Host Hotels & Resorts Inc (HST) 2009 Q2 法說會逐字稿

Good day, and welcome to this Host Hotels & Resorts, Incorporated, second quarter 2009 earnings conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the 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, 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 reconciliations to the most directly comparable GAAP information, in today's earnings press release, in 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 2009. 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. And now, here is Ed.

Thanks, Greg. Good morning, everyone. As will be evident in the numbers I'm about to discuss, it is clear that we continue to face a very challenging operating environment for the lodging industry. Despite the negative impact the economy has had on our business, we are pleased that we were able to accomplish several significant transactions this quarter that strengthen our position as we continue through this cycle; and we are seeing a few subtle signs that market conditions are stabilizing. But before I get to that, let me first talk about our results for the quarter. Our comparable hotel RevPAR for the second quarter decreased 24.9% as a result of a 14.6% decrease in average rate and a decline in occupancy of 9.1 percentage points.

Our average rate was $175, and our average occupancy was 67%. Food and beverage revenues decreased 25.4% for the quarter, and comparable hotel adjusted operating profit margins decreased 560 basis points. Adjusted EBITDA was $256 million. Our FFO per diluted share was $0.12 for the quarter, which included a reduction of $0.15 per share due to non-cash impairment and other charges. Excluding these charges, our FFO per diluted share exceeded the consensus estimate by $0.03. On a year-to-date basis, comparable RevPAR decreased 22.7%, and margins declined 500 basis points. Year to date adjusted EBITDA was $430 million. Year to date FFO per diluted share was $0.22, including a reduction of $0.24 a share primarily due to year to date non-cash impairment and interest charges. In general, if you look at how the quarter played out compared to what we expected, occupancy was slightly better than we had an anticipated. The decline in average rates was worse than we hoped, which lead to a larger RevPAR decline than we had projected.

For the quarter, overall flow through was better than we would have expected, which resulted in EBITDA that was in line with our expectations. Focusing first on the drivers behind our RevPAR decline, the ongoing deep recession in the economy -- which caused group cancellations and corporate travel cutback -- continued to undermine hotel demand, leading to reduced occupancy levels. As our operators sought to replace canceled corporate business and faced significant rate discounting pressure, average rates fell across all segments of our business. The result was a significant decline in average rate in occupancy for the quarter. The impact of these declines fell quite unevenly across our customer segments. On the transient side, these challenges manifested in reduced rates; while corporate, special corporate, and premium-priced business continued to deteriorate, as room nights fell by 20%. Much of this decline was offset by an increase of almost 10% in our discount segment, leading to a transient occupancy decline of just 5%.

However, the combination of rate cuts across all channels, combined with the shift in business to lower price segments, resulted in average rate decline of 20%, and an overall decline of 24% for transient revenues. On the group side, the mirror image of these results occurred. Second quarter was heavily impacted by the wave of cancellations that hit the industry beginning last fall, and by continued attrition at the events that were held. Despite relatively robust bookings in the quarter for the quarter, group nights fell 21% compared to the prior year. Because the bulk of the activity that did occur was booked prior to this year at better rates, our average group rates were only down 6.5% for the quarter, leading to group revenues that were off by 26% for the quarter. Obviously, these trends -- especially as they relate to rate reductions -- are concerning.

The weakness in rate is not likely to abate until demand recovers, which will likely require the economy to stop shrinking and start expanding. However, we have seen some progress in slowing the negative trends we experienced since the beginning of the year. While the group cancellation rate for the quarter was still above our normal average, it represented less than half the rate we experienced in Q4 of 2008 and the first quarter of 2009. In addition, this cancellation rate improved meaningfully through the quarter, suggesting this issue may present less of a problem going forward. While our booking pace fell short of the prior year's levels, booking pace in the second quarter was significantly better than our first quarter results, and the pace improved as we worked our way through the quarter.

Finally, our rate of decline in occupancy moderated each period in the quarter; and for the first time this year, our decline in RevPAR for period 7 was less than what we experienced in the prior periods. None of these facts suggest the decline is over, but they do suggest that the rate of decline is decelerating. Our most important activities during the quarter involved our $500 million common equity offering, and our $400 million senior note (inaudible). While Larry will go into more detail regarding our overall balance sheet in a few minutes, these two transactions, when combined with our other financing activities, provide sufficient capital to address our anticipated debt maturities through 2011, and add significant strength to the our balance sheet. We are now in a great position to both overcome the challenges of our operating environment, as well as to prepare to take advantage of the opportunities we expect will develop.

On the investment front, there are a few signs of an evolving market. There have been a few highly-publicized asset give-backs that are being worked out, and the lending industry is beginning to become to grips with the challenges it will be facing. As of yet, there is little on the market that we fine tempting; but we continue to monitor activity, and we expect to see deal flow improve later this year and in 2010, as the combination of looming debt maturities and depressed operating results create more motivated sellers or inadvertent loaners. We intend to be opportunistic as market conditions further evolve, and are optimistic about the future prospects in this arena. As we mentioned on previous calls, our level of capital spending has declined in 2009. This quarter, capital expenditures totaled $84 million, which was 48% lower than the second quarter of 2008. These expenditures include return on investment and repositioning projects totaling approximately $47 million. Year to date, capital expenditures totaled $192 million, including $101 million of return on investment and repositioning projects.

