business. So it's still a big chunk of our group business. While the first part of '04 got a little stronger, it still was relatively weak and the rate growth was anemic back in the first part of '04. It started to pick up a little bit in the second half of '04. When we look at next year, we think it's roughly half of that. If you look at business that we will have in the hotel in '07 that was pre-mid '04 and before, it's probably half of that. So there should be, said another way, there should be a decent opportunity for mix shift, which is to say that we're going to mix in higher rated, higher-paying groups and mix out some of the lower-rated groups that had been booked in weaker times.

That's helpful, thank you.

Now we'll go to Mr. Donnelly with -- I'm sorry, Mr. Donnelly with Wachovia Securities.

Thanks. Ed, trying to reconcile your 2006 EBITDA guidance, or the guidance for the year that you gave in the previous quarter. Just in short, it strikes me that we should have seen more than what I think was a 10 to $15 million increase in light of the good results in Q2 and given that there hasn't been a material change in asset sales volumes. The remainder just doesn't seem to be explained by the give back of the two Fiji hotels.

Jeff, I think the answer is we've gone up about $10 million or so compared to where we had been in the prior quarter. We did lose a little bit from the standpoint of the timing as it relates to when we would be buying Kierland, the other acquisitions that we had previously built into our forecast and then the loss of Fiji. And so at the end of the day, I think it is just -- it's just a combination of both. We have increased the guidance, but there's also a little bit of an offset that comes from the timing of acquisitions and dispositions.

Yes, I think, Jeff, we obviously look at it in detail. If you kind of compare where FFO, if you try and match up FFO guidance changes with EBITDA, it's really pretty much all what Ed just said. There are timing differences, there are a lot of them in terms of acquisitions that were unspecified, Kierland, Fiji, and some dispositions, but when you do the math and we can do it obviously in a more detailed way, given we have all the facts, it really is driven by that.

Okay. Chris, I was looking to put a little more meat on the bones so to speak about just looking forward for the industry, not specifically for Host. Can you talk about where EBITDA margins are today relative to the prior peak and maybe just share with us your own view of where you think we can reasonably achieve in this cycle? And second, how realistic is achieving a prior peak or even surpassing it given some of the negative events the industry has seen, like the loss of the high margin phone revenues, or property tax and utility rates rising up?

It's a great question. And obviously those things have hurt margin, particularly the telephone side of things has taken a lot away. And you've seen above inflationary increases in a lot of other areas including the ones you've described, wages, benefits, utilities, insurance and some others. Those have obviously been working against us in terms of margin increases and as a result, while we've seen really good margin increases and by any standard of any prior cycle, the margin increases we're experiencing this year are some of the best we've ever seen. Last years were some of the best we've ever seen if you look historically at a year-over-year increase in margins. So on an absolute basis in terms of what we're, or I should say a relative basis relative to any kind of prior increases in margins, I think we feel like this year and last year were very good and we're hopeful that next year will be good.

But it won't be back to the peak for a bit of time. The truth is, if you look at our forecast that we gave you for where margins are going to be by the end of the year, and you look at that vis a vis the peak of 2000, it's probably 3.5 to 4 points lower than the peak of 2000. If you look at '99, which is maybe viewing 2000 as a kind of a anomaly year, a tech bubble, then maybe 0.5 point lower, so it's 3 to 3.5. If you look at then what we would expect to get next year, we haven't given you guidance. I said we hope that we can have a strong margin growth year, I think it's fair to say, while in no way trying to give guidance specifically to us, that we don't expect to get 3 to 4 points in margin growth next year. So our expectation is that if you're going to achieve the prior peak or look at '99 as maybe a real peak given 2000 as an anomaly year, you're really looking at 2008. And then the question is do we think we can actually do that, vis a vis what we see in terms of the fundamentals in the business of demand and supply. And I think the answer is that we do think in 2008 you could get back to the prior peaks. Maybe of a blended kind of '99, 2000 as an expectation of margins. We do not think, although some of have said it, we do not think from where we sit that we will get there in 2007. We think that to the extent we get there, it will be in 2008.

