Host Hotels & Resorts Inc (HST) 2006 Q4 法說會逐字稿

Good day and welcome to the Host Hotels & Resorts Inc. fourth quarter and full-year 2006 earnings conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Kevin Jacobs. Please go ahead, sir.

Thanks, [Nola]. Good morning, everyone, and thanks for joining us. Before we begin I would 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 that could cause future results to differ from those expressed and we are not obligated to publicly update or revise those statements.

Additionally, on today's call we will discuss certain non-GAAP financial measures that we believe are useful to investors, such as FFO, adjusted EBITDA, and comparable Hotel results. You can find this information, together with reconciliations to the most directly comparable GAAP measure, in today's earnings press release and our 8-K filed with the SEC and on our web site at hosthotels.com.

This morning, Chris Nassetta, our President and Chief Executive Officer, will provide a brief overview of our fourth quarter and year end results, and then we'll describe the current operating environment as well as the Company's outlook for 2007. Ed Walter, our CFO, will then provide greater detail on our fourth quarter and year end results, including regional and market performance. Following their remarks, we will be available to respond to your questions. Thanks, and now let me turn the call over to Chris.

Thanks, Kevin. Good morning, everyone. We're pleased to report another quarter and year of outstanding operating results. 2006 was a transformational year for our company as we closed the Starwood transaction, created our European joint venture, and invested nearly a billion euros in strong growth markets throughout Europe. We also, in the U.S. purchased a spectacular resort asset, the Westin Kierland Resort and Spa, in a market that we had targeted for a number of years and executed on the most aggressive capital expenditure program in our history, as well as on numerous value enhancement projects that we believe have created a tremendous amount of value. Finally, we delivered solid operating results that exceeded our expectations and earnings that exceeded the high end of our guidance, driven by solid revenues of growth and outstanding margin growth. Overall, we feel very good about the fundamentals in the industry, the strength of the current cycle, and our expectations for 2007. But before I get into that in more detail, let's talk more specifically about our fourth quarter and full-year results.

Our FFO per diluted share was $0.58 for the fourth quarter and $1.53 for the full year. Adjusting for expenses related to the refinancing and redemption of debt and preferred stock and nonrecurring costs associated with the Starwood acquisition, which decreased our FFO per share by $0.03 for the quarter and $0.09 for the full year, our results exceeded the high end of our guidance and consensus estimates.

Comparable RevPAR growth for the quarter was 8.1%, driven by a 9.5% increase in average rate and a 0.9 percentage point decline in occupancy. For the full year, comparable RevPAR growth increased 8.5%, driven by a 9.2% increase in average rate and a 0.4 percentage point decline in occupancy. We continue to deliver strong margin growth with comparable hotel adjusted operating profit margins increasing 210 basis points for both the fourth quarter and the full year, which led to comparable hotel-adjusted operating profit increases of approximately 16% for the fourth quarter versus the fourth quarter of 2005, and approximately 17% for the full year versus the full year 2005. The adjusted EBITDA of Host Hotels and Resorts LP for the fourth quarter increased approximately 50% compared to the fourth quarter of 2005, to 471 million, and increased approximately 39% for the full year to 1.283 billion.

Food and beverage operations also remained strong with comparable food and beverage revenues growing 6% for the quarter and 6.6% for the full year with profit margins increasing 230 basis points for the quarter and 210 basis points for the full year. We continue to see positive trends in terms of the mix shift from outlet to banquet revenue, spending on ancillary items such as meeting rooms and AV rental fees and greater efficiency in our labor and food and beverage cost models, which helped drive these strong food and beverage results.

The portfolio of hotels we purchased from Starwood also continued to perform well during the fourth quarter and for the full year 2006. During the fourth quarter, RevPAR for the Starwood portfolio that we consolidate increased 11.5%, which was driven by an 8.3% increase in average rates and a 2.1 percentage point increase in occupancy. For the full year 2006, the portfolio achieved RevPAR growth of 10.9% with a 7.9% increase in average rate and a 2 % increase in occupancy.

Reversing the trend from the prior couple of quarters, transient demand was up slightly in the fourth quarter. Transient average daily rate growth continued to be strong, increasing nearly 10%. Demand was particularly strong in the corporate segment and rate growth was strong in all segments, particularly corporate and special corporate. We believe these strong increases in transient revenue will continue into 2007, with one indicator being that special corporate negotiated rates for the year are up 8 to 10%.

