Host Hotels & Resorts Inc (HST) 2007 Q1 法說會逐字稿

Good day, and welcome to the Host Hotels & Resorts, Inc. first quarter 2007, 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.

Welcome to the Host Hotels and Resorts first quarter earnings call. Before we begin, I'd like to remind everyone that many of the comments made today are considered to be forward-making statements under Federal Securities law as described in our (inaudible) 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 publically update or revise these forward-looking statements.

Additionally, on today's call we will discuss certain non-GAAP financial measures that we-- 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 in our 8-K filed with the SEC and on our website at hosthotels.com. This morning Chris Nassetta, our Chief Executive Officer will provide a brief overview of our first quarter results and then we will describe the current operating environment as well as the company's outlook for 2007.

Ed Walter, our Chief Financial Officer, will then provide greater detail on our first quarter results including regional and market performance. Following their remarks, we will be available to respond to your questions. Now we turn the call over to Chris.

Thanks, Kevin. Good morning everyone. We're pleased to report another quarter of outstanding results for the company. Strong revenue growth coupled with margin growth, that was better than our expectations, led the earnings results that exceeded our guidance. Consistent with the views we expressed on the year-end call, we continue to feel good about the fundamentals in the business and our outlook for the remainder of the year which I'll discuss in more detail in a few minutes.

First, let's talk more specifically about our first quarter results. Our FFO per diluted share for the first quarter increased to $0.30 which exceeded the high end of our guidance and consensus estimates by $0.02 a share. As I mentioned last quarter, for competitive reasons, going forward we will not be disclosing specific operating results for the portfolio hotels we purchased from Starwood a year ago, just as we don't disclose specific results for any of our other brands.

That said, in order to give you a better sense for the overall performance of the company, we will disclose pro forma comp results for our portfolio which include our current comparable hotels, plus the hotels we acquired in the Starwood transaction. As a reminder, beginning in 2008, the Starwood hotels will be comparable hotels and we will report results for those hotels, along with all of our other comparable hotels, on a combined basis. Our comparable RevPAR for the quarter was 6.2% which was driven by 6.5% increase in average daily rates and a .2 percentage points decline in occupancy. Our pro forma comp hotels, which again include the Starwood Hotels,had a RevPAR increase for the quarter of 7% driven by a 6.3% increase in average rate and .5 percentage point increased in occupancy.

Our comparable adjusted operating profit margins exceeded first quarter 2006 margins by approximately 30 basis points which as I previously mentioned, modestly exceeded our expectations for the quarter. In addition margin growth for our pro forma comparable hotels was (inaudible) higher. The adjusted EBITDA for Host Hotels and Resorts LP for the quarter was 263 million. Food and beverage revenues at our comparable hotels grew 3.9% for the quarter which, as anticipated, was a some what lower level of growth than we've experienced in recent quarters, due to greater amounts of lower-rated group demand and a couple of unforeseen group cancellations.

Despite this lower level of revenue growth, food and beverage departmental profit margins grew 80 basis points for the quarter for our comparable hotels. Both food and beverage revenues and profit margins were significantly higher for our pro forma comparable hotels. Earning to demand on the transient side, our portfolio saw a modest increase in demand for the quarter which was characterized by a trade up from lower-rated, special corporate to higher-rated premium and corporate demand at nearly double-digit rate growth. On the group side, demand for the quarter was also up modestly with anticipated softness in the association and corporate segment offset by an increase in lower-rated group business at relatively attractive rates. Our average group rate for the quarter was up over 6%.

Overall revenues in both the transient and group segments were up approximately 7% for the quarter. Our group looking pace remains solid for the remainder of the year with association and corporate group demand expected to pick up and with good rate growth. We continue to be very active with our strategy of taking advantage of the current strength of the asset transaction market to recycle capital out of lower-growth assets at attractive pricing. During the first quarter we sold seven non-corp. properties for totals of approximately 333 million and recorded total gains related to the sales of approximately 141 million.

As I discussed in our last call, these sales included three assets from the Starwood portfolio which we sold at significant premiums to their allocated prices in the field as well as value enhancement sale of a non-income producing asset the former Marriott Mountain Shadows Resort and Golf Club which we sold for 42 million. We expect to continue to recycle capital out of our lower growth assets and our forecasting an additional 100 to 300 million of sales for the reminder of the year. On the external growth front as we've discussed with you in the past, we remain cautious on acquisitions in North America due to the current asset-pricing environment. As such, we did not make any acquisitions during the quarter.

We continue to be active in evaluating potential transactions and we will still guide you to between 300 and 500 million of acquisitions for the year for modeling purposes, although our earnings forecast assumes that any acquisitions take place near the end of the year. In Europe, the hotels we have purchased in our joint venture are performing very well and we have a large pipeline of deals we are actively evaluating.

Now let me update you on the outlook for the remainder of 2007. With fundamentals expected to remain strong for the balance of the year, and factoring in our first quarter results, we expect our comparable hotel RevPAR increase 6.5 to 8% for the year and continue to expect our pro forma comparable hotel RevPAR growth for the year to be 6.5 to 8.5%. On the margin side, while we still face several challenges on the expense side that Ed Walter will cover in a few minutes, we continue to believe we will drive incremental profitability and strong flow=through and thus are maintaining our guidance for comparable adjusted margin growth of 100 to 125 basis points.

