Host Hotels & Resorts Inc (HST) 2008 Q2 法說會逐字稿

Good day, welcome to the Host Hotels & Resorts second quarter 2008 conference call. As a reminder, today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Executive Vice President, Mr. Greg Larson. Please go ahead, sir.

Thank you. Welcome to the Host Hotels & Resorts second 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. 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 reconciliations 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 second quarter results and then will describe the current operating environment as well as the company's outlook for the remainder of 2008. Larry Harvey, our Chief Financial Officer, will then provide greater detail on our second quarter results, including regional and market performance. Following their remarks, we will be available to respond to your questions. Now, here is Ed.

Thanks, Greg, good morning everyone. Given the challenging economic trends we have seen recently, we are pleased to report solid results for the quarter that are generally consistent with our expectations. Our comparable hotel REVPAR for the quarter increased 1.7%, driven by a 2.6% increase in average room rate, partially offset by a decline in occupancy of 0.7 percentage points. Food and beverage revenues at our comparable hotels increased 2.5%, with significant growth again coming from the Orlando World Center Marriott. Overall, comparable revenues increased by 1.9% for the quarter.

Despite subinflationary REVPAR growth, comparable hotel adjusted operating profit margins decreased by just 20 basis points for the quarter. The adjusted EBITDA post Host Hotels & Resorts LP for the quarter was $419 million, which represented a decrease of $3 million for the second quarter of 2007. Our FFO per diluted share for the second quarter was $0.56, that was at the high end of our guidance and exceeded the consensus estimates by $0.01. On a year to date basis, comparable REVPAR increased 2% and F&B revenues were up 3.1%. Year to date, adjusted EBITDA was $680 million. That matched last year's total, and FFO was $0.89 per share.

In analyzing what was happening in our business over the last three periods and especially the last 6 to 8 weeks, it has become clear that the various pressure points in the overall economy are combining to depress lodging demand. When we last spoke in April, we were not seeing any acceleration of weakness in our transient and leisure business, nor in our group or group bookings or group cancellation rates. However, since May, we are seeing increased weakness in both our group and transient segments. Although we clearly are still being impacted by our considerable construction program in certain markets, even after adjusting for the impact of that disruption, we experienced weaker demand in the quarter, which resulted in a reduction in our occupancy rate of about 70 basis points to 76.5%.

In Q2, the decline was generally attributable to weakness in our transient segment as we experienced a reduction in room nights of over 3.5%, which was only partially offset by a increase in average rate of over 1.5%. The decrease in demand was most prominent in our higher-rated corporate and special corporate segments due to the slowdown in business travel in many of our markets, which accelerated in May and June, dropping 8% overall for the quarter. We were able to offset only some of the decline with lower rated business. Tracking the trends we saw earlier in the year, leisure demands continued to be soft. Given the various pressures that consumers face, we expect our leisure business will further weaken throughout the remainder of the year, we also anticipate that corporate travel will continue to decline as businesses seek to cut costs to further limit profit deterioration.

Overall, our group business performed well compared to last year as group room nights were up 2% for the quarter and the average rate increased by a solid 4%. The net result was a 6% increase in group revenues. However, this did fall slightly short of our forecast as short-term group pick up in the quarter failed to meet expectations, as we look out over the remainder of the year, our booking take from a rooms perspective has turned slightly negative, especially in the third quarter. This represents a combination of reduced bookings over the last 90 days and an assessment that attendance levels at booked events will likely decline. We have also seen a slight increase in cancellations and remain concerned that this trend could accelerate. Group revenues to the second half of the year are still riding slightly ahead of last year's pace. We are encouraging our operators to be very realistic in assessing group attendance, as we intend to be very proactive in filling these rooms with alternate customers.

On the strategic front, we are pleased to announce that early in the second quarter, our European joint venture purchased a 270-room Crown Plaza Hotel Amsterdam City Center 72 million Euros. The hotel is in a prime location in the center of the city close to the train station and to the central district shops, museums and restaurants. The acquisition was financed through the loan of approximately 53 million Euros at an interest rate under 6%. The loan provides the joint venture with the option to borrow up to 12 million Euros in additional proceeds to fund renovations, which we expect will total approximately 17 million Euros. This brings the joint venture's investment to over 1.1 billion euros in 11 properties, representing over 3500 rooms.