Overall group demand declined somewhat during the quarter, particularly in the lower-rated discount and weekend segments. Association Group demand and rate growth were both strong in the quarter. Corporate group demand was flat. However, rates in that segment were up in the low double digits. Overall Group rates were up approximately 8%. Looking forward, our group booking pace remains strong for 2007 with rooms on the books up and with an average rate increase in the mid- to high single digits.

As I mentioned previously, 2006 was an active year for us on the acquisition side. During the year, we completed the acquisition of 33 hotels from Starwood for approximately 3.6 billion, including 6 hotels that were acquired by our European joint venture, as well as the acquisition of the Westin Kierland Resort and Spa. Obviously, since the closing on the purchase of the Westin Kierland, we have not completed any additional hotel acquisitions, and as we have indicated previously, we remain cautious on acquisitions given the current pricing environment. We continue to be more focused on investing in ROI, repositioning, and value enhancement opportunities in our existing portfolio as we believe these opportunities will yield the highest returns. That said, we believe there is plenty of running room left in the current lodging cycle and as a result we will continue to evaluate potential acquisitions and to selectively execute acquisition opportunities that meet our investment criteria.

In Europe, as you know, in 2006, we completed the formation of our joint venture and seeded it with 6 hotels from the Starwood acquisition, and also closed on the acquisition of the Hotel Arts in Barcelona during the third quarter. As a result, our fund, which has approximately 1.5 billion euros of investment capacity is now roughly 2/3 invested. We have completed the initial staffing of our offices in London and Amsterdam, including the hiring of Mike Goodson, an industry veteran who had been with Intercontinental Hotel Group for many years and are actively evaluating numerous potential single assets and portfolio acquisitions in Europe. To the extent we are successful in investing the remaining capacity of our current fund, we will consider raising a second fund in 2007.

On the disposition front, our capital recycling program remained very active in 2006. Including sales completed during January of 2007, we have sold 11 hotels for over 900 million in proceeds. Our January sales included three noncore assets from the Starwood portfolio, the Sheraton Providence Airport Hotel, the Sheraton Milwaukee Brookfield Hotel, and the Capital Hill Suites in Washington, D.C., which we sold for aggregate proceeds of approximately 77 million. We will continue to focus on this very important part of our capital allocation strategy going forward and expect to complete additional noncore asset dispositions of between 300 to 500 million over the remainder of 2007, with a portion of that occuring in the near term. For modeling purposes, you should also assume a similar level of acquisition activity for the remainder of the year.

We're also very pleased to report that on January 31, we completed one of the value enhancement sales we had previously mentioned, the sales of the former Marriott Mountain Shadows Resort in Paradise Valley, Arizona, for approximately 42 million. This sale is a culmination of a great deal of effort to maximize the value of this nonincome-producing real estate by evaluating alternative uses for the site and identifying a residential developer to purchase the land. With the completion of this sale along with the sales of the Drake in New York and the Ft. Lauderdale Marina Marriott which were sold earlier in 2006, we have generated approximately 630 million of proceeds and 365 million of gains from value enhancement sales over the last 12 months.

We also continue to make good progress on other value enhancement efforts we have discussed with you in the past, such as the sale of excess land at the Newport Beach Marriott Hotel and Spa, and the development of timeshare product at the Hyatt Regency Maui, and are continuing our efforts on numerous other potential products of this nature in our portfolio, such as potential timeshare developments at the Westin Kierland and the Marriott Desert Springs, and the potential conversion of existing resort product to wholly or fractionally owned residential units at certain of our beachfront resorts.

With regard to capital expenditures, in 2006 we spent approximately 530 million, including 275 million on maintenance capital expenditures and approximately 255 million on ROI repositioning projects, which included making substantial progress on some of the larger projects we have discussed with you in the past, such as the repositioning of the Atlanta Marriott Marquis, the development of an exhibit hall at the Orlando Marriott World Center, and the development of a spa at the Ritz Carlton Amelia Island. In 2007 we expect to spend between 625 and 650 million on capital expenditures, including between 300 and 315 million on maintenance capital expenditures and between 325 and 335 million on ROI repositioning projects. Our ROI repositioning projects for the year include the completion of the Orlando World Center Exhibit Hall and the completion of a substantial portion of the work on the Atlanta Marriott Marquis.

