Host Hotels & Resorts Inc (HST) 2007 Q4 法說會逐字稿

Good day and welcome to this Host Hotels & Resorts, Inc. fourth quarter and full year 2007 earnings call. Today's call is being recorded.

At this time for opening remarks and introduction, I would like to turn the call over to the Executive Vice President, Mr. Greg Larson. Please go ahead, sir.

Thank you. Welcome to the Host Hotels & Resort's fourth quarter earnings call. 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 these forward-looking statements.

Additionally, on today's call, we will discuss certain non-GAAP financial information such as FFO, adjusted EBITDA and comparable hotel results. You can find this information together with reconciliation to the most directly comparable GAAP information in today's earnings press release and our 8-K filed with the SEC and on our website at hosthotels.com.

This morning, Ed Walter, 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 2008. Larry Harvey, our Chief Financial Officer, will then provide greater detail on our fourth quarter and year-end results including regional and market performance. Following their remark, we will be available to respond to your questions. And now here is Ed.

Thanks, Greg. Good morning, everyone. 2007 was another positive -- another year of positive growth for the lodging industry and a very productive year for our company. In addition to continued growth in our operations through increases in RevPAR margins, we were also able to achieve a number of important goals this year.

On the domestic front, we continued to focus on our extensive CapEx program that includes maintenance CapEx, ROI repositioning and value enhancement projects investing approximately $610 million in 2007, including $250 million in the fourth quarter. Major projects included comprehensive room reduce at the Minneapolis City Center Marriott, the Harbor Beach Marriott and San Antonio Riverwalk Marriott Hotel, plus an additional 4,000 rooms in 15 other hotels. We renovated more than 625,000 square feet of meeting space including major renovations of the San Antonio River Center Marriott, the Westin LAX and the Tampa Waterside Marriott.

We also completed constructions on our 105,000 square foot exhibit hall at the Orlando World Center Marriott and major spa renovations at the Desert Springs Marriott and the Amelia Island Ritz-Carlton. Other major projects included lobby and public space renovations at the JW Marriott in DC, in Coronado Island Marriott Resort and the Toronto Eaton Center Marriott, as well as several food and beverage facility projects. We continue to believe these investments are high-returning investments that favorably position our hotel at their respective markets while enhancing the future value of our entire portfolio.

In July, our European joint venture acquired three assets in Brussels including the 262 room Renaissance Brussels Hotel, the 218-room Brussels Marriott Hotel and the Marriott Executive Apartments. These acquisitions bring a joint venture's total investment over €1 billion with a portfolio comprised of 10 properties in five countries. We continue to execute on our strategy of selling non-core assets in 2007 with over $400 million of asset sales for the year, including two assets totaling $70 million in the fourth quarter.

We improved our leverage and coverage ratios through a combination of debt refinancings and repayments that lower our overall debt balance and significantly reduced our average interest rate by nearly 1 percentage point to approximately 6%. We amended and extended our credit facility and have full capacity of $600 million. Additionally, we reduced the facility's interest rate, and based on our current leverage ratio can borrow at LIBOR plus 65 basis points or [3-3/4%] We recorded FFO per diluted share growth in excess of 20% for the third consecutive year. And finally, we paid a dividend of a $1 per common share this year, an increase of over 31% versus 2006.

Overall, we believe the actions we took in 2007 materially improved the strength of our balance sheet, and the quality of our portfolio, and positioned us well for 2008. Before I get into our outlook for the year, let's talk more specifically about our fourth quarter and full-year results. Fourth quarter RevPAR for our comparable hotels plus the Starwood portfolio increased 5.6% driven by a 6.4% increase in average rate with slight decrease of occupancy of a half percentage point.

For the full year, comparable RevPAR including the Starwood portfolio increased 6.5% driven by a 5.9% increase in average rate and a [4/10] per percent point increase in occupancy. F&B revenues increased 3.3% for the quarter and 3.7% for the year. Comparable hotel adjusted operating profit margins increased by a half of a percentage point for the fourth quarter, and by 7/10th of a percentage point for the full year, leading to adjusted EBITDA for [inaudible] for the quarter of $540 million and a full-year number of 1.52 billion. This represents an increase of 19% from 2006.