Based on these operating assumptions, the investment assumptions II provided earlier and the impact of certain debt financing and re-payments, which Ed will also cover, we are increasing our guidance for diluted FFO per share for the year for between $1.76 and $1.84 which includes $0.08 per share of expenses related to cost associated with refinancing. Adjusted EBITDA for Hosts LP for the year is expected to be a 1.450 billion to a 1.490 billion.

As I am sure you are aware, we have instituted our new dividend policy under which we expect it to clear a fixed $0.20 per share common dividend each quarter, as well as a special common dividend in the fourth quarter of each year, the amount of which will be based on the level of taxable income. Based on our continued strong operating performance and current earnings guidance, we expect the amount of our special common dividend for 2007 to increase meaningfully, relative to the 2006 amount of $0.05 per share. In summary, we are very pleased with our results for the quarter and remain confident about our outlook for the remainder of 2007.

Based on our booking pace for 2008, which looks very strong, as well as our expectations for fundamentals in the business, including supply growth forecast that remains below historical averages, we continue believe that the current growth cycle and lodging will be sustained. Our portfolio will be well positioned to benefit from the strong fundamentals, particularly given the significant investment we are making in our assets in the form of maintenance capital expenditures and ROI and repositioning investments. Thank you and now I am going to l turn the call over to Ed Walter, our Chief Financial Officer, who will cover the quarter in a little bit more detail.

Thank you, Greg Let me start by giving you some detail on our pro forma comp hotel RevPAR results. Looking at the portfolio based on property types, during the first quarter our downtown hotels performed the best, with RevPAR growth of 9% as we benefited from strong performance from several downtown markets, such as New York and Washington D.C. RevPAR in suburban hotels increased by 6.3% for the quarter and our airport hotels increased by 5.6%.

Our resort conference centers increased by just 3% as the Coronado Island resort was significantly effected by major renovations and the Orlando World Center Hotel was impacted by three group cancellations. Rate growth in all segments range between 5.5 and 6.9% .

Turning to our regional results for the quarter. Our top performing region was the mid- Atlantic which experienced 14.5% RevPAR growth. Our downtown New York property performed especially well, with RevPAR growth averaging more than 20% driven by strong group and transient demand. As expected with city wide demand in the first quarter. the Philadelphia market under performed as RevPAR growth was just 1.5% New York should continue to out-perform in the second quarter and operating results in Philadelphia should improve from first quarter levels. As anticipated the D.C. metro region enjoyed a strong quarter with RevPAR growth averaging approximately 12%.

The solid quarter was driven by very strong performance in the downtown market as transient demand increased significantly, A longer congressional work week and aggressive fund-raising strategy for presidential candidates contributed towards the increase. RevPAR growth in the Dulles quarter, outside the city, it was still weak. The second quarter looks good for D.C. although RevPAR growth is expected to moderate somewhat from Q1 levels. The south central region also had a great quarter as RevPAR grew by 9.7% Performance is fairly solid across all markets, but especially so in Dallas and in San Antonio. where our convention hotels had very strong group demand.

Second quarter should be solid in the region, although we expect weaker growth in San Antonio and stronger results in Houston. As expected, the Atlanta region had a weak quarter as RevPAR was flat. This weaker performance was experienced across the market and generally is attributable to the difficult year-over-year comparables. The Atlanta market was a significant beneficiary during the early part of 2006. from business which relocated to the city because of hurricane disruption in other markets, which has led to a drop in city-wide events in 2007. Although the second quarter should be better, RevPAR growth will still-- will likely be lower than the portfolio average. The second half of the year looks much stronger in Atlanta. In our North central region RevPAR only increased by 2.5%.

After a very strong year in 2006, the Chicago market slowed with the O'Hare market especially challenging this quarter, In addition, the Minneapolis City Center Marriott was under renovations leading to a RevPAR decline of more than 10%. We expect the region's performance to improve in the second quarter. Finally, our New England region also under performed in Q1 as RevPAR grew by just 3.4%. Interestingly our suburban Boston properties performed quite well with Rev PAR growth averaging in excess of 8%. The real issue occurred in downtown markets where our two large convention-oriented hotels, the Sheraton Boston and Copley Marriott, suffered from weak group and transient demand. We expect the trends in the second quarter should begin to improve and second half of the year will be stronger in New England.

Looking at our European J V, we had a strong first quarter's RevPAR based on the local country currency increased by 7.7%. Performance has been particularly strong in Madrid where RevPAR our western Palace increased by more than 14% and in Warsaw where it increased by 19%. The outlook for 2007 remains positive as the EU economy continues to grow at a solid rate.