On the domestic front, we completed the sale of the Sheraton Suites Tampa Airport Hotel for $23.5 million and expect to complete the sale of our Sacramento hotel in the third quarter. We continue to work on additional asset sales, which could total as much as $150 million for the year. However, the current state of the credit markets continues to post challenges for buyers in obtaining financing and therefore make it difficult to predict the likelihood or timing of dispositions. While we are continuing to evaluate potential domestic acquisitions, we are not optimistic that we will identify transactions that satisfy our return targets, so we would guide you to not include any acquisitions in your analysis for 2008. While we intend to be opportunistic if the marketplace evolves. Looking at our capital investment program, we are very pleased with the progress we are making and the impact of our results. Our new ballroom at the Orlando World Center Marriott is an extraordinary success, and has vaulted that property into market leadership position. Bookings at this hotel have increased over 17% in 2008, and by an additional 5% in 2009.

In Mid-June we completed the construction of the new 26,000 square foot Atrium Ballroom at our Orlando Marriott Marquee Hotel, which concludes the property's $80 million-plus repositioning project. In addition to the ballrooms, the hotel has 9600 square feet of new break out space, and 3 new reconcepted food and beverage outlets. We already seeing positive response to the repositioning, as booking pace is up by almost 10% for the remainder of the year, and more than 13% in 2009. Finally, we have added 8300 square feet of meeting space to our San Francisco Marriott Hotel, in connection with the lobby and F&B repositioning of that asset. The booking pace for this hotel is up over 20% for the remainder of the year, and 25% for the first half of 2009. For the quarter, we completed approximately $160 million of projects, building our year to date total to $310 million.

We continue to expect to spend approximately 640 to $650 million in total for the year. Finally, we repurchased 2.2 million shares of our common stock for approximately $37 million during the quarter. On a year to date basis, share repurchases totaled 4.35 million shares for approximately $72 million. Our stock represents an incredible value given we are currently trading at a per key valuation of approximately $180,000, versus a replacement cost valuation of approximately $350,000 per key, and at an EBITDA multiple of about 8.25 based on the midpoint of the earnings guidance we are about to discuss. As we have said previously, additionally stock repurchases for the remainder of the year, will depend on the conditions of the equity debt and disposition markets as well as other opportunities we may have to invest capital.

Now let me spend time on outlook for the remainder of 2008. As we have already discussed, we have seen demand weaken in both the group and transient segments of our business. The combination of these trends and the continued deterioration in the economy have altered our outlook for the second half of the year. While we had anticipated a significant slowdown in economic growth for 2008, due to housing market woes, the financial credit crisis and rising energy crisis, we initially anticipated that the majority of the decline will be captured in the first half of the year, before moderating and paving the way for a gradual second half recovery, helped in part by external events such as the economic stimulus package, and continued reduction of interest rates by the Fed. Unfortunately, as we are all well aware, the issues confronting the credit markets have not abated and it now appears that we are caught in a prolonged slowdown that will last through the end of 2008 and likely into 2009.

This January, consensus forecast for a second half of the year for GDP consumer spending and business investment, all key drivers of lodging demand, have been reduced by approximately 50%. And the out look for 2009 has deteriorated as well. In addition, corporate profits were previously expected to increase in the second half of the year, but are now expected to decline. Price of oil has reached an all time high, and spikes in the price of commodities to put increase pressure on consumers, and we've also begun to witness a decrease in airline capacity due to rising fuel costs, which will likely affect lodging demand, especially with respect to the leisure business. These and other cost pressures are forcing both individuals and businesses to restrain their travel spending.

As a result of these trying economic fundamentals we are revising our estimates downward for the remain other the year, we generally expect that the Q2 of the year will reflect negative REVPAR growth which results in a estimate between minus one to 1%. This weaker operating environment, combined with higher inflationary cost pressures, we expect hotel adjusted profit margins to decline between 75 and 125 basis points for the comparable Hotels. Based on these assumptions, we are reducing guidance for FFO per diluted share for the year to $1.75 to $1.85 and adjusted EBITDA of Host LT is expected to be between $1.375 billion and $1.425 billion. We continue to expect to declare a fixed $0.20 per share common dividend each quarter, and based on our revised guidance, expect a special dividend, paid in January, will be in the range to $0.15 to $0.20 per share, resulting in a full year dividend of $0.95 to $1.

In summary, we are pleased with our second quarter results, but expect the remainder of the year to be challenging. We are intensely focused in our asset management activities, with a clear goal of containing costs as demand weakens. Our investment approach remains highly disciplined with the goal of maximizing our returns on every dollar invested and with the intent of enhancing our existing assets and exploring our options international markets, while domestic pricing remains unattractive.

Thank you and now let me turn the call over to Larry Harvey, our Chief Financial Officer.

Thank you, Ed. Let me start by giving you some detail on our comparable hotel REVPAR results. Looking at the portfolio based on property types, resort convention hotels performed the best during the second quarter with REVPAR growth of 2%, Led by strong growth for the Orlando world center Marriott. REVPAR for our urban hotels increased 1.7%, led by our Boston properties, while REVPAR at or airport hotels by increased by 1.8%, and our suburban hotel REVPAR increased by 1.2%.