Another major ROI repositioning project will begin in 2007 as the addition of approximately 63,000 square feet of meeting and public space and 32 guest rooms to our Swiss Hotel Chicago property. The project involves the purchase and subsequent improvement of space in a mixed use development is being built adjacent to our property. The space will connect seamlessly to the existing hotel and will house a ballroom, a junior ballroom, breakout meeting, prefunction, and other public spaces, as well as a banquet kitchen. Additionally, the development of this new flexible meeting space platform will enable us to convert the third and fourth floors of the existing hotel, which had previously been converted to additional meeting space back to 32 guest rooms. This project, which we expect to complete by early 2009 at a cost of approximately 47 million is yet another example of our asset management and designing construction teams identifying and executing on opportunities to enhance the value of our portfolio.

Now let me spend a minute on our outlook for 2007. We continue to believe that the fundamentals in our business will remain strong in 2007. Expectations for the economy continue to call for good growth, which should lead to growth in lodging demand. This coupled with the supply growth that remains significantly below historical levels should lead to continued strong top line growth in 2007. After completing our 2007 budgeting process and given the outlook for the economy, we are increasing our guidance for a comparable RevPAR growth for the year to 6.5 to 8.5%.

On the cost side, we still expect certain costs to increase at levels greater than inflations, as Ed Walter will cover in more details in a couple of minutes. As a result, our guidance for the year is for improvement in comparable adjusted margins of 100 to 125 basis points. Based on these operating assumptions and the investment assumptions I outlined earlier, we expect our FFO per diluted share for the year to be between $1.80 and $1.88. And the adjusted EBITDA of wholesale P to be between 1.450 billion and 1.490 billion.

As it relates to the Starwood portfolio, as we have indicated to you in the past, and experienced in 2006, we expect that portfolio to grow at a faster rate than our current comparable portfolio. What that likely means for 2007 is that operating results for our noncomparable Starwood Hotels are likely to be at or near the top end of our guidance range. Beginning in 2008, the Starwood Hotels will be comparable hotels. Prior to that, for competitive reasons, we do not intend to report specific results for the Starwood Hotels, just as we don't report specific results for any other manager.

To finish up, we're very pleased with our results for the fourth quarter and the full-year 2006 and we remain confident about the prospects for the continuation of the current lodging cycle. We are also very excited about the ROI repositioning and value enhancement opportunities we are working on to create value in our portfolio, as well as the prospects for continued success and future growth in our efforts in Europe.

Thank you and now let me turn the call over to Ed Walter, our CFO, who will discuss our operating and financial performance for the quarter and full year in a little bit more detail. Ed?

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 fourth quarter, our urban hotels performed the best with RevPAR growth of 9.8%, as we benefited from strong performance in several downtown markets, such as Chicago, New York, and Philadelphia. RevPAR at our suburban hotels increased by 6.5% for the quarter and our resort hotels increased by 6.1%, driven primarily by great performance in Naples and Ft. Lauderdale. Our airport hotels increased by 5.4%. Rate growth in our these last two categories was solid, averaging 9.5%, but was partially offset by occupancy declines which resulted in lower RevPAR growth. For the full year, our urban hotels performed the best with RevPAR increasing 9.8%, while our suburban hotels has improved by 7.8%. Our resort hotels increased by 7% and our airport hotels increased by 6.4%.

Turning to our regional results for the quarter, our top-performing region was the mountain region, which experienced 16.4% RevPAR growth as both the Denver and Phoenix markets enjoyed a strong quarter. We expect a strong first quarter and strong year in this region, especially in the Denver market.

Our mid-Atlantic region enjoyed another strong quarter with RevPAR growth averaging 13.1%. Our Manhattan properties averaged better than 14% RevPAR growth, benefiting from both rate and occupancy increases triggered primarily by strong transient demand. Our Center City Philadelphia properties also performed well, with RevPAR increases averaging in excess of 12%. Our outlook for New York continues to be very favorable, as all sources of demand remain strong. Philadelphia's performance likely will be somewhat weaker as the convention calendar is slower in 2007.