Our FFO per diluted share in the fourth quarter was $0.75, which exceeded the consensus estimate of $0.68. For the year, FFO per diluted share was $1.91 including a reduction of $0.08 per share related to costs associated with debt repayments or refinancings.

This full-year performance exceeded analysts consensus by $0.06, although we should note that the excess is generally attributable for lower corporate expenses related to reduced executive stock compensation and the receipt of business interruption proceeds related to our insurance settlement on the New Orleans Marriott. Both of which were not expected to be replicated in 2008. From a demand perspective the fourth quarter was not as strong as we had anticipated.

In general, we experienced slower pickup in short-term group bookings, and some weakness on transient demand on both the corporate and leisure side. In addition, our portfolio experienced disruption from our record CapEx program. As a result, group room nights in the fourth quarter were down over 1%, offset by an increase in average rate of almost 5%, which resulted in a group revenue increase of 3.4%. We continue to see good performance in some of our major markets including Boston, New York, Los Angeles and San Francisco.

However, we did experienced softness in some our resort markets such as Phoenix, South Florida and Hawaii. Transient room nights were down approximately 1.5% for the quarter as we saw weaker demands in both the corporate and special corporate segments. The reduced occupancy was more than offset by strong rate growth of 8.4%, resulting in an overall increase in transient revenues of 6.7%. This strong rate performance occurred across all transient segments.

Now, let me spend some time on our outlook for 2008. Looking at the major economic data point, most forecasts weaker GDP and employment growth and a slow down in business investment growth. These economic fundamentals for traditionally impact demand in our business leading to a slight decline in occupancy levels for the year given the projected modest increase in supply growth, and more measured average rate growth.

We also expect some negative impact from business disruption generated by our CapEx program especially in the first half of the year. On the positive side, our group bookings for the remainder of the year remain strong. Indicating revenue growth of more than 7% compared to this point last year. With all of these factors in mind, we are lowering our 2008 RevPAR guidance to 2 to 4% for our comparable hotels which in 2008 will now include the Starwood portfolio.

On the cost side, while we expect to see increases that are somewhat greater than inflation, we have already begun to implement contingency plans of some of our assets. As a result, we would expect our comparable hotel adjusted operating profit margins would raise from a quarter of a percent decrease to 25 basis point increase. Based on these assumptions, we expect our FFO per diluted share for the year to be between $1.88 and $1.98, and the adjusted EBITDA of Host LP to be between a $1.450 billion and a $1.505 billion.

Despite the potential for slower growth in operations, the current environment presents opportunities for our company this year and looking forward. Competitive supply for 2008 in our markets is still expected to be well below historical averages and the turmoil in the credit markets appears to be impacting the growth rate in 2009 and beyond, as developers are finding it difficult to obtain financing for new projects. Additionally, our balance sheet has never been stronger, as evidenced by our leverage ratio which is calculated under our credit facility at a roughly three and a half time, and our fixed charge coverage ratio which is more than 3 times.

We also have full access to our credit facility in extremely attractive rate. This balance sheet strength will allow us to take advantage of evolving market conditions to continue to enhance FFO growth and appreciation in share value over the long term. One key aspect in this effort is our board's authorization yesterday of a program to repurchase up to 500 million of our common stock. We believe that the current market pricing of our stock is significantly undervalued based on the guidance we are providing today. Our portfolio is valued at roughly 8.5 cap rate which indicates material discount to the inherent value of our assets.

At our current stock price, we are trading at a value of approximately 225,000 per key which is a significant discount to our replacement costs of approximately 340 to 350 per key. Repurchasing our stock which allows us to invest in one of the best lodging portfolios in the industry represents a very attractive investment for the very strong IRR. In addition to purchasing our stock, we intend to invest between 640 and 660 million in our portfolio in the form of ROI repositioning and maintenance capital expenditures.

Major projects in 2008 will include the completion of our new ballroom at the Atlanta marquis, and the near completion of the 62,000 square foot ballroom and meeting space edition we are making at the Chicago Swiss Hotel. We're also completing lobby and public space renovations to the San Francisco Marriott, the San Antonio River Center Marriott and the Philadelphia Convention Center. In addition, we will be completing major room renovations at the Chicago Swiss Hotel, the New York Financial Center Marriott, the W in New York Sheraton in San Diego and the Ritz Carlton at Buckhead.