As Chris detailed, the adjusted operating profit margins for the comp hotels improved at a somewhat slower rate than we had recently enjoyed increasing by 30 basis points. This was due to several factors including more modest top line growth in room revenues, lower food and beverage revenue growth and atypical increases in certain expenses such as insurance. Our comparable food and beverage revenues increased by only 3.9%, in part because the growth in group business occurred in less expensive price points. As corporate and group association activity picks up over the remainder of the year, we expect to see higher food and beverage revenue and margin growth. insurance costs were up by more than 70%, as our first quarter costs reflected the impact of the significant increases resulting from the April 2006 renewal. This impact alone reduced margins by roughly 40 basis points.

Looking forward to the remainder of the year, we expect to see a significant moderation in our insurance cost as our recently completed April 2007 renewal reflected an annual premium cost decline of roughly 5%. We had a very active first quarter on the balance sheet front as we completed a number of financing transactions. We closed two secured loans totaling $434 million, at an average interest rate of 5.5%. In addition, in March, in conjunction with our inclusion in the S&P 500, we completed a 600 million exchangeable debenture transaction that carried a coupon of 2.5/8%. The proceeds from the two initial mortgage transactions were generally employed to repay the outstanding balance of our credit facility and repay two secured loans to carry an average interest rate of more than 8%. The exchangeable issue has been used to re-pay the 8.5% 96 million secured loan on the Philadelphia Marriott and the 8.4% 33 million loan on the Atlanta Four Seasons.

We intend to deploy the remaining proceeds plus some of our available cash to repay the 7.6%, 520 million CMBS loans which is secured by the New York Marriott Marquis and seven other high or Swiss hotel assets. After completion of the steps, our total debt balance will be approximately 5.8 billion. These series of transactions have extended our maturity profile, further enhanced our already strong ratios and improved our financial flexibility. Now let me clarify our cash situation.. We finished the quarter with unrestricted cash of slight less than $1.2 billion. This amount includes the cash generated by the exchangeable transaction and the asset sales we completed in late February, but does not reflect the 130 million of mortgage loans we have repaid in April, nor does it reflect the 550 we deployed in connection with the intended CMBS loan payment I just discussed. After adjusting for these repayments and our recent dividend in operating partnership distributions, our available cash will be slightly less than $400 million.

These amounts 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 J V, additional debt repayment or for other corporate purposes. We also have full capacity on the 575 million credit facility. With respect to the second quarter, we expect RevPAR growth for our pro forma comp hotels to be consistent with the full year guidance, or between 6.5 and 8.5%. We forecasted FFO for diluted share will range between 43 and $.45 after paying $0.08 of non-recurring debt prepayment costs. As we have detailed today, momentum in our sector continues to be strong and we are experiencing strong growth on both the top line and bottom line leading to solid EBITDA and FFO growth. Our out look for operating trends for the remainder of the year remain very favorable. This completes the prepared remarks. We are now interested in answering any questions you may

Thank you, (OPERATOR INSTRUCTIONS)

We'll take our first question from Jeff Donnelly with Wachovia Securities.

Good morning, guys. Chris, I think -- lose count in the past week, but I think we've seen $4 billion plus hotel portfolio transactions in the past seven to ten days and sounds like there is more to come. I was wondering if you could share with us how you think these groups are under writing lodging business and the return lever on lever their seeking and beyond that, what is Hosts doing to capitalize the environment, the markets are flush in capital. Is it just asset sales or do you explore additional J Vs?

That's a good question, Jeff. On the -- what is going on in the MNA environment the privatization side of that, which I think is what you are talking about, is where some the largest deals are getting done. I can't really tell you definitively, 'cause obviously I'm not behind the scenes of them underwriting, . but my sense is, certainly that they are underwriting, that we are in a point in the cycle where there is plenty of upside left which we would agree with. And, they are under writing fundamentals which are the fact that demand is continuing to grow, the economy looks fairly stable and I think an expectation that there's going to be additional growth in the economy in the next several years. That matched with what is still well below historical levels of supply growth that we expect over the next several years. means very good things for the lodging business, generally so, underlying, I think, their underwriting assumptions that it's basically. strong fundamental. In terms o f how they are getting the numbers they get to, it is hard to say. Obviously, they are playing the games, the private equity guys, a little bit differently in the sense that they are taking advantage of very high octane opportunities in the debt markets in the sense of having massive volumes of debt available at very high loan-to-values and still at very, very low rates by any kind of historical standards. Then, when you take positive fundamentals and you hyper-charge it with very aggressive kind of debt assumptions and very high levels of leverage, they are getting to their underwriting yields in that way. So, what we're trying-- the reason that we haven't been out buying is simply stated.