Our Florida hotels performed generally in line with our overall portfolio with RevPAR growth averaging 7.2%, driven by average rate growth of almost 10%. Our Harbor Beach and Naples Ritz-Carlton properties had quite strong quarters with RevPAR growth averaging more than 21%. While our Orlando World Center Hotel experienced some slippage in attendance from several larger groups leading to a modest RevPAR decline. Florida should have a good first quarter and a solid year in 2007.

The Pacific market strengthened in Q4 as RevPAR grew by 7.8%. The San Diego market did quite well with RevPAR growth averaging 11%, driven by very strong group demand. The San Francisco market also did well, as RevPAR growth averaged 8.4%. Continuing a recent trend, the L.A. market underperformed as RevPAR grew by slightly less than 5%. L.A.'s performance was likely impacted by aggressive pricing strategies as average rate grew by 9.5% while occupancies fell by 3 points. At this point we expect the Pacific markets will get off to is a slow start at the beginning of the year, but then strengthen in the second half of 2007.

As expected, the Atlanta region had a weak quarter as RevPAR increased by just 1%. This weaker performance was experienced across the market and generally is attributable to the difficult year over year comparables as the Atlanta market was a significant beneficiary during 2005 from hurricane disruption. Although the year may start slowly in Atlanta as the hurricane comp issue carries into the first quarter, overall we expect a solid year as the citywide pace is up significantly over 2006.

Continuing a year-long trend results in the D.C. market were disappointing as RevPAR growth was flat year over year, growing just 0.2%. Demand in the suburbs was generally weak with many properties experiencing modest RevPAR declines. Business transient demand in the city was also limited by the short session in congress. The change in party leadership and the extension of the congressional workweek should help increase transient demand. As a result we would expect the D.C. market to strengthen considerably in 2007, performing at least in line with the rest of the portfolio.

For the full-year 2006, our three best regions were the New England region with RevPAR growth of 15.4%, the north central region with growth of 15%, and the mountain region, where RevPAR improved by 12.9%, the south central region with RevPAR growth of 6.6%, and the Washington, D.C. metro region, which grew RevPAR by just 0.5% were the weakest.

Looking at our European JV, we had a strong fourth quarter as RevPAR, based on the local country currency, increased by 9%. For the full year 2006, the properties generated an 8.9% RevPAR increase. Performance has been strong at all markets with the Sheraton Roma leading the group with a 25% RevPAR growth for the quarter. The outlook for 2007 remains positive as the EU economy continues to grow at a solid rate.

Continuing the trend that we have been enjoying all year, comparable hotel adjusted profit margins improved significantly in the fourth quarter, increasing by 210 basis points. The 9.5% improvement in average daily rate and improvements in productivity contributed to strong rooms profit flow through of more than 85%. Our food and beverage revenue growth, which equalled 6%, combined with margin growth of 230 basis points drove flow through of approximately 70%. As we saw in the prior quarters, our strong flow through benefited from the continued shift in food and beverage revenues towards catering business, which drove revenue growth, helped reduce food costs as a percentage of sales, and increased meeting room rental revenues.

Overall wage and benefit costs were up by slightly more than 4%, reflecting a modest acceleration over prior quarters. Support cost increases were minimal, averaging less than 2% as our utility expenses declined by more than 4%. The savings in this area resulted from lower gas and steam expenses, which were due to easy comps and lower consumption driven by the warm December enjoyed by the northeast. Electric costs were still up slightly. Consistent with expectations, property taxes increased by 9% and insurance costs increased by more than 57%.

For the year, we had great profit flow through at the departmental level, with rooms profit increasing by 83% and food and beverage profits increasing by 60% of the growth in revenues. Full-year wage and benefit increases were slightly below 4% and support cost increases excluding utility costs were limited to 1.2%. The low growth in these cost areas reflected the impact of several different cost-saving initiatives, implemented as a result of our benchmarking capabilities. Had our support costs increased by 3% inflation rate, our margin growth would have been approximately 30 basis points lower. The combination of these factors more than offset a 6.5% increase in utility costs and a 37% increase in insurance costs, leading to a margin improvement of approximately 2.1%.