And kind of related to that is obviously, we feel good about, to be able to say that, we feel pretty good about where the fundamentals are. There are a number of different -- you didn't really ask it but you gave me the opening to kind of walk through it a little bit so I will. In terms of where we think fundamentals are, there are a lot of people going all directions on this issue rate now, but we feel very good about what we're seeing in the business rate now and these leading indicators that we have going into next year and frankly beyond. If we look at any of our group booking pace numbers for the rest of the year for '07, '08, they look strong. The transient demand looks strong. There are four or five metrics that obviously people look at different things that we look at to try and judge where we think the economy is going and where more specifically demand in our space is going and when we look at those, it's kind of GDP growth, corporate profit growth, employment growth, business investment growth, enplanement. There are a whole bunch of others, but when we look at it, we think those things generally have the highest correlation to demand growth in our business. If you look at where expectations are for the next two years plus or minus on GDP growth, it's kind of 3%, which is 3 or a little bit higher, which we still think is not robust, but reasonably strong. Corporate profits are growing in the high teens and they're expected to grow 15 to 20% for the next year or two. Employment growth, which everybody has been worried about, is really not bad at all. In fact, very strong growing at a point and a half. Business investment is growing at near double digits, plus or minus 10%, and expected to continue to grow. The software, hardware side of it is expected to grow for the rest of the year and into next year at 15 to 20% so very strong. Enplanement, if you look at the whole country, people have been suggesting enplanement. Are people getting on planes, is kind of moving the wrong direction. The way we look at it obviously is related to the types of assets and markets. If you look at the top markets, the top 30 markets around the country, enplanements are actually up 3% and growing and they're 10% higher than they were at the prior peak. So enplanements look pretty good. From the standpoint of what we see today, realtime and all of our booking stats and from what we look at in terms of the areas where we see a high correlation to demand in our business, we think the stats all look pretty darn good. Are they all perfect? No, but do they all directionally feel like we're still moving in the right direction and we're going to show a lot of strength going into next year? I think the answer is yes.

And on the supply side, while there are a lot of numbers out there, when you look at numbers and kind of whittle it down for the major markets, at least from the standpoint of where we sit and where we can be impacted and you look at those numbers. We take the broader supply numbers that lodging, metrics, and others come out and we kind of customize it to our markets and obviously use our knowledge of what we think is going to get done and what's not going to get done. If you look at the next two to three years, an average supply continues to be very anemic. And in fact, it only really picks up kind of in '08 and '09 because of, in a meaningful way, because of four projects. There are four big projects that are in various stages of development around the country and so when we look at the supply numbers and you dig deep into the supply numbers, and really try to understand them, we think the next couple of years at least will look pretty darn attractive and continue to create a really nice positive imbalance assuming the economy is growing at plus or minus 3%, meaning demand is going to be greater than supply. We look at -- that's why we're optimistic in a general sense, although not specific in RevPAR and margins next year. And that's why we're somewhat optimistic that I would say in '08, all things being equal, we have an opportunity to be able to get back to kind of an average of margins from '99 and 2000. So Jeff, I know that answered probably a lot more than you asked, but I think it's all part of the answer to how we feel about margins, RevPAR, et cetera in '07 and beyond.

It was a great answer. Since you brought it up, can I ask you, when you do recut the Lodging Econometrics numbers, how much lower does the -- or what's the change in what the expected supply growth for the industry? They're looking for 2 to 2.8% growth over the next three, four years.

We're a lot lower than that. Now remember, we're looking at the major markets that we're in. We're looking at the upper scale luxury because we think, in those markets, that's really going to be what we're competitive with. We think for this year and next year, it's lower than 1%. We think as you get to '08, '09, it steps up. It's maybe 1.5 to 2 out there. But the fact of the matter is, a large part of that 1.5 to 2 is driven by four projects. It's driven by the Hilton in San Diego, the Hyatt in San Antonio, the Gaylord in D.C. and the project, the Rosen project in Orlando. So it's four very identifiable projects in four very identifiable markets. And a lot of the stats, even in '08 and '09 that we look at, some of the stuff we've included, even though we look at a different mix than L.A., Lodging Econometrics won't get done. Costs have gone up at a huge pace and some of the stuff that's in '08, '09 will ultimately not get done. A lot of that, in fact, a significant component of that wouldn't be under construction right annoy. So it's still to be seen. You can look at '06, '07 and the first part of '08 and really know that it's kind of got to be under construction. When you look at those numbers, the numbers in our major markets for the upper end of the business are very attractive.

And if I could ask one last question. If you were to go back and recalculate the purchase price of the Starwood transaction based on what you know now, the smaller portfolio, the EBITDA you've seen, do you have a sense of how the initial pricing metrics might change?

I don't think with what's come out it's changed anything much. From an EBITDA point of view where, from the standpoint of during our ownership period, what we expected in EBITDA, we're doing modestly better, but I think it's playing out kind of consistent with the way we described it.

Thanks, Ed.

Moving on, we'll hear from Joe Greff with Bear Stearns.