We are not playing the game in the same way in terms of using the high octane, super high level of leverage and putting a minimal amount of equity in and trying to get two or three X our equity out, we're looking at the overall long-term way to average cost and capital on an on- leverage basis and trying to get a meaningful premium to that and as we underwrite assets, even though we think there is certainly a lot of cycle left and the fundamentals are good, we agree with the kind of the underlying assumptions that they are making it in terms of the big picture, when we get done underwriting it on the basis we underwrite it and compare it to our long-term weight-average cost and capital, there is just not the spread that we need, generally, so that we can argue. to you guys we are creating value per share for the company. Now that's not going-- that show to be the case with every single deal, which is why we still have model (inaudible) to model in, some level 3 to 500 million of acquisitions because because we are out evaluating lots of different opportunities and I suspect we will find some that will meet that metric but certainly more are not meeting it than are meeting it. In terms of how we're taking advantage of it,

I think you see in what --. like we did in the first quarter. We were a net seller, $333 million of assets in the first quarter at strong multiples, at low cap rates and, in a way where we are think we are getting substantially greater than our whole values and so every time we make the decision we're taking advantage of the robust M&A environment by, in our opinion, creating enhancements to our M&A per

I am curious. You are close to the buyers and sellers with some of these assets and you're obviously experienced in the business. If you had to guess, where do you think some of these folks are underwriting these unleveraged IRR basis or do you think the underwriting criteria has changed in just recent months?

I think they're probably on a unleveraged basis underwriting anywhere from eight to ten, but I'd say the more recent deals on an unleveraged basis are probably eight to nine, if I had to guess. And that's based on, in some of these cases, we look--not in all of them, but obviously our M&A folks are looking at some of the deals, if nothing else, just to kind of assess where the market is even if we are not that interested in a particular portfolio. And, I would say eight to nine is probably, on an unleveraged basis, where we think they are ending up..

Now, when they apply 80 to 90% leverage at rates that are probably 6%. Maybe a little bit more to get to that level of leverage, 6 or 6.5% you can do the math. They can get into kind of high teens IRRs and that's where the market is, I think, right now. And most of the private equity money still says they want to get 20% leverage IRRs but, I think, the real world is that they are getting-- they can accept high teens kind of leverage IRRs. And, I think on paper. that's what they are getting and in reality, at least for now. I think, generally in line with what they are probably achieving.

Last question. If I could. Concerning the softness in suburban markets, Marriott International seemed to imply that was more of a Q1 event than a continuing concern, and maybe it was largely the result of difficult comparisons as a result of Katrina. Do you agree with that assessment, that this is not a continuing event and-- or is there some price sensitivity here that your full-service assets lost a little share, if you will, to the select services in the same sub-market.. Well, obviously we are a lot less concentrated in suburban markets, if you look at our overall portfolio. It is pretty light in suburban, particularly when you look at a lot of our markets which we categorize as suburban, are really urban markets. So, it's not a significant part of our portfolio. And as we look at it, obviously it was weaker in the first quarter. We don't see any systemic issue with it. We do expect, generally, to see greater strength in the second through fourth quarters in that segment, so I think in the end.--well, I'm not sure exactly what Marriott said, I heard bits and pieces of it from our folks on suburban. Our expectation is that suburban will do better for the rest of the year. We don't see any real reason why it shouldn't.

Thanks, Chris.

It is driven market by market. if I aggregate it and generalize it, it's definitely doing better.

We will take our next question from Bill Crow from Raymond James.

Good morning, guys. Chris, just a couple of questions. First of all, have you quantified the RevPAR growth on a calendar basis.

Yes, on a calendar basis, our pro forma comparable RevPAR growth, and the reason we, obviously. -- we describe while we are talking about that-- that's the substance of the company, that's if you're modeling which you should be focused on because that's whats driving our EBITDA and our (inaudible) share. On a calendar quarter, it was 7-7.

7-7.

Plus or minus and it was better when you add, effectively,-- when you add March into the equation, particularly for the Starwood Hotels, and our monthly hotels, it blends it up to plus or minus to 7.7 from 7.0.

And, just looking at the Starwood Hotels. I know you are not giving specific answers on that brand, or that portfolio, clearly the performance there was dramatically better than what you had --what you reported as an overall comp basis. Is that geographic? Is it brand specific? Anything you can identify. I mean in markets where you have, let's call it Marriott-branded hotels versus Starwood, any difference there?

It's little of everything, is what I think.. Clearly, and you are right, I am not going to give awe specific number on what the portfolio did, but you can do the math and back know it. Clearly, and you are right, I am not going to give you specific number on what the portfolio did, but you can do the math and back into it. It obviously performed extraordinarily well in the first quarter. I think part of it is geography. You have a couple of big assets in New York.

New York is doing extraordinarily well. It certainly is dominated by urban markets in that portfolio, you can see urban markets perform the best. Some of it is geography and some of it is Starwood and the brands. Some of the brands We are seeing some market share gains and, as we'd expected and some out- performance that it is just based on head to head out performance. So, it's combination of all these things.

We are obviously extraordinarily pleased with the performance in the first quarter and we're extraordinary pleased with how it did last year and we're very optimistic about its performance for the full year in '07. I'd say as we described when we did the deal. One of the reasons we did the deal, along with many, many others is that we -- our view was, this was an enhancement to our overall growth rate and I think as every quarter of last year passed and every quarter -- as we passed through this year. I think it will prove itself out that overall ultimately plus or minus a quarter of the company, it's performing at a very high level and as a result, even in only a quarter of the company, it is waiting the overall growth rate performance of the company up which is it is obviously why we wanted to do it.