For the year, we expect our capital spending to be between 340 and $360 million. On the asset sale front, we are pleased to announce the sale of three non-core properties comprised of over 1100 rooms, including the Washington (Inaudible), the Sheraton Stanford, and the Boston Marriott Newton, for total proceeds of $64 million. All three hotels represent non-core properties with less obvious growth prospects compared to the remainder of our portfolio, and in some cases with significant capital needs. We are pleased to have completed these asset sales, given their favorable effect on our liquidity position. Given the challenging pricing environment, with the exception of one additional 25 to $30 million sale that we anticipate completing in the near term, we would suggest you not include any additional dispositions for the remainder of the year. For the year, we have completed four asset sales totaling $177 million in proceeds.

Now let me spend some time on our outlook for the remainder of 2009. In considering our full-year forecast, we continued to caution you that our visibility is very limited, especially given the weakness in average rate and the extremely short booking cycle. Assuming that demand stabilizes at current levels for the remainder of the year but we continue to see pressure on average rates, we would anticipate the full-year comparable hotel RevPAR decline would range between 20 and 23%. The reduction in our full-year RevPAR forecast is tied to the weakness in rate we experienced in Q2, and our expectation that this trend will continue through the remainder of the year. Since our margin comps become more difficult as we move into the second half of the year, at these RevPAR levels, we would expect our full-year comparable adjusted margin decline to range between 600 and 650 basis points, leading to a projected EBITDA range of 750 to 800 million. This will translate into FFO per share of $0.43 to $0.50 for the full year, which includes $0.25 per share primarily related to non-cash charges for impairments and non-cash interest expense.

With respect to our dividends, we expect to declare in September a common dividend of approximately $0.23 to $0.25 per share, which will be paid late in the fourth quarter. In order to conserve cash, we intent to take advantage of the IRS ruling which allows us to pay up to 90% of the dividend in the form of newly issued stock. As a result, our common dividend will be comprised of a maximum cash distribution of $0.03 per share, with the remainder paid in stock. Given our perspective on the business, our operating strategy for the next several months remains consistent with our prior descriptions. At the property level, we have stressed realistic revenue forecasting and aggressive expense reduction in an effort to maximize our EBITDA and property cash flow. At the corporate level, we have been intensely focused on strengthening our liquidity and proactively addressing any debt maturity. While the current environment is challenging, the longer-term fundamentals of our business are improving.

Supply growth is moderating, especially after 2010, and will likely remain at historically low levels for several years, setting the stage for solid RevPAR growth once demand recovers. The current distressed environment should ultimately result in acquisition opportunities that meet our pricing and quality requirements, which will accelerate our future FFO growth. We are working hard to prepare to execute efficiently and intelligently as the market for acquisitions improvements. Thank you; and now let me turn the call over to Larry Harvey, our Chief Financial Officer, who will discuss our operating and financial performance in more detail.

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, our urban hotels performed the best during the second quarter, with a RevPAR decline of 23.7%. RevPAR for our airport hotels decreased 25.2%, and RevPAR for our suburban hotels fell 26.5%, While RevPAR at our resort conference hotels declined 27.2%.

Turning to our regional results, as expected, the D.C. metro region continued to outperform other markets, with a RevPAR decline of 10.3%. Our downtown properties performed well due to strong government and government-related demand, as well as solid leisure business. We expect the D.C. metro region to continue to outperform in the third quarter. RevPAR fell 20% for our central region. The New Orleans Marriott had a RevPAR decline of just 9% due to higher levels of business and leisure transient relative to other markets. RevPAR for the San Antonio market declined 21.4%, driven by a reduction in city-wide room nights, group cancellations due to swine flu, and lower transient room rates.

We expect the New Orleans and San Antonio markets to perform better than the overall portfolio in the third quarter due to relatively strong booking pace and rate. Overall RevPAR growth for our Pacific region fell 25% for the quarter; however, results varied by market. RevPAR for the San Francisco market declined 23.7%, as corporate transient business fell and lower rates affected both business and leisure transient. RevPAR for our Hawaiian properties decreased 28.3% because of lower airline capacity, which lead to lower leisure transient and group demand. Our properties continue to utilize promotions at lower price points in order to increase transient demand. RevPAR for our Seattle hotels was down 20.3% due to weaker transient business from layoffs at Microsoft, Boeing, and others. For the third quarter, we expect the Hawaiian market to outperform the portfolio due to easier comparisons. We expect the San Francisco market will be negatively affected by very strong transient demand, and city-wide in the third quarter of 2008. Seattle will be affected by lower levels of group and transient business. RevPAR for the mid-Atlantic region decreased 27.4%, as our New York properties experienced a RevPAR decline of 30.4%, with significant declines primarily in rate.