Looking at acquisitions for 2008, we are not anticipating an active year on the domestic front, so we would guide you to not include any acquisitions in your analysis. Although, we intend to be opportunistic at the market place as of throughout 2008. We intend to be very active in New York as the financing turmoil has improved our competitive positioning, and we will be exploring joint venture opportunities in Asia and Latin America. On the [distribution] front, we will continue to recycle capital out of our lower growth assets and prices that exceed our whole value. Despite the challenges in the credit markets for buyer seeking financing, we are making good progress on a number of deals and guide you to 200 to 300 million of dispositions primarily in the first half of the year.

In summary, we are pleased with our results for the fourth quarter and full year 2007, but remain cautious for 2008. We continue to be very excited about the ROI repositioning and value-enhancement opportunities we are working on to create value in our portfolio, as well as for the prospects for continued success and future growth of our efforts in Europe and other markets such as Asia. Thank you. And now, let me turn the call over to Larry Harvey, our Chief Financial Officer who will discuss our operating financial performance for the [quarter-end] year and more details.

Thank you, Ed. Let me start by giving you some detail on our comp hotels plus the Starwood portfolio RevPAR results. Reflecting a trend in place all year, our urban hotels performed the best during the fourth quarter with RevPAR growth of 7.4% as we benefited from strong results in several downtown market such as Boston, New York and San Francisco. RevPAR suburban hotels increased by 5.4% for the quarter and our airport hotels increased by 4.8%. RevPAR for our resort conference centers decreased by 1.9% as two hotels were significantly affected by major renovation.

For the full year, our urban hotels performed the best with RevPAR increasing by 8.1%. RevPAR for our suburban hotel increased 6.2%. Our airport hotels have RevPAR growth of 5.7 and our resort hotel have RevPAR growth of 1.4% for the year. Primarily result a significant displacement from renovations. Turning to our regional results, in the England region was the top performer with RevPAR growth of 16.8% as our Boston hotels performed exceptionally well, did a very strong group of fewer city wide. We expect the Boston market to have a good first half of the year and a weaker second half in 2008.

The Mid-Atlantic region enjoyed another great quarter with RevPAR growth averaging 8.9%. Our New York City properties performed particularly well with RevPAR growth of 11.4% driven by strong business and leisure transient demand rate increases. We expect New York City to have a very good 2008 because of strong good bookings during [this time] strong leisure transient business and limited supply growth. Although the W New York and New York Marriott downtown have renovations scheduled in 2008.

The Philadelphia market would be affected by fewer city-wide and a slower group booking days in 2008. Our DC metro region also performed well with RevPAR increasing by 6.2% as our downtown hotels led the strong performance. We expect our downtown hotels to continue to perform well in 2008 due to transient demand driven by the elections, while our suburban hotels will have moderate growth because of weak transient demand. RevPAR for the Atlanta region increased 4.3% for the quarter. A significant improvement over the third quarter performance. The growth was driven by strong group bookings in midtown, but overall RevPAR growth was slightly below expectations as the anticipated short-term transient pickup didn't materialize particularly in Buckhead.

Overall, we expect Atlanta to perform in line with our overall portfolio in 2008. The South central regions performed poorly with RevPAR declining 4.1% primarily due to renovations at both of our San Antonio properties where RevPAR fell by over 15% for the quarter. At this point, we expect the South central region to get off to a slow start as the San Antonio renovations won't be completed until the end of the first quarter and then straighten in the second half of the year. Overall RevPAR growth for our Pacific region was 5.3% for the quarter. The Los angeles market built on a strong third quarter with RevPAR up [14.8%] as the hotels were able to drive rates on transient business due to a strong group base.

The San Francisco market also had a very strong quarter with RevPAR up 10.5% driven by strong city wide decompression. We expect the San Francisco and Los angeles markets to have very good years in 2008. Our two hotels in Hawaii had a weak fourth quarter with RevPAR up 1.4% due to reduced group demand at one hotel and an overall softening in leisure demand. Hawaii will likely continue to be soft in 2008.