Looking forward to 2007, we expect that wage and benefit costs will grow somewhat faster than in 2006, and that we will experience above inflationary cost increases in insurance, although the increases in insurance should moderate after we complete our renewal at the end of March. We're also expecting real estate taxes to increase significantly, as our revised assessments begin to reflect the impact of improved operating results and increases in the value of our assets. We are projecting that utility costs should moderate as oil and gas prices remained lower than in the prior year, but this area still remains volatile and difficult to predict. Our projections also assume that support costs will grow slightly in excess of inflation, generally because of growth in revenue-related cost items such as commissions. However, this area will continue to be a focal point for cost saving initiatives. As a result, we expect 100 to 125 basis points improvement in comparable hotel-adjusted profit margins in 2007.

We finished the quarter with unrestricted cash of $364 million. This does not include the net cash of approximately 119 million we received from the sale of the three Starwood hotels and our Mountain Shadows property, which was partially employed to repay 75 million of our outstanding balance on the credit facility. Nor does it reflect our early January dividend and distribution payment of 138 million. The total remaining cash of approximately 275 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 our European JV, or for other corporate purposes.

Since year end we closed a $134 million loan bearing interest at a rate of 5.55% with a 7 year term which was secured by our Harbor Beach Marriott. Proceeds from this loan were employed to retire our existing mortgage loans which carry an interest rate of 8.6%, as well as fund additional investments in the hotel. We also expect to close, in the near term, a $300 million loan secured by two other hotels. Proceeds from this loan will be employed to repay the outstanding balance of our credit facility of 175 million and for other corporate purposes.

With respect to the first quarter, we expect that RevPAR growth will come in at the low end of our full-year guidance range of 6.5 to 8.5% with nominal margin growth. While performance in January across the industry and our portfolio was slightly weaker, reflecting lower group activity in many markets and lingering year-over-year comparable issues in certain markets such as Atlanta and Houston, our group bookings were strong in February and are expected to be even stronger in March, which should result in a solid quarter.

For the first quarter, we project that FFO per diluted share will range between $0.27 and $0.28. We would note that similar to our experience in Q2 of 2006, the timing of our standard reporting periods in connection with the Starwood acquisition has the affect of understating our FFO per share growth in the first quarter. As most of you know, our fiscal quarters reflect the timing employed by [Avaria] International, which uses 13 four-week fiscal -- 14 week period for our fiscal year. Because our first quarter will be based on the 12 weeks ending March 23, we will only include the operating results for January and February for our non-Marriott hotels, including our Starwood properties. However, our share count and debt load for the quarter will include all of the shares and debt issued in connection with that purchase for the full quarter. This timing difference will not affect our full-year results and we should see a corresponding benefit in quarters two through four.

As we have detailed today, we are seeing great results on both the top line and bottom line, leading to a very strong EBITDA and FFO growth and our outlook for operating trends remains very favorable. With a very strong balance sheet, we are optimistic about the opportunities we expect to see in 2007.

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

Thank you. [OPERATOR INSTRUCTIONS] We'll take our first question from Harry Curtis, JPMorgan.

Good morning, guys.

Good morning, Harry.

Are you seeing any customer resistance to higher rates in your strong markets, like New York. If, for example, you look back in history, has customer resistance versus supply growth or a soft economy ever explained declining pricing power?

Thirdly, if I understand the second part of the question, supply and demand fundamentals will clearly affect pricing power. But in most of the strongest markets around the country, like in New York as probably the best example, where you really don't have a lot of new supply coming in now or in the foreseeable future and in the case of New York, you've actually had some supply that's come out over the last couple of years, we're not sensing a lot of price resistance. I think it's as simple as -- not to be trite about it, but it's the laws of economics where there's greater demand because demand growth generally in those particular economies is good, which is resulting in great demand growth for us. And it's not being met by any real meaningful additions to new supply. So we're able to move our rates up. And, frankly, when we look at price turndowns in the strongest markets, including New York, around the country, we're not seeing a real strong resistance to the rate increases that we've been seeing.

Are you seeing any increase in midscale without food and beverage supply growth that could absorb some of the incremental capacity in markets like New York?