Final question, the group cancellations that were referenced by yourself. Anything concerning there. And anything that--

No, it happened.

Going on?

No, there is no grand explanation. These things happen. It was a comedy of errors in Orlando, the fact that we had three there was coincidence. That hotel is doing well generally.

We expect to do better throughout the rest of the year. We're getting ready to open our new exhibit hall in October this year. The bookings for that are phenomenal, so we expect some great market share growth and great performance out of that. These things-- they generally don't happen three in a quarter, but they do happen periodically. Obviously, we will get some breakage revenues out of that from those groups, but, that never makes up for what we really ultimately lose in terms of the full spend on catering, FMV and other ancillary revenues. So, I don't think there is any bigger story in it other than coincidence in timing.

Okay. Thank you.

Yes.

We will take our next question from Joseph Greff with Bear Stearns.

Good morning, guys. Chris, you mentioned that the '08 group booking pace looks very strong. Can you just help explain what that means and can you talk about pricing on group in general?

Yes, pricing on group in general, is kind of, in the first quarter that we expect kind of not too far off (inaudible). in the low to mid sixes in terms of increase and we would hope you could experience that. If not, potentially a little better in '08 and the booking pace, meaning, if we look at where we were last this time last year and how '07 looks versus this time now how '08 looks, I think it's up basically 2 to 4%. Which is on a year-over-year basis. generally-- in room nights, it is generally a very good metric. Obviously in revenues. it's up a lot more than that because you take the rate increase and build that in. But in terms of overall room nights, 2 to 4%. So, we feel good.

And obviously, as every year goes by, you get better and better rate, you're getting groups that are lower rate and up to more and more of those off the books to the point where kind of, this year you're getting down to maybe 20% -- . 25% of your room nights were for a weaker period. Of course, every year that goes by you think the period in another year was weak because things have gotten so strong and the next year, you burn off a lot more of that. and you're getting higher quality groups, greater spend. You get the food and beverage. and other ancillary spend that goes with it. So the '08 metric is-- it's one metric, it's not the-- the only metric to look at. I wouldn't suggest that, but, it's certainly a very good leading indicator to what is going on in that segment of our business which is a huge component of our business,. and it is very positive right now, as is the remainder of this year., which is looking, obviously, looking pretty positive as

Great. Thank you.

Yep

We will take our next question from Harry Curtis with J.P. Morgan.

Chris, good morning. If you could talk about the condition of your balance sheet today and the room condition. Specifically, I am thinking about their renovation state versus 10 years ago, and maybe the implication for returning capital, increasing dividends available to shareholders now versus 10 years ago?

Well, the balance sheet is obviously, in much, much better shape than 10 years ago-- so ten years ago would have been '97. So I don't know.

I can't recite the credit stats of 10 years ago. But, I cana tell you, the balance sheet is in the best shape it has ever been in our history. And, obviously with the results that we expect to be able to achieve that we give you guidance on today. It is only getting better and some of the recent financings that we've done in terms of the mortgage financing that convert the exchangeable deal rather, we did just recently as part of the S&P 500 inclusion. The Starwood deal and equity involved in that. All of the things have led to credit stats that are well beyond anything that the company has ever achieved and so we feel very, very good about the balance sheet, as Ed described, and feel like we have significant flexibility that is only, as we continue to this year and into the future, going to continue to increase.

On the condition of our rooms, I thin, as we are this year really -- if you think of the Cap Ex spending as we've described it, We really ramped up our spend both in, somewhat, maintenance but particularly in ROI and repositioning CapEx in, really, '06, '07 and '08. In another three years we are going to spend a significant percentage of revenues and a significant amount of overall absolute capital into our rooms and food and beverage outlets and meeting space, etc. And then obviously, once we get beyond next year you'll start to see that trail off in terms of the percentage of revenue spent. When we get through next year in terms of our rooms product., our meeting space, restaurants, They will be the youngest in terms of renovation age in our history, other than you know, when you had a new portfolio. But in-- the youngest in terms of the last five or ten years of our history. So, the portfolio is in terrific shape right now and when we finish this program next year, we will be in the best shape in our history.

So, we will have the best balance sheet, we'll have our product positioned better than it has been in terms of the age of the actual rooms and meeting space and renovations schedule, etc. And, I think as we think about. The opportunity to give money back and the various forms we can do that. including dividends obviously with a very strong balance sheet, we-- , and with great results, very robust growth that we experienced last year, robust growth we're experiencing this year, as I say in my comments, you are going to continue to see meaningful growth in the dividend. Now the form it's going to take, given our $.20 per share quarterly dividend, is going to be in that special dividend at the end the year. Now there are other opportunities to give back money in terms of stock buy back which is probably your next question, other things which we have not been pursuing to date. We certainly view that with the strength of our balance sheet, as I said, it is only getting better. As a weapon in our arsenal.