Finally, as we discussed on the third quarter call, the Florida market continued to underperform in the fourth quarter as group activity was lower due to renovation displacements and hurricane concerns. RevPAR for our Florida market declined 2.9% for the quarter due to construction disruption at the Harbor Beach Marriott and the Clarion Hilton. Looking into 2008, we expect RevPAR for the quarter region to rebound particularly at the Orlando World Center Marriott, we will get the full year benefit at the new exhibit hall.

For the full year, the mid-Atlantic has been our best region with RevPAR growth of 12.7%, followed by the New England region where RevPAR growth was 8.4%, the Atlanta region where growth has been just 1.6%, and the North central region where growth was 2.1% have been our weakest performers. Looking at our European joint venture, RevPAR calculated in Euros increased by 4.1% for the quarter as several properties were undergoing renovations. Performance was particularly strong at the hotels in Brussels, Venice and Madrid, if calculated in U.S. dollars, RevPAR was up by 16.1%. For the full year, REvPAR was up 7.3% in Euros led by the hotels in Barcelona and Venice, in US dollars, RevPAR was up by 70% for the full year.

For the quarter, adjusted operating profit margins for our comp hotels improved by 50 basis points. Profit flow-through in the room's department remained strong, while the fourth quarter had our lowest at a B revenue growth of the year at 3.3%. Flow-through was excellent due to growth in catering and banquet business, as well medium rate rentals which resulted in a 60 basis point improvement including beverage margins.

On the cost side, wages and benefits increased by roughly 3.4%, and an allocated costs grew by roughly 4% for the quarter. As anticipated real estate taxes increased by 5.7% as assess evaluations continued to catch up with increases in property values. On the positive side, utility costs increased less than 2% for the quarter and insurance costs decreased 5%. For the year, we have strong profit flow-through at the departmental level leading to adjusted comp margin improvement of approximately 70 basis points.

Full year wage and benefit increases were approximately 3.6% and support cost increases excluding utility costs were up 4.3%. Utility costs increased 1.2%, while property taxes increased 5.9% and property insurance increased 5.5% Looking forward to 2008, we expect that wage and benefit costs will increase slightly more than inflation. We believe that support utility costs should increase with inflation, although we expect to receive some savings in our property insurance renewal.

We also expect some benefit as our managers and operators further refine and implement cost reducing contingency plans given a low RevPAR environment. As a result, we expect comparable hotel adjusted operating profit margins to decrease 25 basis points at the low end of the range and increase 25 basis points at the high end of the range.

Effective with this earning release, we have changed our methodology for calculated adjusted EBITDA for entities where we don't own a 100% of the equity. EBITDA for these entities both consolidated and unconsolidated will now reflect our pro-rata ownership. Previously adjusted EBITDA was reduced by the amount of cash distributed to the minority owners of entities we consolidated. An EBITDA was increased by the amount of cash we received from unconsolidated equity investments.

The primary reason for the change in methodology is that including only the cash distributed in adjusted EBITDA is not representative of the performance of these subsidiaries because it can be retained by the entities for future investment in properties or for other purposes particularly in international entities where there's more cost effective to maintain in a foreign jurisdiction. The new methodology is also consistent with many companies in the lodging industry.

We finished the year with the strongest balance sheet in our history, as well as with exceptional liquidity, coverage and fix charge ratios. At year end, we have $488 million of cash, of which $212 million was used for our January dividend payment. The remaining balance of approximately $275 million will be used to maintain working capital of roughly a 100 to $125 million, as well as fund additional investments in our portfolio, our European joint venture, our stock buybacks and for other corporate purposes. We have less than $250 million of debt maturities in 2008 primarily consists of the mortgage for the Orlando World Center Marriott.

We have excellent relationships with the number of lenders and to the extent the high yield debt market is too expensive, we are very comfortable in our ability to obtain favorable secure financing terms from licensure company on the refinancing of this $210 million mortgage. Our first quarter guidance is affected by several items including a lower group booking pace in the first quarter relative to the rest of the year, the level of our capital expenditure activity is much more significant in the first quarter of '08 versus the first quarter of '07, and the bulk of the Easter vacation holiday will be in our first quarter this year versus the second quarter in 2007 for our Marriott properties.