Turning to the regional results, the New England region continued to outperform, with REVPAR growth of 6%, as our Boston hotels performed exceptionally well due to very strong group bookings at Citywide, in particular, REVPAR growth for the Hyatt Cambridge and Sheraton Boston exceeded 13% and 11%, respectively. As we previously discussed, the New England region and Boston in particular will have a weaker third quarter, due to fewer citywides and softening leisure demand. The Florida region also had a had a strong quarter, with REVPAR growth of 4.4%. Driven by the again, Orlando World Center Marriott. The new exhibit hall and ballroom space that opened in the fourth quarter of last year continues to drive both group bookings and rates. The Florida region will have a weaker second half of the year due to a significant amount of business disruption, with 3 properties under rooms renovations and the start of construction for ballroom additions at the Harvard Beach Marriott and the Ritz Carlton Amelia Island.

Our DC Metro region had REVPAR growth of 1.8%, rebounding from a weak first quarter because of four hotels under renovations, downtown hotels out performed, particularly the JW Marriott and the Hyatt Regency on Capital Hill, each with REVPAR growth in excess of 7%. Our suburban DC properties underperformed because of weaker transient business and lower short-term group demand. We expect the rest of the year to play out that way, with the downtown hotels generally continuing to perform well, although the Hyatt Regency on Capital Hill will be under renovation and the suburban hotels continue to struggle.

Overall, REVPAR growth for our Pacific region was 0.5% for the quarter, however, results varied by market. The Los Angeles market continued at strong performance with REVPAR up over 8%, due to excellent transient and group demand. The San Diego market also had a good quarter with REVPAR up 3%, driven by the San Diego Marina Marriott. On the other hand, REVPAR for our Hawaiian properties declined 5% because of lower leisure transient demand. We expect that trend to continue into the second half of the year due to rising fuel costs and lower airline lift in Hawaii.

As anticipated, the San Francisco market was weaker in the second quarter, due to lower group demand in the San Francisco [Muscony]. Overall, we expect the San Francisco market to rebound strongly in the third quarter, driven by increased citywides and favorable year-over-year comparisons as two hotels were under renovation in the third quarter of 2007. We also expect the Seattle market to have a good quarter while the Los Angeles and San Diego markets will have a weaker third quarter due to softening transient demand and lower group demand.

The mid-Atlantic region had a interesting quarter with REVPAR growth of just 0.2%. REVPAR growth for our New York properties was limited to 1.3%, as the renovations of the New York Marriott downtown, and the W New York affected the second quarter. Excluding those 2 hotels, REVPAR growth would have been 5.8% for the quarter. We expect the third quarter to be better because of strong group booking needs during the times, solid international leisure transient business, although the W New York will still be under renovation in the third quarter. REVPAR for the Philadelphia properties declined 3.6%, due to fewer citywides and weaker new bookings. The Philadelphia market will continue to struggle due to fewer citywides and group bookings and a significant decrease in leisure demands because of the departure of the King Tut exhibit, which drove a substantial amount of demand in 2007.

As expected, Atlanta had a weak second quarter, as REVPAR decreased 5.6%. The core performance was driven by weak group bookings, lower transient demand, and a very disruptive rooms renovation at the Ritz Carlton Buckhead. While we anticipated that Atlanta would rebound in the third quarter, at this point, we expect it to continue to perform poorly as the group and transient booking pace is lagging and the Ritz Carlton Buckhead rooms renovations continues through the third quarter.

The south central region also performed poorly in the second quarter, with REVPAR declining 0.7%. Performance varied by market. Houston had a very good quarter, with REVPAR up nearly 6% due to group bookings, the market was led by the JW Marriott, which had REVPAR growth in excess of 14%. Results would have been better, but the St. Regis Houston had a rooms renovation during the quarter, results in San Antonio were particularly weak as REVPAR failed by over 6%, primarily due to the opening of the Grand Hyatt and renovations at the San Antonio River Walk Marriott. We expect the San Antonio and Houston markets to perform poorly in the third quarter, due to the continued renovations and a weaker group booking pace in Houston. One hotel in this region that I should mention that is not in our comparable Hotel set is the New Orleans Marriott. We continue to see improved signs of life in this market as REVPAR increased over 30% for the quarter. We expect the property will continue to perform exceptionally well in the third quarter.