We don't believe right now, given the balance sheet of where we want it to be, and that we're using all of our free cash flow investing in what we think of as very high yielding ROI and repositioning opportunities as I described, in terms of the reinvestment of our portfolio, that now it is the moment in time that we should be doing that. But, we certainly knew that as a weapon in our arsenal that at some point in the future, I expect we will-- we will utilize. When and how we do that, obviously will depends on market conditions as we go forth. Right now we are very comfortable that the way we are allocating our capital, in the sense of just reinvestment our existing portfolio, is ultimately. short and long term the best way that we could allocate the capital in terms of creating share-holder value and NAB per share.. So, as time goes on, obviously, the balance sheet is very, very strong. when we don't have the opportunities that we have, the investor (inaudible) existing portfolio, assuming we don't find other opportunities for external investment at that time, we would be looking at different ways to give capital back and not just afford capital certainly, and the ways, the obvious ways we could do that are increasing dividends which presumably we would be doing at that time, if it made sense, and/or buy back

Thank you.

We will take our next question from Will Truelove with UBS.

Just a couple of questions. Can you talk about the International hotel results. The rough part looked a little surprising with a low in that. And then two, do you have any sort of guidance related taxes on a full year basis and then three, Chris, you mentioned--

The taxes. Full year basis, if you guys are going to find any kind of expectations on that. And then, finally, you mentioned that the CapEx this year would be a significant portion of revenue-- sense of revenue. Do you guys have more of a targeted point of what the percentage might be, or a total amount, maybe I missed the CapEx number for this year. Thanks. No, happy to do that. International results we thought were pretty good, they were higher than our comp then pro forma comp numbers here for the quarter.

Part of the reason you have an expectation of seeing something even better is because London generally is doing exceptionally well. We do have an asset in England and it is sharing in Heathrow airports. We don't have anything in the city of London and so that would impact our overall results. We actually feel very good being in the 7.5 to 8 range in -Europe in the first quarter and our expectation, right now, is that for the full year we're going to have somewhat similar growth to our growth in the U.S. and Europe this year. Obviously, that has a lot to do with the geography of those assets and as that portfolio grows and we get representation in other markets, I think you will see some changes there.

In terms of the overall value and proposition in Europe, we feel unbelievable about what we're doing there. We-- we've acquired all these assets at very attractive prices and, I think, created a huge amount of value in a very short time in the transactions that we've done.

On the taxes, we as you know, don't typically give full year specific guidance on what is going on with the taxes. I apologize on that obviously. It is a complex equation and we haven't typically given specific guidance on that. With the CapEx, you didn't miss it, because we didn't say it. But the reason we didn't say it, is it hasn't changed from eight weeks ago, whenever we did our year-end call and that is that we're going to have plus or minus 640 million in total CapEx for the year.

About a little over 300 million, so a little less than half of that is maintenance CapEx and renewals and replacements, and then the remainder of that is ROI repositioning CapEx. We would probably expect next year, it is early to tell, but we'll have a number. Maybe some of that, probably in aggregate a little bit lower, I think ultimately, depending on how some things in the ROI repositioning area play out. Could be our max spend year, but as some other opportunities in ROI are repositioning come to the forefront., it might not be, but, that is good news. because we are making great yields on that. Then as I mentioned, after you get through next year. then you see a bit of a drop off because we'll have our three year program where we have been doing an increase spend, starts to get towards the end.

Yes, thanks. Just want to clarify something. on the international results. I was just looking at your supplemental on Page 11 of it and it shows that the change in international for the quarter is 0.3%. I thought you mentioned something like seven. So is there something --

yes, let me.

little confused.

The difference between the two of those is what Chris was describing.

I was describing Europe, Will, I'm sorry. When you add International in our reporting is what we (inaudible) internationally would be Canada and Chile. And Toronto had a weak first quarter.

We had construction at one of.our properties and I also think we had the currency moved it a little bit against us in the first quarter and consequently, we had the deal-- actual Canadian currency was stronger than what's shown there.. I'm sorry Will. that is

No, tha's alright, That's very helpful to know Europe is seven and the rest is maybe negative.

Europe won't even be in that number. It is not in the part-- it is off-balance sheet. Because of the joint venture structure. I was thinking Europe when you said International and my apologies. It is driven by Toronto.

Okay. Thanks.

Next question from Jake Cogan with Banc of America.

Yes, hi, good morning. I've got a couple of questions just on RevPAR. For the second quarter you talk about guidance on a pro forma basis, but there isn't the kind of standard comparable second quarter guidance pre-Starwood. Do you want to do about that. Should we expect a comparable number or given what you just said about March should we anticipate maybe that . those numbers show a little bit better than what you saw on a first quarter on a pure comp

No, on a pure comp bases which I think is less relevant for obvious reasons because, it is only a part of what we own, I would say, it is probably in the range that we gave for the full year, but, I would say-- I would favor the lower end rather than the upper end.

And then, just so everybody's expectations are said appropriately, as we move through time here, when you talk about the second quarter on a pro forma basis, should we be thinking that whole range is feasible? Especially since . what you just said about March or including the Starwood assets or are we still kind of in the lower part of that

No, obviously if we give you the range, it's feasible. And when we give ranges I think the logical place we expect people to end up, although it is not always true, is the middle of it. So, I wouldn't guide you, necessarily to the low end for pro forma comps.