All of that leads to our expectations that RevPAR growth for our comparable hotels for the first quarter will be near the low end of our full-year guidance and that first quarter diluted FFO per share will be in the range of $0.29 to $0.30. This completes our prepared remarks. We are now interested in answering any questions you may have.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to assemble the question roster. We'll take our first question from Chris Woronka from Deutsche Bank. Please go ahead.

Hey, good morning, guys.

Good morning.

Maybe you can share with us a little bit more color on the guidance, and you mentioned the slower group pickup in the fourth quarter. What are the chances that that happens throughout 2008? I mean, I guess where I'm going with that is if you can share with us kind of what percentage your group nights are already on the books, and what needs to go right to get the 4% and what needs to go wrong to get to 2%? Any color on that would be great. Thanks.

I guess the way I would look at it is if you look at the bookings so far for this year, and really even through the end of last year for 2008 have been trending very well, and as we indicated on the call, if you look at -- if you look at how 2008 plays out for the rest of the year from a group perspective, we're up in a room nights perspective, we're up in a revenue or rate perspective, and overall, we think we'll be North of the 7% increase for the businesses on the books. That business represents roughly 75% of the group room night that we would expect to see this year. So it obviously represents a significant chunk of the business that we should ultimately end up with for the full year.

I would say in trying to speculate what actually happens on the group side, we have not seen significant attrition yet at any of our hotels. We are not seeing more than isolated cancellations, so far. And so the only trend that we have seen this cause some concerns as the one we mentioned which is the fact that we have been noticing that as you get closer to the particular month when the group events would happen or particular month of operations. We are finding that the short-term pickup is not matched up with prior levels. Some of the explanation for that , of course, is due to the fact that we have had, we have been running ahead generally in terms of our group activities, so there have been less group rooms available.

But, I think at the end of the day, we are seeing that the events that are being scheduled in the near term have not been occurring at the same pace, and we saw that throughout almost the entire fourth quarter, and I think we are still seeing it as we work our way into the beginning part of 2008. I think what that is reflective of what you would expect. As the economy gets to be a bit weaker and businesses and corporations tend to be a little bit more conservative in how they spend their money, this unfortunately is the short-term events tend to be the things that are the first casualty.

I'd still say overall that I think our group business for the year will be up, and I think one of the keys will be to what -- how strongly it is up and how quickly we start to see the economy recover. If the weakness that we're seeing right now begins to dissipate and we get back on a more normal growth pattern by the second half of the year, then I think you'll see that short-term activity pick up, and you'll see us towards the high end under the RevPAr guidance that

Okay. That's helpful. Thanks.

We'll go next to Patrick Scholes from JP Morgan.

Hi, good morning. With your announcement this morning of some potential or possibility for share repurchases, what is your new comfort level with where debt should be or debt to EBITDA on your balance sheet ? Right now, you are about three and a half times trailing. Again, what is your comfort level with

I guess the way -- we certainly feel that with debt to EBITDA three and a half times that we have a significant amount of capacity. We could easily move back towards a level where we were at five times and we would still feel that we were in very safe position. Now, I would want you to read that to say that we are going to be aggressively investing in the near term to try to move our debt to EBITDA from where we are right now to a level like that. I think the way -- maybe to speak more broadly to the whole stock repurchase question, we certainly feel that looking where the stock price is today, it's a compelling value. Having said that, we also recognize that there is a fair amount of uncertainty around the economic outlook for this year, which obviously translates to uncertainty in our business. And we're also interested to see what sort of opportunities might evolve on the acquisition front. So I think what you're going to see from here that we certainly do intend to buy stock back. We will probably take a measured approach especially in the beginning of the year, comparing that option to other options that might be available from an acquisition perspective, and all of this needs to be balanced against the overall economic environment and what is going on in the lodging industry.

Thanks. Just one more question. With your renovations for 2008, can you give me an estimate of how many basis points of margin those renovations will have an impact and how does that compare to the impact in 2007 from renovations?