There's some -- again, New York is so hard to build. There's some of that going on around the periphery. Obviously, if you look at the supply numbers, there's more in the lower segments, supply coming when people look at supply numbers than there are in the upper segments. But, I would say because of some of the best markets, like New York around the country are so difficult to build in, more of that midscale of that food and beverage is occurring out in the secondary and tertiary locations. So, obviously, as we sit here today, and as we look at '07, we don't feel like there's going to be a lot of impact from that.

Okay. That's great. Thanks.

We'll go next to Bill Crowe with Raymond James.

Good morning, guys. Chris, could you give us an update on your efforts in Asia to establish a joint venture and what you anticipate for this year?

Yes. We, I think I've mentioned in one of the last couple calls tha,t as we've gotten Europe under our belt a little bit, recognizing that we just really started our efforts in Europe last summer, and while we've had some, I think, great, early success in the sense that we've invested over 1 billion -- around 1 billion euros, and have got ourselves now fully staffed and in the thick of what's going on over there and have great expectations for that, we obviously still are trying to build our business over there and have that grow to be a much more sizable business. Do it intelligently as we have with the first billion euros of investments that we've done, which are terrific investments, all of which are performing at greater than our expectations.

As we get Europe a little bit further under our belt and have grown that and as we move through 2007, we are doing R&D on Asia, is what I would describe and I think I have described. Whether we actually do anything in Asia in the very short-term, meaning this year versus just really trying to understand the region and what the point of entry or points of entry might be for us, what might make sense for us in terms of where we want to be, what type of product we want to be and how we want to do it from a capital structure point of view, I don't know. It's hard to judge whether we'll actually do anything. I think that the primary thrust of what, Bill, we want to do in '07 is just really get our arms around what's going on in the region and where the opportunities are and be very intelligent about what those points of entry might be.

We think, as we look at our business and I've said this many times before, that going forward over the next five and ten years, that's a part of the world given the incredible growth that you see there now and you're going to continue to see over the next decade or two, that we need to be there in some way, but we need the figure out exactly in what way and how we structure it, et cetera. So a lot of work to be done there. We're in it and we're doing some now. And, I think it's, I would say it's too early to tell exactly what we'll do, but it's very interesting and I would be surprised if over the next few years if we don't find an interesting point of entry.

Thanks. Chris, you talked about the difficult acquisition environment. At what point do you start to weigh the build versus buy decision? Are we close to that point where we're going to see construction start to ramp up? And are you going to be a participant at all in some of your key market, whether you go into New York City, for example. Could you give me your thought process there?

Yes. I think right now, as I said in my comments, we're still very interested in investing our capital in our existing portfolio where we're getting extraordinarily high yields. So the option isn't, if we're not buying to go build. Right now, I think the option is more that, as a result of our not buying as much, we're investing a lot more in our existing portfolio where we're getting huge spreads to our cost of capital, vis-a-vis, any acquisition we can do and certainly any new build that we can do.

I think there are certain markets around the country as you've seen pricing go up where you will eventually get to point of crossover where you'll see the economics for new build start to make more sense. I don't think that even as pricey as things have gotten, we're there yet in most of the best markets. I still think if you look at where margins are, they're still a lot lower than where they were at the peak, and when you look at where construction costs are today, they continue to go up. Notwithstanding what's going on in the residential side of the real estate business and construction there, cost on the commercial side and the cost of building hotels continues to go up. Maybe not as crazy a rate as it had over the several years, but, nonetheless, it is still going up.

The economics, even in the major markets that have done really well are still pretty, pretty, tough and there's not a lot -- while there's a lot of money out there, Bill, right now, for acquisitions, there's really not a lot of money that's out there on the new build side. So of course, eventually, you will see some additional construction being built as you continue to season this cycle and as things continue to improve, '07's going to be a great year. My guess is '08's going to be a great year. You'll certainly -- as the economics get better, see more pressure in that regard. But I don't see it as being eminent other than select cases that we all know about around the country. And then remember, once these things get done, they take two to three years to kind of get really rolling and be in the competitive set.

For the same point, the high end of the business, I don't worry a whole lot about at least the next two to three years on the supply side. From the standpoint of what we're doing on the investing side, while we always look at opportunities of all sorts, all the major acquisitions we're looking at, obviously we're pursuing everything we can in our existing portfolio and we do occasionally look at new build opportunities. We think the economics are really tough, and that you're not getting the yields in new build right now given where costs are to justify the additional risk that is always inherent in a new build opportunity.