Year to date, the international region has been our best with REVPAR growth of 22.6% in U.S. dollars. Primarily driven by the weak dollar and strong growth in our Chilean assets and the Calgary and Toronto Marriotts. Followed by the New England region with REVPAR growth of 7.2%, the more central region with a REVPAR decline of 4%, and the Atlanta region with a decline of 2.4% have been our weakest performers. Our European joint venture had a weaker quarter with REVPAR calculated in euros increasing by 1.5% as several properties were undergoing renovations, if calculated in U.S. dollars REVPAR was up by 18%. On a year to date basis, REVPAR calculated in euros increased 3.1% and increased 18.7% in U.S. dollars. The Westin Palace Madrid, Renaissance Brussels and the Marriott Brussels outperformed in both the quarter and year to date periods.

For the quarter, adjusted operating profit margins for the comp Hotels decreased by 20 basis points, which represents solid performance given that REVPAR growth was below inflation. Food and beverage flow through was excellent due to the growth in banquet and audio visual business, resulting in a 60 basis point improvement in comparable hotel adjusted food and beverage margins. Wages and benefits increased by roughly 3%. And unallocated cost grew by 4.3% for the quarter. As anticipated, real estate taxes increased by 7.9%, as Assessed valuations continue to catch up with increases in property values. Utility costs increased 7% for the quarter. We expect natural gas and other energy costs to remain high throughout the rest of the year.

On a positive note, property insurance costs decreased nearly 20%, reflecting the successful renewal of our property insurance plan. Year to date, our comparable adjusted operating profit margins had decreased by 30 basis points. For the rest of the year, we expect margins to come under pressure. In addition to the expected increase in utility costs, we expect margins to be affected by a decline in food and beverage revenues, particularly in the more profitable business such as banquet and audio-visual, and an overall increase in food costs. Every hotel we own has implemented some level of contingency plan and roughly 20% of our hotels are at the highest level. We are proactively working with our managers to right size the work force to the amount of business being generated and have implemented a series of additional cost cutting measures such as eliminating discretionary spending, not filling vacant positions, modifying restaurant outlet operation hours, and delaying implementation of grand standards.

As we discussed on the first quarter earnings call, we entered in to a $165 million term loan that was an add on to our $600 million credit facility. Subsequent to the earnings call, we closed on an additional $45 million under the term loan, with two lenders outside of our bank group, increasing the overall size of the loan to $210 million. The loan bears interest at LIBOR plus 175 basis points. The proceeds from the term loan were used to repay the $100 million draw on the credit facility that was made after the end of the first quarter, and to supplement our cash position. In addition, during the quarter, we closed on the refinancing of the $208 million mortgage on the Orlando World Center Marriott. This loan was our only refinancing obligation in 2008. The new loan is a nonamortizing $300 million mortgage that bears interest at LIBOR plus 350 basis points. The loan matures in July 2011, we have the option to extend for two one year periods upon the satisfaction of a interest coverage test. The excess loan proceeds of $90 million will be used for general corporate purposes. We finished the quarter with $505 million of cash and we currently have $600 million of available capacity on the credit facility. Due to the level of disruption in the credit markets, we are maintaining additional cash on hand for working capital purposes.

Turning to our third quarter guidance, we expect comparable hotel REVPAR to be down 2% to 4% for the quarter, due to lower group bookings less short-term group pick up and softer leisure demand. As well as a difficult year-over-year comparison since the third quarter of 2007 was our strongest quarter of the year with REVPAR growth of 7.2%. We are forecasting an FFO per diluted share to be in the range of $0.27 to $0.29 per share for the third quarter. This completes our prepared remarks. We are now interested in answering any questions you may have.

Thank you, the question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). We'll take our first question from Celeste Brown at Morgan Stanley.

Good morning.

And how are you doing?

Good. Just first on your guidance, maybe I'm understanding it wrong, looks like you're implying a potential for REVPAR to be positive in the fourth quarter, is that because of group business or is that not what's implied in the fourth quarter number?

I guess it depends a little bit upon what your perspective is on what happens in the Q3. How you get to the plus one scenario. I would say overall, we expect REVPAR to be negative in the second half of the year. We think there are opportunities for the fourth quarter to be better than the third quarter, which I think you correctly surmised. Those would come from a combination of the fact that the group bookings for the fourth quarter are stronger, We also had much more construction disruption in 2007, in the fourth quarter, and so we are optimistic that having more of those rooms available for customers will ultimately result in slightly better occupancy and consequently better REVPAR in Q4. That's going to depend ultimately due to trends we are seeing from a standpoint of weaker corporate business and slower group pick up, do they accelerate further into the fourth quarter or do we sort of, having stepped down a bit in the May/June period do we remain at that level for the rest of the year.

Given the contingency plans you implemented at your hotels, what kind of REVPAR do you need to maintain your margins?

I think at this point we probably assume that we need to be in the mid 3 range. Probably about 3.5 in order to maintain the margin.