It's really tricky to try to tie renovations in to the impact on margin. I think what we were indicating last year is that we thought that the renovations were costing us a point or two of RevPAR growth. As I would look at '08, I would guess that certainly to think that our renovation activity has gone, it would cost us a point or more in RevPAR growth for the full year is probably a realistic assessment of the impact. That would probably guide me to think that it would cost us a quarter of a point maybe 35 basis points of margin growth.

Thanks. That's all.

We'll take our next question from Celeste Brown at Morgan Stanley.

Hi, guys, good morning.

Good morning.

Two questions. One, in your guidance you talked about I think $300 million of dispositions. And mostly front-end loaded. Who can fund acquisitions of that size? Or is it just a number of hotels that are small enough that you don't need to borrow a lot of money to do it? And then the second question is -- you talked about being opportunistic in terms of acquisitions, but there has been sort of a stalemate between buyers and sellers on transactions of more significant size. When do you think that stalemate breaks? Is it in the summer, is it earlier than that, later than that?

Let me start with who is buying first, then I'll jump into that speculative comment. In terms of who is buying, I think there are still folks that are lending out there. The lending environment has moved from the CMBS lenders being really the dominant source of funds to balance sheet lenders, whether it's life company's or banks that tend to be balance sheet lenders providing the financing. So what we're finding with our buyers is our buyers tend to be lower profile companies usually private companies that still have good lending relationships in access to capital.

The interesting thing in our world right now from an acquisition perspective or from us looking at it in this context such as posting of asset is there's still a fair amount of equity capital that's been raised that has not yet been placed. Part of what you are seeing happening here is leverage is probably going down a little bit. You are seeing some adjustment in terms of expectations on returns, and you ultimately finding that lower leverage levels, some of these balance sheet lenders are more comfortable and consequently are providing fund.

Now having said that, there is no doubt that the disposition market from our perspective has gotten a lot more choppy. And a number of the transactions that we are working on now that we are hopeful will close over the next quarter or so are transactions that we would have felt fairly confident we're going to close in the fourth quarter before the financing debacle begin. So, it's still a much more difficult environment to complete sales, but we do feel we have buyers that we -- in many cases who we have a long track record with, and they are folks that we pre- qualified from a financing perspective in order to go under contract with them.

Looking at how long it takes for the stalemate between buyers and sellers to evolve, that's a real tough question to look at. I think you have already seen some cap rate movement below the top level of quality in the industry. We would generally think that cap rates have moved to 100 basis points or slightly more on many of the types of assets that we're selling. It still makes sense for us to sell those assets because as we -- the process that we go through in selling an asset is always to look at what we think the whole value would be, which is roughly equivalent to what we would be prepared to pay for the assets.

And as long as we're able to sell the asset for a price better than that, then we feel it is a good decision to be a seller. But clearly, the [delta] between the sale price and the hold value has come down over the course of the last six to seven months. I think a lot of it is going to depend upon where financing ultimately settles in, and as we begin, right now the markets are solid liquid, it's really hard to predict where a rate would be -- certainly outside on the balance sheet area is difficult to predict where rates are going to be.

And as that begins to settle down, you get a little bit more liquidity in the financial markets. You'll probably start to see pricing begin to adjust as velocity in the market begins to increase.

Thank you.

And we'll take our next question from Bill Crow at Raymond James.

Good morning, guys. Couple of questions on cap rates. You said the cap rates on potential sales have moved up 100 [BIPS]. Give me a ballpark range of where you think that is today on those assets. is that up to 8, or 7.5?

As best as we can judge it, we would probably say for the top-quality assets in the market, you are still looking at cap rates in the 6.5 to 7.5% range. And that I think if you work your way to maybe airport -- still good, but airport style hotels or full service hotels located in suburban markets, you are probably more in that 8 to 9 range now.

And then if you -- I think the statement was made earlier that you are trading at 8.5% implied cap rate today, your stock price is 225,000 per key, but you believe the portfolio is worth 340 to 350 per key. What does that imply for a cap rate if you got back to that kind of asset value number?

Bill, there is a couple of different concepts in there. I think what we've said is we're trading at about an 8.5.

Right.