While group demand declined, transient demand was strong, but at a lower price point. While international demand did not reach the record levels of the second quarter of 2008, it was still very solid. We expect New York City to continue to struggle in the third quarter with difficult comparisons to a very strong third quarter in 2008. The Philadelphia market did well, with a RevPAR decrease of 13.2%, driven by lower group and transient rates and flat occupancy. We expect the Philadelphia market to continue to outperform in the third quarter due to relatively better group and transient demand. As we anticipated, the New England region had another rough quarter as RevPAR declined 28.7%. The New England region, and Boston in particular, had a very strong first half of 2008 due to strong group bookings in city-wides.

Conversely in the second quarter of this year, the Boston market had approximately 37% less group room nights versus 2008, and we had two hotels under renovation. We expect the New England region to perform better in the third quarter due to growth in city-wide room nights compared to last year. As expected, the Florida region underperformed in the second quarter, with a RevPAR decline of 28.8%. Our Tampa properties benefited from stronger transient business, while the rest of the region struggled with lower transient and group demand, as well as rate deterioration. We continue to see resistance from groups to book at luxury hotels and resort destinations, as RevPAR at all three of our Ritz Carltons in the Florida region declined between 30 and 39%. We expected the Florida region to continue to struggle in the third quarter. The international region, which includes our four Canadian hotels, two hotels in Chile, and one in Mexico City performed relatively well, despite the strength of the U.S. dollar. Using constant U.S. dollars, RevPAR declined 20.5%. The swine flu did significant impact the results of the JW Marriott, Mexico City. Year to date, the D.C. metro region has been our best region, with a RevPAR decline of 1.9%; followed by the South Central region, with a RevPAR decrease of 18%. The New England region, with a RevPAR decline of 29.4%, and the international region, with a RevPAR decline of 32.3%, have been our worst performers. However, using constant U.S. dollars, RevPAR only declined 14.3% for the international region.

For our European joint venture, RevPAR calculated in constant Euros decreased 324% for the quarter. Due to overall weak demand, the majority of the properties experienced considerable decreases in both occupancy and rate. On a relative basis, the Westin Palace Milan and the Westin Europa & Regina in Venice outperformed the rest of the portfolio, while a renovation contributed to the underperformance of the Crown Plaza Amsterdam. On a year to date basis, RevPAR calculated in constant Euros fell 30.1%. For the quarter, adjusted operating profit margins for our comp hotels declined just 560 basis points, which is very strong performance given the nearly 25% RevPAR decline. We have been very successful in working with our operators to contain the margin deterioration. Our managers continue to actively cut discretionary spending and have been very proactive in implementing new cost-saving measures. Profit flow-through in the rooms department was higher than anticipated due to the implementation of cost containment measures that drove reductions in controllable expenses and a significant improvement in productivity. Food and beverage flow-through was quite good due to reductions in food and beverage costs as a percentage of revenues and improvements in productivity, despite the fact that the revenue decline was driven by the loss of higher margin banquet and audio visual revenues.

Overall, wages and benefits decreased 13.9%, and unallocated costs declined by 14.4% for the quarter, as hotels reduced the management headcount and significantly lowered other controllable costs. Utility costs decreased 13.6% through a combination of lower usage, lower rates, and the impact of energy saving capital improvements. For the quarter, real estate taxes increased by 5.8%, while property insurance costs decreased 7%. Year to date, our comparable adjusted operating profit margins declined 500 basis points. Looking out to the rest of the year, we think the margins will decline more than we experienced in the first half of the year, as the RevPAR decline will be more weighted to declines in average rate and changes in the business mix, as well as lower food and beverage margins due to further declines in high-profit banquet and audio visual business. In addition, we expect an increase in hourly wage rates and in property insurance costs as insurance rates have started to increase. Comparisons will also become less favorable as we move in to the second half of the year, as the implementation of contingency plans increased throughout the year of 2008, and in particular were at high levels in the fourth quarter.

As a result, we expect comparable hotel adjusted profit margins to decrease in the range of 600 to 650 basis points for full year 2009. We have further strengthened our balance sheet and significantly enhanced our liquidity. After taking into consideration our $480 million equity offering, our $380 million bond offering, and secured debt and asset sale proceeds, we raised nearly $1.1 billion in the first half of the year. We finished the quarter with over $1.3 billion of cash and cash equivalents and $600 million of capacity on our credit facility. Subsequent to the end of the quarter, we repaid the $175 million mortgage loan from the San Diego Marina Marriott and received $64 million from the asset sale that Ed previously discussed. We currently have $1.2 billion in cash. We are continuing to work with the lender on a new $175 million mortgage loan on the San Diego Marriott. However, it is possible that we may not be able to negotiate acceptable terms and the loan will not close.