In this cycle, will we build a hotel? Historically, we have been more of an acquirer than a developer, but occasionally when we find a unique set of circumstances, we have done development deals, and I suspect we'll always do periodically and very selectively development deals, whether that's where we get a municipality to give inducements or it's related to another property we already own and there's some real cost savings opportunities, et cetera, I don't know. But I don't think it will be a certainly a huge component of with a we're doing.

One final quick question, Chris. Now that you've provided the guidance for 2007, if you could help us think about the dividend, which I know you kind of shifted your policy. It's going to be a special year end dividend. Should we anticipate the growth to be somewhat commensurate with the FFO growth at this point?

I'd rather not -- obviously, there are a lot of inputs in that equation. It's very early in the year. We've got a big CapEx program, which obviously can affect impact in a significant way, what our taxable income is. I guess what I would say directionally is we're obviously going to continue doing our $0.20 a share, which in and of itself is an increase in the dividend over last year, given that we weren't for the full year at the $0.20. As we look at the special dividend, as we get a little deeper into the year, we'll try and give you a little bit more specific guidance when we have more data.

But, clearly, I would say to you, based on our expectation of what we've laid out today, which is for a very healthy operations environment for us in 2007, that you'd see meaningful growth in the special dividend, because you'd ultimately, as our cash flows grow and our earnings grow, our taxable income would be growing along with it. Whether it's a perfect -- I would rather not comment on the exact relationship other than to say, if the year plays out equal to or better than what we're describing to you today, we're going to see meaningful growth in our taxable income, which means you're going to see some meaningful growth in that special dividend.

Thank you very much, Chris.

Our next question comes from William Truelove with UBS.

Hey, guys. Can you comment a little bit about Europe, where it stands relative to the U.S. cycle? And your thoughts about maybe increasing your joint venture program in Europe? Thanks.

Europe and the U.S. are a little bit more closely aligned in terms of -- well, there are two different cycles, one's the investment side, the other is kind of the operations or the economic side. I understand the economic side, Europe is lagging a little bit the U.S. On the investment side, I think there's been a lot of money that has started to focus on Europe, and so I would say that while yields are still a little bit lower over there, maybe a point lower overall that the, that GAAP has narrowed a lot as it relates to what it used to be. We expect it to continue to be a pretty competitive environment on the M&A side, and we think we've got a pretty good mousetrap in terms of our cost of capital related to the joint venture structure we have over there. We're pretty confident we can have some good success. On the operating side, we think there's plenty of running room left in Europe, generally, in terms of where things are going relative to those economies. And as I said, we do believe it's a bit on a lag to the U.S.

In terms of our -- what we're going to do with our fund, obviously we're about 2/3 invested in our first fund. I would say we're working on a whole bunch of different things, as I mentioned in my prepared remarks on single asset and portfolio deals. If we got one more deal done, which I'm confident at some point this year, obviously, that we would do, and do in an intelligent way, then I would say we would want to have additional capacity given the pipeline of things that we're looking at, and that we would be back out and seriously considering a second fund. How exactly how we do that and who we do it with is still to be determined. Obviously, the existing partners we have, I think and believe,are happy with the investment. Certainly we are. It's worked out so far extraordinarily well, and so they'll be the first people that we'll be talking to in that process. Does that answer all the parts of your question?

Of course. Thanks.

Our next question comes from Jay Cogan, Banc Of America.

Hi, good morning. A couple CapEx-related questions for you. First, Chris, can you remind us when some of these larger projects that you're working on in the U.S. start to bear fruit from a return standpoint? Is it going to be '08? I know you said, for example, Chicago is going to be '09. Maybe just a little bit more detail on that would be helpful? Maybe project by project. Also, you mentioned that there could be some additional residential timeshare opportunities at some of your Coastal properties. Can you just kind of highlight for us maybe which assets you're looking at or maybe get a little bit more detail about what some of those projects might entail?