Thank you.

Next question from Chris Woronka at Deutsche Bank.

Good morning, guys. Could you maybe give us some guidance on how much of your group bookings for full year '08 or first half '08 were booked in prior years?

Chris, could you repeat that for some reason you're breaking up as we try to hear that?

Could you maybe give us a little bit of guidance on what percentage of your group bookings were full year '08 or just first half '08 were booked in prior years?

I would say if you look at the year, roughly about three quarters of our group room nights were on the books when we started the year. If you look at what is left for the year, a slightly more than 90% of our full year group bookings have either occurred or are on the books.

Okay. That's helpful. Also, in terms of thinking about the contingency plans and the cost cuts, what quarter do you think, where is the kind of the low hanging fruit? Have you gotten that out of the way in the second quarter? How harder does it get to be to continue to cut costs without significantly impacting the revenue side?

Each of these contingency plans happen on the property by property basis. They are always tied to the level of business that you're seeing at the individual hotel. So things like closing F&B outlets and adjusting other levels of staffing will be implemented in a more severe form if you begin to see occupancy decline at a more severe rate. Overall, I wouldn't view, by any means, that the full impact of the contingency plan has already been felt and implemented, the way these tend to work, the worse it gets the more we implement. I think we captured that in the market guidance that we have given you. But I don't think we fully exhausted the benefits from those plans.

Okay, great. Can I just clarify the first data point you gave us, You said 90% of your -- room nights that were booked in prior years for '08 are already happened?

No, what I was trying to say is that at this point in the year, 90% of your group room nights have occurred because we are half way through the year, or are on the books. 10% of our group business, less than that, it's closer to 8%, of our group business that the full year remains to be booked.

That's helpful, thanks.

We'll go next to Felicia Hendricks at Lehman Brothers.

Hi, good morning guys. Wanted to talk about your special dividend you reduced, which is understandable given the state of things now. Wondering though, if we should be concerned at all about any risk to your regular dividend, and wondering if you could help us understand at what REVPAR levels do you start reassessing your dividend goals?

I would say as it relates to our normal $0.20 per quarter dividend, you shouldn't be worried about that at all. Number one we have taxable income, we expect taxable income to be well in excess of that for this year. Consequently, we would be required to distribute that, in fact, we are capturing that taxable income in the special dividend, and looking forward, I think you would have to see a very draconian decline in REVPAR and in EBITDA before we would reconsider the dividend. As we discussed in the past, the structure that we created a few years ago when we reinstituted our dividends was designed to put us in a position where we could give investors a fair degree of comfort that we would be paying the $0.20 per quarter dividend going forward, and I don't see a scenario today that would suggest we wouldn't be able to maintain that.

Great. Then just wondering if you could give us a overview. Obviously, they've deteriorated, but where you're seeing cap rates now?

That continues to be one of the most challenging questions in our business because it's difficult to actually get comparables that one can evaluate that would confirm your sense that pricing should be going down a bit. I think everybody was talking at the NYU conference, about the sale that happened out in California by Sunstone, and clearly the multiple on that was quite strong. As a indication of where high profile top quality properties would sell, as an owner, it was somewhat comforting to see that valuations would be at that level. Having said that, knowing what's happened in the financial markets, and applying some of that to, and probably also capturing some reduced expectations, so for the next 18 to 24 months as people try to look at what's going to happen, you have to assume that if we would have said and did say a couple of quarters ago, that we thought pricing for the top part of our portfolio, the bulk of our portfolio would probably range between 6.5 to 7.5. We think that those cap rates have modified a bit, and probably think in a range of 7 to 7.5. I probably guess too if you looked at the assets that we are selling, probably have seen a similar 25 to 50 basis points increase in cap rates for those types of assets.

That's really helpful, thank you. A final question on the renovations that you have remaining for this year and even maybe some that you can talk about for next year, can you just walk us through the status of those so we have a better idea of how to model that?

In terms of the timing of the cash flows?

Well in terms of when the timing of the completion of the renovations and where they are?

I mean, spending as much money as we are spending, those are hitting at all various times over the course of the year, the larger ones, Orlando obviously, we talked about we finished at the end of last year, Atlanta just finished. Chicago, which is another big meeting space addition is not due to finish until the middle of next year. That's probably in terms of the big meeting space additions, that's probably the timing for those.

That's helpful. Thanks a lot.

Thanks.

And we'll go to our next question from David Loeb at Baird.

Just to hit the cap rates again, Ed, earlier you talked about valuation in terms of EBITDA multiple replacement costs, it looks like the market is implying a cap rate that's well north of 9, maybe close to 10. What do you think about the difference between that and your current share price and how does that affect your buy back analysis?