With our substantial cash balance and access to capital, we are very comfortable with our liquidity position whether or not the loan closes. Our sole remaining debt maturity in 2009 the $135 million loan on the Westin Kierland, which we will repay with available cash. We continue to maintain higher than historical cash levels because of the uncertainty in the credit markets, and we will continue to do so until the credit markets stabilize and the timing of economic recovery is more clear. During the second quarter, we recorded $91 million of impairment charges on assets. Approximately 57 of the impairment charges were for two hotels, one of which went under contract to sell subsequent to the end of the quarter. The other hotel is located in a market that has significantly been impacted by the recession, severely affecting our outlook for both short-term and long-term demand.

While we are still analyzing options available us to, we currently think the best strategy will involve a sale of the hotel in the short to medium term. As a result, since we do not expect the sales price to meet or exceed our current investment, we have recorded an impairment charge to writedown the asset to its fair value. These impairments were recorded as additional depreciation expense on our statement of operations and a reduction in property and equipment on the balance sheet. In addition to the impairment charges on those two assets, we recorded a $34 million charge on our European joint venture investment. The fair value of joint ventures and partnerships has to be reviewed in relation to their book value.

As a result, the reduction in cash flow for the European joint venture's assets, and the resulting decline in fair value to below our book value requires us to record an impairment charge on our investment. This impairment as been recorded as a loss in equity and affiliates on the statement of operations, and a reduction in investment in affiliates on the balance sheet. This completes our prepared remarks. We are now interested in answering any questions you may have.

(Operator Instructions). Our first question comes from David Katz with Oppenheimer.

Hi, good morning.

Hey, David.

So I wanted to just go back to the -- I guess one of the issues we're trying to figure out is on the cost-cutting side. You know, we have gone through the first portion of this year and sort of executed on some strategies to cut costs, and to the degree that we can look at next year and ask ourselves the question, do we get to next year with a sort of more meaningful run rate or a more sort of a set cost base going in to next year, irrespective of whatever happens to RevPAR? Or are you still, do you think, in the middle innings of cost cuttings and there's more to do that you will execute on through the back half of this year also? And I know you have touched on some of these issues, but I think you may see where I'm headed with this.

Yes, I think reality is is that the cost-cutting efforts went in to high speed about this time last year as RevPAR went negative. It was started in 2008, and I think most folks in the industry, even in their fourth quarter 2007 conference call, talked about the fact that they were implementing cost-cutting initiatives across their portfolios. But the reality is in the first half of last year, the occupancy decline was relatively modest, RevPAR was still positive, and you didn't have the reductions in business levels that permitted you to really implement wide-spread cost-saving initiatives. Obviously as we worked our way through the third quarter and certainly in to the fourth quarter of last year, we started to see those occupancy declines, and consequently the cost-cutting initiatives became more severe. That effort continued through the first half of this year. As is contemplated by our margin guidance, we -- while we still expect to be able to continue to cut costs, and I would overall say that the flow-through that we're anticipating for the second half of the year is still pretty good given the RevPAR decline, the reality is that the comparisons get more difficult; and certainly as you get in to the fourth quarter, you are not going to be able to duplicate the performance that we had last year.

As you carry that into 2010, I think I would agree with sort of the -- with what you were suggesting, which is, while we will still be able to cut costs to some degree, based upon if demand is lower, and you will certainly see some cost decline if revenues are lower, because you would be looking at -- a lot of costs are directly tied to revenues; other than for those two reasons, I doubt that there will be a lot more that we can do in 2010 portfolio-wide. Obviously, the story will depend upon what happens at each individual hotel, and so there will be search examples where additional efforts may be productive and we're certainly going to work hard to try to find them; but overall, as you think about 2010, I think you are going to find that -- to the extent that you are anticipating a weak beginning to the year, you probably are going to find that the -- it's going to be difficult to achieve the same sort of margin results we had this year.

Got it. And if I can just ask one more -- and I got on a few minutes late, and I'll apologize if you addressed it, but I was surprised by the urban performance in the portfolio. I -- thinking about sort of a West-coast presence, thinking about New York and some of the other urban markets we have seen, I think inherently we were expecting urban to be among the weaker RevPAR markets in the quarter, and it wasn't. It was higher end of the range. Not by a lot, but just worth discussing. Do you have have some strategies in place there that are worth discussing?

I think what I would say is that you are clearly right. Markets like New York, Boston, and Chicago all suffered, and we certainly have a fairly high concentration of hotels in each of those markets. I think what benefited our portfolio on the urban side was significant concentrations in markets like Washington, D.C., which performed quite well. We also found that New Orleans and Philadelphia did much better than the average market. And so I think what you saw overall across our portfolio was that the urban numbers probably had a fairly broad range of performance; but when you total it all together, it did better than suburban, resort and airport.

Okay. Thanks very much. Appreciate it.

Our next question come from Chris Woronka with Deutsche Bank.

Hey, good morning, guys.

Good morning.

Good morning.

Wondering if you can maybe tell us what you are hearing from your operators about group activity for next year? And how price sensitive is it, and what is the strategy in terms of maybe locking in multi-years at today's lower rates, versus kind of locking it in on a shorter-term basis and kind of floating the future years?