Yes, in terms of the big stuff that we've spent a lot of time talking about bearing fruit, you've got the Orlando World Center Exhibit Hall which we'll deliver at the end of this year so it will start to bear fruit in '08. Obviously, it will take a little bit of time to ramp up, so, probably bear a lot more fruit in '09. But we're preselling it and presales are great. And so, I think '08 it will start to bear some fruit. The Atlanta Marriott Marquis will finish up the ballroom expansion I think the middle -- second, third quarter of '08. So it really will, I would say, start to bear fruit late '08, more likely '09. Ritz Carlton Amelia Island Spa opened the end of last year, so it's bearing fruit today. Chicago, which is another big one we just talked about today, as you see, will probably start to bear fruit '09. So I think when you start to look at the substance of the dollars we're spending, some of the smaller stuff bears fruit pretty quickly, I'd say, and the big stuff really starting to bear fruit '08 and '09, and probably fully ramped up by the time you're getting to the latter part of '09 when you look at them in the aggregate.

In terms of additional projects, we mentioned a couple. You know my attitude on this is, I don't like to talk about these things until we've fully vetted them. One, because, until we've fully vetted them, we don't know if they make economic sense. And two, almost without exception, they're very complex public approvals involved, and so we never want to get ahead of ourselves about talking about them publicly and having the municipalities we're dealing in get upset about it because it obviously doesn't help us create value when we have an uphill fight with some of the municipalities.

So, the ones I talked about today, obviously, I can mention again. We're looking at some timeshares, the property we bought last year in Phoenix, the Westin Kierland. We have a parcel of land adjacent to the hotel that we bought with it and we think there are some great timeshare opportunities there. We have some opportunities at the Marriott Desert Springs where we have 36 holes of golf. We don't think we need with 36 holes of golf, we think we can probably do with 27 and meet all the demands of the property and so we're looking at redeveloping 9 holes of golf there into timeshare. And we're pretty far along the process of the research and development on that. And there are two or three others, and I'm not trying to be coy, it's not in our interest or our shareholder's interest at this point for us to talk about those until we've moved them a little bit further down the line. As we get to a point like at Kierland and Desert Springs where we have a fair amount of confidence that we have an opportunity and we have entitlements that are pretty straight forward, we'll talk about them as soon as we can.

And then back to Europe just for one clarification question on the potential for a second fund, would you think that fund would be equal in size to what you've raised in the first? Could it be larger, would it be smaller, can you give us any sense as to how incrementally aggressive you can potentially be in Europe?

Yes. I think it's too early to tell, but my -- by sitting here today my honest answer would be equal to or bigger. I doubt very seriously it would be smaller.

Great. Thanks.

We'll take our last question from Smedes Rose, Calyon Securities.

Hi, good morning. Built into your guidance for EBITDA for 2007, is there a level of insurance proceeds assumed in there as well?

Yes. There is. Somewhere between 5 to $10 million of insurance proceeds.

Okay. So not much. My second question is in your guidance for EBITDA, does that exclude these's asset sales, not the ones that you've already completed, but also the ones that seem to be underway?

Yes. Generally, we've tried to bake into our guidance on earnings and on EBITDA all of what we described to you in terms of our assumptions that is go in from a disposition acquisition standpoint.

And if you were unable to find more than say one acquisition that works for you and you end up with excess cash, I know it's not typical, but would you consider buying back stock, or would you just hold on to it for a while, or what's your thoughts on that?

I say right now we still believe we've got ample opportunity to invest in our existing portfolio. So right now I think the dollars would be more focused on those opportunities until we think we've run the gamut of those. So the answer is not in the immediate future. Obviously, stock buybacks over time is something we'll consider very seriously, but as I think about this year, I would say given the investment opportunities we have in the portfolio, if we're not making acquisitions, the capital likely will be allocated that way.

All right. Thank you.

Yes.

And we have no further questions at this time.

Okay. Well, thank you, everybody, for joining us today. We're obviously very, very pleased with what we accomplished in 2006 across the board, particularly on the margins. We think 2007 is going to be another great year. We think there is plenty of cycle left and we'll look forward to talking to you after our first quarter and giving you an update on the first quarter and outlook for the rest of the year at that point. Have a great day. Thanks.

Once again, thank you, ladies and gentlemen. That does conclude today's conference. We do appreciate your participation.