Good morning, guys. Two quick questions. One is with regard, Chris, to your comments about European joint venture and that you have a lot in the pipeline, can you just talk about the transaction market in Europe and maybe compare it to the U.S. in terms of the amount of capital, multiples being paid, the cap rates implied, and if that's changed at all in the last few weeks in terms of what's going on in the middle east?

I can't talk to you about the last few weeks. It's hard to know if anything's changed in the last few weeks as no transactions have been completed. My sense is no, if what goes on in the middle east -- if what goes on in the middle east continues, and escalates, I think it can obviously have some impact over there, but we haven't seen enough to be able to judge that. In terms of what's going on in general, it's a competitive environment. We're obviously trying to do there what we try to do here, which is really build relationships within the industry and with owners that allow us to do things on an off-market basis so that we're not out in broker, in a situation where it's a broker deal, and we're building a pipeline and obviously we're just getting going, but we've got some very interesting opportunities we're looking at. We'll see, obviously as time plays out over the rest of the year whether we get any of those done, but we're certainly hopeful that at least a couple things we're working on will pan out. The fact of the matter is, there's a lot of money in Europe right now like there's a lot of money here. In fact, I don't have a hard stat, but I'll tell you anecdotally in terms of percentage, growth in capital that's seeking hotels. I'd say the percentage growth in that kind of capital is higher in Europe than it is in the U.S., just because a lot of people have been raising funds and looking more to invest in Europe in general, recognizing that the European cycle is a little bit behind our own and that there's going to be some opportunity for good growth. While there's still a lot of money in the U.S., I think disproportionately there's been a little bit more money rerouted to Europe and hotels, alike in the U.S. as a sector, real estate viewed as having tremendous growth potential. I think there's also a decent amount of allocation within those funds that's focused on hotels. So it's competitive, make no bones about it. I think we do have some real good opportunities over there. I think we're one of the the, if not the only longer term institutional type player to be an owner for some of the brands over there. There's plenty of money over there. A lot of it is opportunity fund money, which is fine money, but it's shorter-term money. Europeans, even more than I think other parts of the world, are focused on relationships and long-term ownership and stability and so we think that we've got a nice niche in terms of who we are and what we represent as a long term owner and investor in a property that will allow us to be successful. Importantly, because with where yields are over there, which are still meaningfully lower, maybe a 100 basis point cap rate difference between Europe and the U.S., we have a very challenging time doing this with our balance sheet because from a cost of capital point of view and the spread we need to get, we find it very hard to invest and really create value.

Importantly, as we've talked about a number of times now, we created this joint venture structure in part to not only extend our capacity in terms of dollars, but to financially engineer it in a way where we found partners that have lower yield requirements that allow us to leverage off of them and put us in a position where we have the best of both worlds. We've got a view of having a long-term joint venture and long-term ownership from a seller's point of view, but we have a very competitive cost of capital so that we can afford to pay in a competitive environment the price it takes and can accept the lower yield and still make the yields that our partners need and as a result of the fee structure and the promote structure that we earn at Host, that we can still get equal to or even maybe a little bit better yields than we might be able to get here because of the financial engineering. It's competitive, it's more expensive, there's a lot of money over there, but we've got a nice competitive advantage in terms of who we are and I think we've got a very good mouse trap in terms of our cost of capital at the joint venture level.

And one final question. As you guys go back and look at the second quarter, and from an EBITDA perspective, how you performed relative to what was implied in your Q2 guidance or your internal targets, how much of that EBITDA in the second quarter related to your legacy properties? How much of it related to the recently acquired Starwood properties?

I would say the majority of -- I don't have the exact number. The majority of it is from our legacy properties. There's some amount. If we had 20 or $25 million over what we had forecast, I would say, maybe 5 of it was Starwood and I'm rounding. The rest of it would have been legacy.

Great, thank you.

Celeste Brown with Morgan Stanley has our next question.

Hi guys. You talked a lot about, or to some extent about our the timeshare opportunities within your portfolio. How do you monetize that in terms of your status as a REIT? Can you sell the land? Is there some sort of JV structure that you can run it through in order to make it work for you?