And I think, generally, feelings that the great majority of our portfolio would fit in to the top-quality assets security group. the assets that we're selling represents just a very minor part of our portfolio especially when you look at the EBITDA range. I think we would feel comfortable that the bulk of our portfolio should be valued in that 6.5 to 7.5 cap rate range that I mentioned. That's what I would sell for today. The 340 to 350 replacement cost number is what it would cost to rebuild that portfolio at current pricing. So those are slightly different numbers, and that's why -- I'm sure when you asking that number in part because the delta seemed to be a bit big.

That's right.

in that situation.

That's right. Okay. Finally, what do you see as your recurring CapEx number for this year? Are you still in that 310, 325 sort of range?

I'd say long term we would still expect that recurring CapEx should be about 5% of revenues. This year is going to be a little bit higher, and I would say roughly 50% of the capital that we projected to spend is going to turn out to be in maintenance CapEx.

I'm sorry? 50%?

50% of that overall number.

Okay. Thanks, guys. I appreciate it.

We'll go next to David Loeb at Baird.

Just a follow up on the cap rate question. As you look at acquisitions, is it the same kind of trends that you just described? And can you talk little about cap rates in Europe, Asia, Latin America?

Certainly on the properties that we would be trying to acquire, it generally follows the same trends that I described. I think as you look at Europe, you would find that cap rates there has traditionally been a bit lower about 100 basis points lower than where they have been in the U.S. And as best as we can tell that still stands -- seems to be the case. As you move outside of the U.S. and Europe and look to some of the other environments, you would typically see higher cap rates, but they will vary considerably based upon the volatility versus stability of the particular market that you are investing in.

As you look in Asia and Latin America, are you considering a fund structure, or are you looking at more of a straight JV?

In terms of investing outside the U.S. in either Asia or Latin America, we would be looking to invest in the form of a JV. We have been very happy and pleased with the way our European effort has progressed. As I mentioned, we have invested more than a billion in Euro in Europe in the last two years, that represents slightly in excess of 2/3 of the overall capital that we expect to invest in our first fund. By using the JV, as many of you may remember, we not only used -- typically use local country debt, which I think tends to limit some of our exposure to currency issues, but more importantly, we get the opportunity to earn asset management fees and a promote within the overall structure of the venture, because we're typically using sources of capital that have lower return expectations than we do.

So especially in these international markets, I think we find that approaching these from a JV perspective makes a lot of sense, and it allows us to increase our return, and frankly because we can buy more assets with less of our capital. It also allows us to diversify a bit as we invest in foreign markets.

So if I'm hearing you right, you are talking about a discretionary fund type of structure line of investors that you have control of the timing and the investment decisions?

It will depend upon the jurisdiction. Our efforts in these areas are relatively preliminary. A lot will depend on whether we end up with multiple investors which would be the fund approach that you were describing, David, or it's also possible and we would be very open to this is that we might pursue an approach where we would have one or two or three signature investors. People of a club transaction. Not surprisingly if you have a smaller investor group then you are probably not going to end up with discretion in that format, but you will be playing a leading role in terms of deciding what the venture buys.

Great. Thanks.

We'll go next to William Truelove at UBS.

Hi, guys. Just a couple of maintenance questions. Did you guys say how much CapEx you anticipated spending this year?

[ inaudible ]. About $650 million.

And of that, half of it is going to be maintenance, right?

Correct.

Okay. And this is just sort of an accounting question, if you guys are anticipating selling assets in the first half of the year, but I noticed on your balance sheet, you don't have any assets held for sale listed. Is that -- how does that work? I'm just ...

You know, I'm going to turn that question over to our CFO. [inaudible] are trying to describe that for you. Larry, would you explain that everybody.

Our policy as we explained very detailed in our 10-K is that we have to have a signed contract and capital at risk, money at risk, by the buyer before that asset goes in to held for sale. What you see last year in that $96 million number is we had several properties under contract where the buyer had gone hard from the contract, so there was money at risk. and they were classified as held for sale.

Okay.

As of the end of the year, there weren't any of the sales in that position.

Great. Thanks so much.

We'll go next to Smedes Rose at CBW.

Hi, good morning.

Good morning.

I'm curious your European joint venture, what is the debt on that now? And what is your, I guess effective pro forma interest in the JV at this point?