I think it's hard to find a clear theme for 2010 right now. If you look at the booking takes for 2010 compared to this time last year, it's down significantly. Having said that, those numbers don't truly reflect the (inaudible) cancellations that occurred in the fourth quarter of this year, and the -- the fourth quarter of last year, and the first quarter of this year. And I think if you adjust for that, then bookings are still down somewhat; but it's nowhere near the disparity that you would look to if you just looked at the year-over-year activity. I think the theme that we have been seeing so far is that certainly groups are very focused on the rate at which they can book. Certain groups that feel like they are in a position to commit to multiple years are seeing if it's possible to negotiate a multi-year deal and get better pricing because of that.

I think we are finding that a lot of groups are trying to price based on a total -- kind of a total meeting price, where they are not just looking at what the room rate is, but they are also looking at what the cost of their food and beverage and other associated services are going to be in order to try to put a little bit more pressure on those profit centers, too. And I think the other -- we are seeing, as I mentioned in my prepared remarks, that as we look out to 2010, we have been seeing some overall increase in booking activity relative to the beginning of the year. But I would say it still feels like we are running a bit behind last year's pace at this point in time.

Right. That's helpful. And shifting gears a little bit to the asset front, heard your prepared remarks on kind of your expectations; but a 30,000 foot view, what is kind of the -- going on out there in terms of buyers, sellers? I mean, do you think there are more buyers in the market for hotel assets now versus maybe three months ago? And what are they doing differently now? Is there -- are we getting to levels where people can actually get leverage to make a deal pencil, and it is really price that is the issue or something else?

I think the acquisition market is very difficult to characterize right now because you're -- there has -- I -- first of all, I don't think that there is anymore buyers out there than there were at the beginning of the year; and I think that while we are meeting with some success in identifying potential mortgage loans for individual assets, the reality is that that market is still relatively slow, and so that the conversations we have had with buyers on some of the assets that we had been marketing, we're generally finding that their approach is to buy all cash, than maybe using a credit line to facilitate their acquisition. But their basic plan is to be somewhat all cash for the first couple of years of the investment and then expect that the markets will improve later in 2010, early 2011, which will allow them to refinance. So to the extent that a buyer needs financing today in order to consummate an acquisition, I think they are finding -- that group is finding it difficult to plan and to move forward and to execute.

Now on the cap rate side, that -- there's not a consistent theme across the industry in terms of where pricing is. Some of the -- a couple of acquisitions that have been out there and either marketed or closed at the higher price points are starting to show evidence that cap rates are falling. I think a lot of that is not surprising, given the level of decline that we have seen in EBIT and NOIs over the course of this year, and so you would sort of naturally expect that as people begin to look at pricing that is attractive on a per pound basis, and represents a significant discount to replacement costs, that they are getting more comfortable with lower cap rates. Having said that, I don't know that I would characterize that as a broad theme. I think that the examples that are out there are somewhat anecdotal. So I suspect that what we're going to find for the rest of this year, based on the conversations we have rest of this year, based on the conversations we have had internally, is that you will continue to see more assets migrate back to lenders, or potentially be headed towards lenders. You will begin to see lenders take a slightly stronger stance as they perhaps see a little bit of improvement in acquisition activity which will start to create some additional deal flow. But I would be surprised if we saw any significant surge in activity until next year.

Okay. Great. Very helpful. Thanks.

Now we'll take a question from Steve Kent with Goldman Sachs.

Hi, good morning. Just two questions. One, maybe to the earlier question I think that David asked, just be a little bit more specific on your cost cuts, both at the property level and at the headquarters level? For example, have you shut down floors in any of your hotels? Have you shut down virtually all of your restaurants or snack bars or any of those kinds of things that maybe would give us a little bit more flavor as to how deep those cost cuts are, and how much more opportunity there truly is. And the second thing is -- and maybe I misheard it in the beginning of your first comments -- it sounded like you were teeing yourselves up to start to acquire hotels in 2010 and 2011, and I guess I was a little surprised by that given the problems that this industry has faced over the last two years, both balance sheet and operating, that you would be doing that rather than moving the opposite direction, which is to maybe sell assets into maybe the next wave of people willing to buy?

Let's start with the cost-cutting side and then come to the acquisition side. The -- certainly there are some hotels where we have closed an entire tower for a period of time, where we might have a multi-tower structure, and we have found that the overall level of demand is low enough that unfortunately the logical thing to do is to try to shrink the hotel by closing a tower. I wouldn't say there are many examples of that. But there are certainly a couple through the portfolio where that has proven to be a good strategy. Cutting floors is something that we would do pretty consistently whenever we start to see occupancy levels be lower at a particular hotel, especially for any sustained period of time, because it just makes it that much more efficient for us to operate the hotel. Food and beverage outlets across the board are reducing hours; and whenever occupancy merits it, we will try to knock out the restaurant open for dinner and try to serve dinner out of the lounge or out of the bar, and I think there's probably a couple of cases where we've probably tried to just do it on a room service basis too -- probably on a Sunday evening or something like that.