David, we would agree with your assessment that if you look at current numbers right now, it would suggest we are being valued at close to a 10 cap. That only would confirm in our minds the opportunity that exists exists in buying our stock, and it's one of the reasons why as we look at our investment program for the year, you heard us indicate we were less optimistic about investing in assets in the US and more optimistic about the prospects of buying stock. Part of what you got there is a dislocation still between where the private market is buying assets and where the public market is valuing companies.

Does that mean you're going to be substantially more aggressive in buy backs or at least considering that?

I wouldn't think, at the end of the day, right now, I think it's hard for anybody to be confident in the overall economic outlook, and so I think that we would still stand by the comment we made, the description that we used for most of this year, with respect to the stock buy back program that we would approach it in a measured way. The events of the way the year have played out frankly confirm the intelligence of that strategy in my mind. I think as we look more broadly at what we trying to do to deal with this environment, we start with being focused on making certain that we are maintaining appropriate levels of liquidity, because while we are in excellent shape right now, and I think done a great job of that, I think that it's incumbent upon all of us right now, series of uncertainty to start by focusing on that. We want to continue to invest in our core portfolio, we think that by continuing to position our assets, we will end up in a scenario where when we ultimately recover, and you know that we will, we want to be in a position to be in a better and stronger competitor than we already are, so that when you go to the next step, which is investing outside your portfolio, you really look at what are the opportunities internationally, what are the opportunities to buy our stock and select intelligently among those alternatives, with recognizing in the case of some of the opportunities to invest internationally we are building business that we think will contribute meaningfully to EBITDA.

One other topic, in your prepared remarks, it sounded like you were seeing some of the impact of reduced air lift. Any thoughts on how big an impact that particular piece is on your third and fourth quarter numbers?

It's hard to isolate that particular issue alone as you look at the Q4, Q3 and Q4 numbers. I say as we assess the likely impact of that, we had the opportunity to look at some analysis that was done that suggested that as you get in to October you are probably looking at a reduction in capacity that's in the 6 to 7 range, it feels like the absolute level of capacity reduction you're going to run in to in the major markets where most of the hotels are will fall short of that, we suspect that the real impact of the travel, the capacity restrictions will not be that heavy on our business oriented hotel. The leisure side is where we are more concerned. It's clear that what the airlines are trying to do with their entire capacity restriction program, is really reduce their reliance on trying to fill planes with lower priced customers, and consequently push rates up by raising their overall average rate. That's clearly hitting at leisure and a lot of the capacity reductions have been targeted at major leisure markets. That would include Orlando and for us, that would include Hawaii. We have anticipated a fairly significant deterioration in Hawaii for the rest of the year. In part because of those capacity reductions.

Okay. Great, thank you.

We'll go next to Jeff Donnelly at Wachovia Securities.

Good morning, Ed. I know you haven't given guidance for 2009. I don't expect you to. There is some speculation in the marketplace. In some degree in the industry that hotels could see 5% or greater decline in REVPAR next year. I'm curious if there are rates of REVPAR growth or decline that strike you personally as improbable, meaning that if you had to guess a wide range today for what the industry could face next year, where would you put the lower bound of REVPAR growth if you have a sense?

Jeff, it's hard to try to do that now. There has been enough changes over the last six to eight weeks in 2008 to project that out to '09 is difficult. What I would say about '09, I don't think this will surprise people. The primarily thing that's going to determine 09 is what's going to happen from a standpoint of GDP growth in the overall health of the economy. That's since the drive watch and demand, that is going to be critical. We are concerned as we look at '09, that the consensus forecast for '09 appeared to have deteriorated since this year. Especially on the business investment side, so that does not make us particularly optimistic about demand growth in the beginning part of '09.

We are also a little bit concerned bout the fact that supply is going to be slightly higher in '09 than '08. The level of supply in 09, which we put in compared to our portfolio, compared to our markets, at slightly more than 2%, is still at or below the long-term average for supply. In the long run it doesn't represent a big problem in the short run, looking at '09, that's not a positive factor. The other side of that though is that we are still seeing fairly decent group bookings for next year. The pace in a room nights perspective is matching up to this time last year, which is good, and the rate is up in the mid 3, 3.5 range, so if we were to project at this minute we would be anticipating that we have higher group revenues next year, than we had this year. Those group bookings represent about half of the overall group room nights that we are going to have for next year. So there is clearly the currents are not overly favorable. Some of the smaller data points like the group bookings are not as bad as you might think. I think we are going to be looking carefully at that, and we will do our best to get better insight into that. It will probably be more satisfying come October.