What's effectively happening, you saw it in the first quarter, is when we gave guidance for the full year at our year-end call, and we gave pro forma-- I mean, excuse me, , when we gave comp RepPRO guidance of 6.5 to 8.5, the reason we didn't distinguish pro forma comp, at that time, was because they basically were the same. And what has happened, partly of a result of what has happened in the first quarter, is the comp is a little bit lighter and the Starwood, other than-- largely Starwood that makes up the pro forma comp is better. so it's the complexion of it, and if you look at the aggregate and our pro forma comp which is the aggregate of the company, we are still getting to the same place in terms of 6.5 to 8..5, it's just that the complexion is different.

When we started out the year, they were almost identical they were within ten basis points of one another and now that spread in terms of where we think comp is in pro forma comp is an little bit greater which is why we are trying to give you the information because both are important. Frankly, we think pro forma comp is more important 'cause it's what is going to drive the EBITDA and what's going to drive our bottom line

Understood. Just wanted to make sure we are all clear on that. As it relates to hotel companies they tend to say-- what we see right now, no real major issues, but remember we lag the rest of the economy, so. don't look at us, really for all that much insight in a relative basis. But at the same time, I guess, there are indicators that you see day to day as it relates to the transient, how it relates to the group side or even leisure side that would give you a sense that what we are seeing right now. is just maybe a kind of continuation of the hurricane comps or a minor soft patch or you really feel good about this kind of resurgence from the fourth quarter here, from the demand standpoint.

Can you give us, Chris, any maybe Incremental thoughts on some of the trends you're seeing in group or transient that maybe. you haven't discussed yet, that leads you to believe the back half numbers, even the second quarter, can be as strong as you think they are going to be.

I think I covered most of it. I will summarize a little bit of it. In the first quarter of the trends that we saw, were all reasonably good. if not very good.

We saw transient business kind of demand pick up with additional room rates and we saw an equivalent amount even the group we expected to be weaker overall, the group was actually up. The complexion of the quality of the groups was down but that was partly just the cycle. of how they are cycling through in terms of corporate and association this year.. So, we saw a 1/2 point increase in demand in both of those. We saw weekend improvement as you look at the transient side. and overall weekend improve-- we actually saw weekends improve greater than week day, which we thought was a pretty good indicator. Obviously the first quarter, the first half of the year aren't that strong in the group bookings, but . even in the face of that, we are doing reasonably well.

Transient business, as I said, seems to be main-- kind of maintaining and doing pretty well with growth there and growth in weekends being even better. The remainder of the year, the second half of the year, the group pace is . better, rate is better. We don't have any,-- if I had it, I'd tell you. I don't have any telltale signs that transient is weakening but transient-- we have less of a a crystal ball in the transient than we do into the group side, for obvious reasons. So, all of those indications kind of make us feel pretty good about the rest the year.

If you look at our overall guidance again focusing on pro forma comps, 'cause that;s . the whole company, really. If you look, and took the mid point of our range and we gave you a range and you took the mid=point of it, we are basically, kind of saying to you, in the first half of year, we are kind of performing at the mid point of the range. And so, if we performed about how we are performing in the first half of the year and second half of the year. even though we have a better group booking pace and some other things I'll describe in a minute, . Then we are kind of at the mid point. So. at least they will say gee, I say this doesn't sound so crazy, that sounds pretty reasonable, . can we do better than that? We could.

I know there are a bunch of reasons why we could. The economy could be stronger which I think a lot of people think. That's all over the place. Our own expectation is, you'll see some stabilization potentially of little bit of upward trajectory in terms of growth rate, not crazy, but a little bit of upward trajectory, and you've got easier comps, and we've got some pretty darn tough comps in some in the southeastern and southwestern markets right now related to Katrina. Atlanta and some of our other markets are really getting beat up pretty badly, and that kind of abaits. And as I said, you've got stronger group bookings in the second half of the year and particularly focused in the fourth quarter where you have some pretty significantly better group bookings. So I am not saying that I think that means the trees are going to grow to the sky. To me the logic is performing where we are kind of now, generally leads you to kind of a mid point of our overall guidance and if some of those other things really benefit us a little bit more than what we are thinking right now, which they could, then you could do better. But, I think when we look at it. and we look at all these trends, that we've described, I think as thoughtfully as we can, we feel pretty good.

We feel like we are having a darn good year in terms of growth and in absolute sense. and in a relative sense. So, these are, I think robust growth rates that we ought to be, they ought to be thankful for and pleased with. So, hopefully, I've answers the question. We have given a lot of data and that

It sure did. Thank you.

We will take our next question from Celeste Brown with Morgan Stanley.

Hi guys, good morning. I guess to the second company that reported with lower RevPAR, but stronger for . being able to maintain the margin out look. The Marriott talked a lot about some of the programs they put in place to improve the productivity.. Are you seeing that flow through the properties that Marriott manages or are you seeing other things that's driving a maintain margin

Well, on a comp basis, yes. We got huge benefits from that last year which is why we had industry-leading margin growth last year which makes it harder to replicate those kinds of margin growth rates year over year, this year.