The strategy is, if there's an opportunity to profitably be open, then a food and beverage outlet will be open; but to the extent that you don't see the demand within the hotel, or don't see the occupancy within the hotel, you will try to avoid opening that restaurant. A big area where I think we have had some significant savings is in the manager level. If you look across our portfolio, I think we would estimate that we have 20 to 25% fewer managers at a property than we had two years ago. Another area where you have seen some savings has been in the salary area, where we have postponed salary increases over the course of this year, and you have also seen some restructuring on bonus plans this year. So that it -- again, I -- each -- none of these steps necessarily in and of itself is hugely significant; but when you average it out across the portfolio, and when you -- and you implement all of them in a particular hotel, you can have a meaningful impact.

Switching over to the acquisition side, I think what we have learned over time is that the best time to be a buyer in our business is earlier in the cycle. Now I think you're -- so you -- it's -- those are the opportunities to buy at significant discounts to replacement cost, and those are the opportunities to buy at cash flows that have the opportunity for significant increase; which ultimately, as we both know, is how we create value. So as we start to look at the world that we're facing right now, while we're certainly not through this downturn, and that -- the recognition of that fact is important to any underwriting that we would do as it relates to acquisitions, the time to be a buyer is going to be when -- when operations are weak and when supplies is declining, and when you can start to feel -- as long as you start to see that the wind and the tides are changing a bit and that you are going to start to move in to a better economic environment, where EBITDA and RevPAR are going to begin to improve, I I think that's generally where we would like to be a buyer. I don't think -- you shouldn't expect that we're going to be super aggressive. We have a huge bet in this space already. We have already got a great collection of hotels, but I think it would be value as we -- to overall shareholder value and the value to the Company to be looking to add selectively as we work our way in to next year and certainly in to 2011 to add new assets.

Okay. Thank you.

Next we'll go to Baird's David Loeb.

Just to follow up on that, when you are at a point when you look at going on offense, two questions: Do you feel like you have the dry powder to do that with your balance sheet the way it is, or would you look to raise more equity to do that? And would you consider buying paper as a way to get in to those kinds of assets?

David, I would say that we have a little bit of capacity on the way we're structured right now from a balance sheet perspective. But by and large, as we thought about when we would -- how we would implement an acquisition program, I think that we would look to follow a model that's not far from what we did in 2003, 4, and 5, where we looked to fund the bulk of the acquisition activity through additional equity issuance. I wouldn't say exclusively, but I think we found that that program worked well last time to both generate accretive -- to both allow us to buy accretively and at the same time improve the balance sheet, and I think being prudent with respect to the balance sheet in this environment would suggest it would be smart to fund the bulk of the program through equity issuance.

Okay. And on the assets that you impaired, is there secured debt on any of those, and particularly the one where you are looking at your strategic options? Are you -- among those options, are you considering giving that back to the lender?

There's no debt on either of those assets.

Okay. So those are assets -- you are looking at your options, but you don't have an option because there is no lender?

Well, we have options.

But you are right. One option is not to give the asset back to the lender.

Right. I understand the other options. Okay. And Larry, the mortgage on D.C. to -- from what we can understand was the largest hotel mortgage done this year. You sound moderately with optimistic that you'll do what I'm assuming would be an even larger one on San Diego? Is that fair? And can you comment on size limits in the mortgage market?

Well, there's definitely a -- when you get over $100 million, there's definitely a big difference. Typically -- although we are seeing certain lenders -- especially on the insurance side -- starting to at least put feelers out, and we have a couple of term sheets. But the bottom line is, over $100 million, there's definitely a big difference; and to get over that number, you would typically need two lenders or more.

Got it. Okay.

In the case with San Diego, that loan is somewhat complex in the loan structure. I mean, both us and (Inaudible) are putting money in to that -- into a renovation there to cover capital expenditures over the FF&E reserve, and the lender wants a say in those renovations, and we're working through some of those elements. If we can reach acceptable terms, we'll close the loan; but we're not going to do a bad deal. So we have raise additional proceeds by upsiding our bond offering. We have a lot of assets with unsecured debt, as you know, and our bonds trade in the high 8s to low 9s. So we're very comfortable with our current liquidity situation with or without that San Diego loan.

That makes sense. And I'm not sure you answered the second half of my first question. Would you consider buying paper, buying mortgages, as a way to get additional assets?

David, I think we would. We have -- frankly, have been open to that for the last 12 months. Unfortunately from that perspective, a lot of the paper that is potentially challenged is in CMBS loans, and it's in broader pools, and so it's more difficult to get to the paper and get to the asset than we would like. But to the extent that opportunities develop, say with individual banks that hold first or second positions on hotels that fit sort of quality spectrum that we've been interested in acquiring, then I think we would be very interested in buying the paper, and in a sense approaching the acquisition of any asset through that course.