I guess building on that, where do you think the industry begins to lose pricing power, or at least is no longer able to get positive rate growth. Do you have a sense of where the occupancy level is? Do you have a gut sense of where in the next 12 months the change in the number of I guess sellout nights in the industry, where you tend to get disproportionate profits on a given night?

And as it relates to overall occupancy levels, it seems to me as we went through the last downturn and went through the recovery, it was in, for our portfolio, I can only assess it from that standpoint, what we typically found is that we got much below 72, 73% we would run in to challenges in trying to maintain pricing. We are still above that level at this point but we're obviously getting closer to it. The second part of your question was?

Pertaining to the you had a sense of the change in the sellout nights you are facing.

I don't know I have any good data points on that. The one insight I could throw out relative to that would suggest that that's been holding up is that if we look at where our weakness in actual occupancy turned out to be, it was on the weekend. During the week we continued to maintain the same level of occupancy, that we did last year, weekends is where we seem to be suffering a bit more. I suspect that's where we had more troubles maintaining pricing.

I guess one last question, I know your shares are down 50% in the past year, but some of your peers have seen their prices fall 70 to 80%. I know it's premature, but you hosted a pretty good balance sheet, where does acquisition activity fall in your mind right now and when do you think that will come on the radar screen? Six months? 12 months? Hard to say?

I would tell you consistent with the way I answered David's question, acquisition activity is always on our screen because we are a;ways paying attention to what is available in the market. Having said that, I think is when your stock is at the price where our stock is at, you need to be comfortable there are fairly great returns coming out of a particular individual acquisition, in order to pursue that opposed to buying back stock. I suspect that what we will see as you normally do in a market, is that as we work our way through the next period, the next year and a half, we will ultimately see pricing on the part of sellers become realistic from a buyer's perspective and as the economic outlook changes and the prospects for better growth become apparent, it's easier for a purchaser to justify an acquisition. It's going to take a little while before that happens. I suspect it will certainly take sometime next year. As it relates to other broader corporate acquisitions, which is I think part of what you were hinting at with your question, that's something we have not focused on. We have done a couple of larger acquisitions in our history, but the way we generally built the company is one asset in time I wouldn't see that as a priority for us.

Thank you.

We'll take our next question from Ned Overton at Morgan Keegan.

My questions have been addressed, thank you.

We'll go next to William Truelove at UBS.

Good morning.

Good morning.

Getting back to cap rates and asset valuations where your stock is, if you're saying that generally you get 7 to 7.5% cap rate. You think that's correct, generally that's the correct cap rate given the current financing environment?

Well, no. I'm not saying that necessarily represents the right cap rate for us as the buyer, I'm giving you a feel for is based upon what we're seeing, when we try to estimate where transactions are happening, that's probably the best estimation we can come up with for value given the limited amount of data that's out there.

For your portfolio specifically right?

Yes.

So then if there is such a differential, are you moving more aggressively in finding additional assets to sell to the more aggressive in share repurchases, since you could use more money faster that way than buying, you said you didn't want to buy a large portfolio of assets, I would agree with you, that's risky, couldn't you sell more aggressively sell your assets to repurchase stock?

That represents an intriguing opportunity for us. We have been in the market attempting to sell assets on a consistent basis. We have been an active seller of assets over the last five years, we seen a slowdown in the ability of people to complete transactions it goes back to last fall. As I mentioned in our prepared remarks, we are hoping there is $150 million plus or minus worth of transactions we are working on, I hope that all of that closes. Certainly redeploying those proceeds and just buying back stock would be an attractive option. Especially because based on where we are currently priced we would be buying our own company at a better multiple than where we would be selling, but it's just hard to get them done right now. I think that a lot of the buyer -- while there certainly are interested buyers in the market and people are actively working those transactions, the ability to pull together their debt and equity financing in a turbulent environment has proven very complex.

Okay, fair to say you're increasing activity on the sales side it's just difficult getting closed.

We are continuing to work hard at getting sales done and then, we hope that we are in a position to report additional sales.

The one last question, getting thoughts on margins, going back to a term we haven't heard since the 90s. Talk about your REVPAR to EBITDA multiplier effect. Where it used to be like a two times, so for every 100 basis point change in REVPAR there is a 200 basis point change or 2% change in EBITDA, given the kind of contingency plans that you see in place by your operators, is there a multiplier effect that you feel might be a reasonable one, is it two times,is it 1.5, what do you think is a reasonable way of thinking about going forward approach given the contingency plans --

I know that in the past the industry has defaulted to those rule of thumbs in order to make things a little bit easier to assess. The tricky thing of course is that especially with a portfolio like ours it becomes more complex than just what REVPAR is because food and beverage is a big part of our overall profitability and a big part of our overall revenue streams. There is a lot going on within it. Somewhere in that two times area, maybe a little bit more, is probably not a bad rough measure, if that's what you chose to use. But I think typically the way we assess it is more to look at what is happening with margins, make some assumptions with respect to margins, and let that carry out, because there are so many moving parts right now in the overall machine, it's the safer way to try to look at it.