We can be -- as a REIT, we can be in the timeshare business. The way we have to do though is through our TRS structure. There are a number of different ways that we're going to do that it and it depends on the project. The one that we're focused on first is our Hyatt Maui timeshare project and the intention there, while not complete in terms of negotiations, is actually to do a joint venture. We obviously don't have the distribution system that the brands have and so we want to obviously work with the brands, because we need that distribution system. And given that we're going to be basically buying those distribution systems, where I sit and I think where we sit, we want them to be invested with us. We don't want to just have them be hired hands because they've got a lot of projects whoever it is, and no criticism to any of them, but we just think that the best focus from the timeshare sales forces and operators is going to come with some meaningful co-investment. So our objective in the first one and it may follow down this path is to do a joint venture with Hyatt and have them have significant capital invested and our ownership would then be run through our TRS and just like them, we can get the full benefit of it. We may find on occasion that we want to sell some of it, meaning just sell the land out. And that will depend on the project and the opportunity, but I think in a number of these, we're going to likely try and do them in joint venture with the operators.

Okay, great. Thanks.

Moving on, we'll now hear from David Anders with Merrill Lynch.

Thank you. Chris, could you maybe comment a little bit more or add on the food and beverage offerings? Is this more groups or are you actually being able to push pricing on your standard menu items? Help us understand that, and also help us understand the leg, meaning even if RevPAR starts to decelerate in '08 or '07 to more normal levels, how long can you keep pushing food and beverage? I'm assuming it's a bit of a legging issue.

As it relates to the food and beverage margins themselves, both factors are impacting it. We had a shift in business from outlets to banquet business which as you know is far more profitable. I'd say that that is the primary driver. We have been able to -- I think another element that's been important is that in different markets now we're starting to see the ability to be able to charge for the meeting room and of course in comparison to a prior year, that type of a change is fairly dramatic in terms of what it means for profitability. As you look -- this year has been good, obviously from a food and beverage perspective. We're not seeing any real slackening immediately on the improvement. Although I would say as you start to look -- if you look backwards, the fourth quarter of last year, we had some fairly good food and beverage growth. So if you wanted to try to decide when that trend started, it probably started in the fourth quarter of last year. So that probably suggests the comparables might be slightly harder as we get into the fourth quarter of this year.

Okay. And Chris, just a follow up kind of a big picture, when this cycle started, you said a lot of my supertankers are going to leg to broader industry because we need the repricing of the big contracts. Is this playing out like you suspected early in the cycle?

You know I like long answers, but I won't give you one. Yes, I think it is. I think as every quarter goes by, you see another or more than one other hotel kind of turn the corner. So I think the answer is yes, it's playing out about as we would have expected. If you look at what we're seeing in our group bookings in those hotels for the second half of this year and into '07 and frankly into '08, it looks very healthy. And so as a function of what we would have thought, it's very consistent.

Great, thanks a lot.

And Bill Crow with Raymond James has our next question.

Good morning, guys. Just a couple of quick questions. Chris, I continue to get calls and hear from investors about fears over the consumer and what that's going to do to leisure travel. I know I've asked this question before, but any indication that you're seeing that leisure travel is slackening because of overall, whether it's gasoline prices or mortgage rates or home building industry, anything like that that's impacting travel to your resorts?

Not -- we have been getting a lot of questions, Bill, on that as you might imagine as well. The truth is, when we look at all the stats, we're not seeing any real weakening. The summer season -- I mean, leisure is light for us, so recognize that. But the summer season seems to be going pretty well. We're not that impacted by the drive to market. It's not the type of hotel that we have. Frankly, a number of people have been kind of asking about weakness on the weekends and I've had a lot of questions about that. As we look into that, at least within our portfolio, which is again not the world of lodging, but it's a pretty good index, a big portfolio and representative of every major market in the country. What we actually see year-to-date is that the leisure business on the weekend, which I think is what people have been using to say the leisure business is really getting weak, the leisure business is up. The weekends have been a little bit slower than we like, not crazy weak, but a little bit weaker. But the fact of the matter is, where it's been weak is group, weekend groups, and that's in part how groups are cycling through this year. If you look at our pace for the third and fourth quarter, we actually think we'll make up for that and then some so it's not a trend. In other words, yes, the weekends have been a little bit weaker, but it hasn't been transient or leisure. It has, in fact, been group. It's been lower rated groups and as we look at the booking pace for the rest of the year, our expectation is based on those bookings is that group weakness on weekends will have corrected itself by the end of the year. So we're not seeing it. You could probably talk to people that have a much higher leisure component and get a more fulsome answer, but in terms of leisure parts of what we see in our portfolio, we haven't seen it that way.

That's helpful. It was mentioned early on that the competition for domestic acquisitions was actually increasing. Does that mean that you're seeing cap rates continue to decline, or have we seen a stabilization in cap rates given the interest rate environment?