We have right now about 685 million Euros of debt on that joint venture. The average leverage ratio is probably somewhere around 60, 62%. We own a third of the venture as a limited -- in our limited partner position before taking into account any of the benefits we would receive from our promote.

Okay. And you have slightly adjusted the way that you show your EBITDA, and that's essentially adding back a full third of the EBITDA from the venture? Is that more or less right versus just whatever your net income was previously?

That's correct. Before, what we used to show would be the cash that we would distribute from the venture. One of the things we have found is we have begun to operate in Europe is that generally in the context of how the venture is run and dealing with some of the restrictions you run in to on distributing cash in foreign environment, it just is a lot more logical to leave the cash over there and then use that for subsequent reinvestment needs either for new properties or for CapEx. Consequently, we have not distributed as much cash as we frankly earned in the markets. So as we looked at that and looked at how others were addressing EBITDA, we felt that the change that we were making was appropriate.

Okay. Great. Where in the income statement -- where are the insurance proceeds included?

Go ahead, Larry.

Yes. In the expense side, it's the gain on the insurance settlement.

Never mind. Okay. I guess that would be it, right? Okay.

It's the credit on the expense side, it's accounting gimmickry and the detail of that is on page 9.

All right. Thank you.

Go next to Joseph Greff at Bear Stearns.

Good morning, guys. Question back on the CapEx flow rate. Can you break that out by quarter? And [inaudible] renovations will be a little bit heavier [under 1-Q]

We don't have a quarterly breakout right now. The impact will be larger in the first quarter. But I think we're probably guessing somewhere around 125 to 150 million in the first quarter. But, it will be generally strong throughout the entire year. Part of the point we were making relative to the impact being greater in the first quarter is really the year-over-year delta. One of the things that we ran into in the fourth quarter, which I think did have an impact on our occupancy to some degree was the fact in '06 we have spent about $140 million in CapEx in the fourth quarter, and in '07 we spent about $250 million.

Well, as we look at the displacement that's coming from some of the capital plans that we have for the first quarter, we're seeing that our displacement in the first quarter is going to be three to four times more than what it was in '07. So the level of CapEx, I'm not certain in the first quarter overall is going to be that different from the rest of the year, some of that will just tie to the actual -- the timing of when projects are completed, but the impact of the capital on our operations because it is a big range rooms redo project or it's some larger meeting space renovations, will be greater than what we would have experienced in 2007.

Thank you.

We'll go next to Joshua Attie at Citi.

Can you talk about why you feel comfortable that you could hold the margin decline to only 25 basis points that's the low ends of your guidance, maybe in the context of -- you only did 50 basis points on a 5 to 6% RevPAR gain in the fourth quarter.

Josh, that's a good question, and frankly, it's an issue that we spent a fair amount of time thinking about in trying to decide where to guide you for the year. Because I think -- you are right from the standpoint in a normal environment, if you were to be -- not only talk in terms of the midpoint of the guidance just to make the conversation simpler. If you were to look at 3% RevPAR, you would probably say generally that -- you wouldn't expect flat margins at 3% RevPAR.

The reason why we think that that's achievable is because having watched some of the weakness developed at the end of the fourth quarter, we were fairly proactive in circling back with our operators and encouraging the development to contingency plans at really at the end of last year. In certain weak market, say Chicago, Philadelphia, Orange County, and a couple of others, we have already implemented the contingency plans or the first step in some of the contingency plans that have been developed for the hotels.

As a result of that, while the normal flow-through that you would expect would probably guide you to think that the margin performance would be worse than we've indicate. Our sense is because of the efforts that we'll be making at the properties, and because we're making them quickly, we should be able to restrain some of the margins -- the effect of lower RevPAR and lower overall revenues on our margins.

Okay. Thank you.

Ladies and gentlemen this will conclude today's question-and-answer session. I would like to turn the conference back over to Mr. Walter for any additional or closing remarks.

Great. Thank you very much for joining us on this call today. We appreciated the opportunity to discuss our results and our outlook with you. We look forward to providing you with much more insights since 2008 is playing in our first quarter call in late April. Thank again. Have a good day.

This does conclude today's presentation. We thank everyone for their participation. You may disconnect your lines at anytime.