Okay. Very helpful, thank you.

Our next question comes from Jeff Donnelly with Wells Fargo Securities.

Good morning, guys. Ed, I guess for a moment if we could just sort of ignore the realities of the current market, as you look forward to say 2011 beyond, how you think you would like to be positioned for that environment? Are there any, I guess, geographic or brand or segment changes that you could see yourself moving around a little bit, either focusing on a gain exposure to, or markets you'd like to shed4 exposure to?

Probably there are some changes. I think from a brand side, we like the brands that we're working with today, and I think that we would certainly feel comfortable in expanding our ownership with any of the brands that we're doing business with today. From a market perspective, one of the things that we're trying to do is to really -- to go back through again and evaluate which of the markets out there do we think have the most potential over the next 10 years? And which of the markets that we think probably don't have that type of a potential? And I think you'll probably see, if I were to go beyond just 2011 and think about 2012, 13, and 14, think about more of a strategic context instead of tactical, you would probably find that over that period of time, we are in fewer markets than we are in today, but we are probably in the markets that we like in a bigger way. We don't have a firm list yet of exactly how that plays out. I think that certainly there's some markets like Washington and San Francisco and San Diego that would continue to be high on our list, and would be markets we would be interested in looking in today. I think there are some markets in the Southwest, that -- in Texas -- that we, long-term continue to be worried about supply and not certain that the demand growth is going to be there, and those might be markets that we would tend to own less in other time.

It is possible that, in that example, you look forward in say four, five years, that overall Host is a net smaller -- call it a smaller Company, but as you said, sort of more dominant in certain markets? And maybe your brand profile widens, that hypothetically you help provide liquidity to folks like Hilton or other private entities?

I certainly could see that our brand profile could widen, and -- because Hilton is certainly someone that we would expect at some point in time here will be disposing at assets, but we would certainly like to think we'd be considered as an option when they go to do that. We also don't have a lot with InterCon other than one property in Europe, and I think that's another brand that you could theoretically get exposure to, too. It's not inconceivable that we would be smaller in the future. It might be more in the number of hotels. I tend to think at the end of the day -- because we are optimistic about the opportunities facing us -- that we would probably end up being more of a net acquirer over the next several years as opposed to a net seller. But in the context of doing that, we probably would be buying larger hotels and selling smaller ones; so the number of hotels we control in four or five years might be smaller, but I suspect the overall value of the Company would still be larger.

And then just switching gears back to the current environment, in you remarks you indicated the rate of decline that you are seeing, I guess from a demand perspective, might be decelerating; but because you're reducing your 2009 RevPAR outlook pretty meaningfully when you consider we're about halfway through the year and the results thus far have been roughly in line with your expectations, the implication is that despite -- I guess people believe to be easier, these revenue comps ahead -- your full-year -- for your full-year guidance, it doesn't really reflect, I guess I would say, that less-bad outlook for the top line. Is that -- I guess, am I reading that right?

At the low end of what we suggested for guidance, you probably have it correctly. If you look at -- to maybe elaborate a little bit on our prepared remarks, the bottom line was that rate was weaker in the second quarter than we expected, and occupancy was a little bit better. As we let that -- see that play out in the third and fourth quarter, while we'd hope that the sort of positive development in our last month or last periods of operations -- which did come in better than the prior month and came in better than where the second quarter was -- we'd hope that trend continues. Our general sense of what is likely to happen in the third quarter preceding those numbers yesterday, was that the second -- the third quarter would generally match up with the second quarter. I think there is some chance now that that turns out to be a little bit better.

We would still expect the fourth quarter to be better. I think that is probably -- solely because of the easier comp that the fourth quarter presents when you compare back to 2008. We have said for a while that we generally thought if you looked over a two-year time frame, that the fourth quarter has a potential to be the weakest quarter of the year, thinking back to kind of comparing to '07 -- and I still think that's probably about right. But I think what -- if you look at the RevPAR range we have suggested for the full year, it tends to suggest the second half of the year that somewhere between 17 and 23% decline in RevPAR. Obviously at the better end of that, that would be a meaningful improvement over where we've finished in the first half of the year. At the low end of that, it's flat and a couple of tenths worse.

Thanks. And just -- I guess one last question. I apologize if I missed this in your remarks, but the key pricing on the assets that you sold was fairly low. And that might just be the reality of the larger, full-service hotels and more suburban locations. Can you maybe walk us through what the '09 budgeted EBITDA was there, and maybe what you -- I'll call it like a three or five year capital plan looked like for those assets, so we can kind of see -- or better understand the pricing?