Thanks so much.

Next question from Patrick Scholes at FBR Capital Markets.

Good morning, with your third quarter REVPAR expected to decline between 2 and 4%, implied fourth quarter basically flat range, what are your expectations for your year-over-year change in incentive management fee payouts for those quarters?

I would say overall, if you looked at what we expect to see happening in incentive management fees for the year, that we are expecting them to be relatively flat. For the full year. Probably means they'd go down marginally in the second half of the year.

Okay. Thank you. Then just touching on what your target leverage ratio is it still around approximately 3.5, four times? .

Leverage meaning?

Net debt to EBITDA.

I think we probably, we would be comfortable being at a higher level of leverage than that. I think we probably would be comfortable -- we tend to look more at coverage frankly than we do at leverage. I think we generally this year in the high threes in terms of coverage EBITDA interest coverage. We would be comfortable being at 3, maybe slightly below.

One last question. Looks like in international you did 22% year-over-year REVPAR in same store REVPAR, I guess excluding foreign exchange, what would that have been?

Roughly half. Around 11%.

Okay, thank you, that's it.

We'll take our next question from Smedes Rose at KBW.

Hi, thanks. You answered most of our questions, I wanted to ask you in your guidance for EBITDA the distribution received from equity invested, seems like it's going down, is that a reflection from your European joint venture, and does that include the contribution from the Amsterdam hotel bought by that JV and I guess in more color on why that would be going down with the inclusion of that hotel now?

Hold on one second. Equity distributions, we are taking in adjustment in the forecast as well. You're looking at the full year?

Yes, looking at your full year guidance and the change from the guidance as of the Q1, looks like it's about a $5 million decline. And is that mostly the European assets, contribution to you guys?

It's timing on your Asian investments. We now pushed those back so it's a combination of both.

Your underlying assumptions for the European assets are in line where where they were or is it fair to say that international properties are starting see some of the same fall off as U.S. properties?

We've seen a, I would say Larry described when he went through what was going on in REVPAR in Europe, the phase in the second quarter there was slower than it had been in the Q1. We are seeing some decline in Europe compared to where the budgets were. Compared to budgets is not as extreme as what we have seen in the States. I think you saw that as being reflected there.

The other thing I wanted to ask you, have you seen when you look at the supply growth in your markets, presumably things scheduled to come on line in '09 are out of the ground and are going to open, but are you seeing or hearing of any kind of cancellations or things getting stretched out due to lack of financing further out?

Clearly seeing that, even as I look at updated numbers to what was going to happen this year, I noticed the other day that the expectation for completions in '08 is following the pattern we seen over the last three years, where as you work your way through the quarter, whatever the starting point is, seems to drop by a quarter, to 35 basis points, a quarter over a percent to 35 basis points off by the time you get towards the end of the year. So I'm seeing the number for '08 decline. I think that some of that sliding in to '09. At the same time I think you're seeing assumptions with respect to the '09 completions become extended. As you look out to '10, we see based upon what is under construction, at this point in time, which is the only thing I think that you can really count on being delivered, we see a material drop off in supply in 2010, our estimate now is probably be roughly 1% and wouldn't surprise me given the overall out look if that didn't further, so I think that kind of -- as you think about fundamentals for our industry and you look out past 2009, that clearly is one of the plus points. Frankly thinking about the fact that the '09 supply is slightly over 2 for our markets would end up being the high point in mid-cycle, is as I mentioned earlier, quite a plus in thinking about the long-term health of the industry.

Thanks. I guess on the final point, such as it is, your airport hotels, have the airlines as they take capacity out,, are they talking about reducing contract business at those hotels, I know it's not a huge part of your overall business, but less flights means less crews, less contract business? Part of all airport business, right?

I'm sure if they are reducing their fight capacity by 6 or 7%, we are going to feel some effect from that in our contract business. I would remind everybody that contract business only represents 3 or 4% of the overall business mix. It may be an issue at a hotel or two. But it shouldn't be an issue for us overall.

Thank you.

That will conclude the question and answer session. I would like to turn the call over to Mr. Walter for any additional or closing remarks.

Thank you for joining us on this call today. We appreciate the opportunity to discuss our second quarter results and outlook with you, we look forward to providing you with insights to what is proving to be a ever interesting 2008 during our third quarter call in October. Have a great remainder of your week.

Ladies and gentlemen, this does conclude today's presentation, we thank everyone for their participation. You may disconnect your lines at any time.