I think you've seen a stabilization. I think increasingly competitive was what I said and I meant that. I think I look at that as kind of through the year from the beginning of the year until now. I think it's become increasingly competitive. If you look at it, a snapshot over the last month or so, I don't think it's been getting more competitive. I think that it's kind of stabilized. Still, we're out there, we're always looking and obviously we're buying Kierland. We found that opportunity, I think it's a terrific opportunity and there may be others. The message we're sending is that it's competitive, that we think that the yields are low and we look at the spreads, our cost of capital on a lot of deals that are getting done, we don't like the spreads, we don't think we can create a lot of value. Will we find some other opportunities? We might. In the cycle, I'm sure we will. In the short-term, obviously, we're guiding towards no additional acquisitions for the year. So we're not optimistic that we'll find opportunities. Could we buy? Yes, we could buy. We just couldn't buy and get the spreads that we think are necessary to be able create value. And by the way, we've got a monumental opportunity in our existing portfolio and our new portfolio, Starwood assets, to invest hundreds and hundreds of millions of dollars over the next several years at much, much higher yields. And so, we're here to make you all as shareholders money. So our focus and capital allocation is recognizing where we can get the best deals and deploying our resources towards those opportunities.

Things change though, Bill. Things have been slow and opportunities come up that are off market opportunities and the markets change and cap rates change and so I would view this as something we should be talking about quarter to quarter. What we're telling you right now is we don't see anything else getting done for the rest of the year. We have great opportunities in our existing portfolio. We've got some interesting opportunities in Europe and at some point in the future, maybe not too distant or maybe distant future, there'll be again acquisition opportunities that will make a great deal of sense.

Sure, one final question. Chris, the recovery over the past couple of years has been tremendous. As you go back to the negotiations with Marriott and the settlement that you ended up with and the EBITDA amount that you quoted or you told us you were going to save because of that, how is that playing out relative to your expectations at that point?

I don't have the exact number in my head, but having look at it not that long ago, it's working out better, a little bit better than we would have thought, because operations are better than we would have thought.

Right. Okay. Thanks, guys.

We'll take our next question from Bill Loeb with Baird.

How about David Loeb? Don't know cousin Bill. I have a question about the dividend. In the release, you said that you expected to show good growth for the remainder of the year. I wondered if you could give us a little bit of insight in to how the tax books look relative to the GAAP books and particularly relative to the gains on sales that you've had and do you think that creates possibility of the need for a special dividend or are you likely just to pay that out in the normal dividend cycle?

You know what, the difference would be that the gains on those sales were largely, if not entirely, sheltered by virtue of doing 10-31 exchanges. So when you think about our taxable income, I don't think you should really factor that in. It should really be taxable income that's being generated out of our operation.

Okay. Then that still is growing pretty rapidly, fueling good dividend growth?

Yes.

Okay, great, that's it. Thanks. Short answer.

I'm good at the short ones.

And I apologize, Mr. Loeb. We'll now move to Michael Silenski with RBC Capital.

Congratulations on a good quarter. Just a follow-up question to one that was presented earlier. You mentioned that the acquisition markets right now, the pricing is pretty much off the realm right now. I'm assuming you're probably going to invest a good percentage of that into the redevelopment and repositioning opportunities where you're seeing better yields. Any thoughts on what you're looking for to spend in '07 at this point? Would it be pretty comparable to this year or would you look to ramp it up?

Are you talking about on the capital, CapEx side?

Yes, CapEx side.

It's a little early. We're actually deep into the process right now. Unlike the budgeting process for the operations side, where I think it makes sense to try and push that back a little so you have more information, given the lead times associated with doing any of these repositionings or capital projects, we're trying to move that up. We're in fact, our very capable capital team, led by our Head of Developments, is right in the middle of that right now. My sense right now, we'll give you obviously better numbers as we finish the process, it's roughly comparable, could be modestly higher on the ROI repositioning side. But I'd say for now my best sense is it's comparable.

Great. And secondly, during the quarter, equity income from affiliates came in a little lighter than you were forecasting. Was that in relation to delays with the formation of the joint venture, or was there a one-time charge in there I'm missing?

It's just related to the JV.

Okay. Thank you.

And that concludes our question-and-answer session. I'll turn the call back over to Mr. Nassetta for any closing remarks or comments.

Thank you, everybody for joining us today. We're obviously thrilled with what we delivered in the second quarter and feel great about the rest of the year. I hope everybody enjoys what's left of the summer, and it's not as hot where you are as it is where we are and we'll look forward to talking to you in the fall after we finish the third quarter. Take care, thank you.

That does conclude our conference call. Thank you everyone for your participation and we wish you a great day. You may now disconnect.