But, we clearly-- not as much as last year are we seeing those benefits, but we are clearly benefiting from some of that and pro forma comp portfolio, when you add in Starwood. particularly given the much higher level of top-line growth there, we are getting obviously very good margin growth and obviously working with all of our brands. brands-- all of our brands on greater efficiencies and benchmarks. And one of the greater advantages we have, and I can understand why the brands don't like to give us credit for it, but-- and so they don't.

But, one of the great advantage we have is a business intelligent system and technological base and the data that is in it, with the portfolio we have which is representative of most of the major brands in every market, allows us to kind of bench mark once against the other and trying really, figure out what best practices are and then transfer that knowledge, to the extent that we can, to get better performance, better productivity, better margin growth. And I'd say, what you saw (inaudible) last year as a direct result of the work. , Now ultimately day to day, obviously,. our brains that we work with who are great and we love, and do a fabulous job carry that out.

But. we are a very active participant in the dialogue and we saw great results from that last year. We expect to continue to get some benefit from that this year. Obviously as we get deeper into things with Starwood, I think we will continue to find more and more opportunities there. So, short answer is yes some of the reason that we are able to do better (inaudible) and even with, in the first quarter, RevPAR where it was get a little better margin growth, is. because some of the great work our brands are doing and frankly, some of the work we are doing to help them achieve better

Great. Thank you.

We will take our next question from Steve Kent from Goldman Sachs.

Hi, good morning. Two quick questions. One on Europe which seems like a huge opportunity for you. When we were there, the other management teams that we met with suggested almost 3.5 to 5% cap rates which seemed very, very high to me for -- sorry. very, very low for me for acquisitions. Just give us a sense where sort of, how you are competing in the markets for assets, especially against some of the private equity and real estate players who have-- actually have more capital than you and secondarily, I know-- people have asked you this a couple of different ways, but for the balance of '07, what are we really talking about is at risk or potential benefit on the transient side. Sort of what percentage is now group bookings. locked in, you know what you are going to have for the balance of '07 and now we are just talking about what transient will do.

On Europe, I think that if depends on where you are. And cap rates. at 3.5 to 5 are . not unheard of but it's in maybe city center of London. I think if you look at cap rates generally across Europe. that is low. I mean, I would say cap rates generally across Europe when you blend it all together are probably 5 to 6.5 kind of cap rates so it is extraordinarily competitive. The way we can compete against these guys who have lots of more money, I don't know. I am not keeping track. We've got ample resources I think to grow our business there and ultimately growing. The way we compete with them, is they are playing it a little bit differently.

Let's assume that we are both underwriting the same kind of numbers. They're playing, as they are in the U.S., with a lot higher leverage than we are playing with, but the advantage that we have at least, keep us competitively is we are not playing with all our money. We own about 32% of a joint venture and the majority of it is owned by two institutional partners that have lower overall yield requirements than we do. And, as a result of the fees in the promote structure that we have and we look at investing our money even though the going in yield ends by the way, the long term yields are much lower for what we are acquiring there They are willing to accept those lower yields and because of our fee and promote structure, we're able to get yields that are equivalent to and in some cases, even better than what we could do investing here. So, you're right, and 3.5, those kind of cap rates are fairly few and far between. But they are occurring, particularly in London you 've seen some of that occur, but not generally.

But you're dead on target that's extraordinary competitive and that's, frankly one of the primary reasons we put our J V together, in addition to some others, was that we didn't think that we could be competitive without doing it. With our cost to capital., we couldn't go over and buy a 3.5 to 5 or even 5.5 cap rate that were delivering 7% or 7.5% unleveraged IRRs just because that would be lower than our cost of capital and we'd be ultimately, long-term, losing money. So, we paired ourselves with some other capital sources that have lower cost to capital. On the second question, that-- I figure if you look in the group business, right now our group business is representing about 44% of our overall makes and kind of look at that for the full year. And,I'd say at this point that we probably have at least 90% of that business on the books at this point in time. It varies by hotel and by type of hotel.

But, If you just apply those percentages, Steve, that would suggest we have already gotten 40% of our business for the year that's pretty much locked in at this stage. So, you have 60% then that is outstanding in the transient in the,-- in some--, for the year group and transient. And so you have still the majority of the business that is outstanding independent upon what is going on at the time. But as I said. You know, with the trends that we are currently seeing in the first quarter and second quarter, not that we are all milling in all things. but the trends we see. that we spend a lot of time looking at and contemplating, it makes us feel pretty good about the remainder of the year. Thank

It appears we have no further questions. I would like to turn the conference back to Chris Nassetta for closing remarks.

Thank you, all, for joining us today. We are very pleased with what is happened in the first quarter and I just finished describing we are optimistic about the rest of the year and feel good about the trends that we see, frankly, going into '08. We'll look forward to talking to you later this summer when we have made it through the second quarter. Again, thanks for your time today. We appreciate it.

Once again, ladies and gentlemen, that does conclude the conference. We appreciate your participation today.