Maybe another way to put that is that the pricing for the assets kind of fell -- it was not necessarily super tight, but if you take the three assets and combine them, what you would find is that the cap rate was in the mid-sevens. If you look at the CapEx plan, I would probably say -- I think the average -- there is probably another 15 to 20,000 per key worth of CapEx that was required for those hotels over the next two or three years. So as we think -- if you add that in to the equation, you are looking at a cap rate that starts to approach the low sixes. So that gives you a few metrics to try to evaluate that. In terms of the significance of those assets to our portfolio, these are assets that we had previously identified were ones that we did see growth prospects that matched up with what we expected for our overall portfolio. In two cases, you are talking about a suburban asset that was getting a little bit older, and we just didn't see that it was going to perform that well going forward, especially with the CapEx requirements. And in one other case, it's was -- the hotel was in a smaller town in Stanford; but, again, we just -- as we looked at the outlet for that particular asset, we were not that optimistic.

Our next question comes from Joe Greff with JPMorgan.

Good morning, guys. Most of my questions have been asked and answered, but I do have one operating expense cost control related question. If we assume next year that occupancy can be flat, how much control do you have over property level expenses? Can you hold that flat?

I would say not. It's -- the -- I think the problem you are going to run in to -- I mean, it probably depends a little bit on what happens with inflation, and I think that some of the estimates for inflation at this point in time are fairly diverse. But if occupancy stays flat, unless we were to see a remarkable savings in utility expense or some line item like that, the reality is that with the changes that we have made already, I think it's hard to think that there's a lot more costs that would come out of the system. You are going to face -- in some markets, whether it's because of union contracts in our hotels, or union contracts in other hotels, you are going to probably face at least modest pay increases at the hourly level. I think that -- whether there will be any at the manager and the senior manager level is still up for debate at this point in time, but I don't think you are going to be able to get more cuts in that area. So by and large, I would say that it would probably in that scenario be hard to think that expenses would be flat.

Great. Thank you.

Next we'll go to Morgan Stanley's Ryan [Millager].

Hi, guys. Thanks for taking the questions. Just a couple of quick questions. I was wondering if you could provide any type of update or more detail in terms of where group pace is relative to last year? I think last quarter you had said it was down 19%. I'm wanting to see if that -- how much that had changed, understanding that the cancellations can have a fair impact on what the actual results will be. The other question I had was I was just hoping you could speak a little bit about your dividend. Obviously, you reduced the guidance on the dividend from the last time you gave it from about $0.30 down to 20 or 23, and a large portion in stock. I was hoping you could talk about why you made the reduction in terms of your guidance, and also your thoughts on the stock portion, especially given that your balance sheet and liquidity seemed relatively strong, and you are potentially in the market or acquisitions. Thanks.

Okay. As it relates to the group pace side, what I would say to you is that the quarter that we're facing right now, we're probably looking at being down about 20% in the -- so the third quarter would be down about 20. The booking pace for the fourth quarter is about the same, but the booking pace right now has not really started to capture the effect of the cancellations that we experienced as we worked our way through the summer of 2008, and certainly into the fourth quarter of 2009. So our overall group room nights in Q4 of 2009 were down about 6%, so you could probably make that as an adjustment to the down 20, 21 that we're facing right now in terms of group booking pace for the fourth quarter, and get to an adjusted -- call it 15 plus or minus percent that we are behind in group bookings for the fourth quarter. As it relates to the dividend, we spent a fair amount of time thinking about that. First of all, the reason why it is down a bit from what we had previously indicated is probably two reasons. The bulk of it is the equity issuance that we did earlier this year, which resulted in -- and since we were dividending out a certain amount of taxable income, if you dividend that -- if you allocate that over more shares, you are going to see the amount per share decline. I think there might have been a modest reduction in our overall level of taxable income, which would have been the other reason that we would have seen the dividend shrink a bit.

As it relates to the issue of cash versus the planned cash and stock dividend, while we certainly understand the importance of a cash dividend, I think while we continue to be in what is still a fairly challenging operating environment and a challenging liquidity environment, despite the fact that we feel very comfortable with the liquidity position we are in, the bottom line is that by handling the dividend this year, we can save another 100-plus million in cash, and I think at this time that's the most prudent step for us to take, so that's why we decided to handle it that way.

Great, thank you.

For our last question, we'll go to Bill Grant with Morgan Stanley. Mr. Grant, please go ahead.

Hey, guys. Say, just a quick question on something I heard in the prepared remarks. You had mentioned there was an asset you took -- recorded an impairment charge on. You located in a market that was significantly impacted by the recession, severely affecting your outcome for short-term and long-term demand, and so the sale of the asset made the most sense. And that all made sense. I was wondering -- my question specifically is, what is it about this asset and this market that is different than your core portfolio where you are anticipating a better outlook for the recovery of lodging demand once the economy recovers? Thanks.

We don't want to get too specific with the asset, because it -- we have -- again, looking at our options; but the bottom line is, it has been significant affected by the current recession as well as it's a market that has been challenged over the last few years because of changes in the industries that are there, and the size of those of those companies.

Part of what is happening in this particular case, which is why this particular asset gets called out and would be distinct from what we have been running into, in a number of other hotels, is at this point we are losing money at this particular hotel, and so as a result of that, it sort of forces a -- perhaps a more cautious expectation with respect to what's going to happen with the hotel. As we think about this particular market, which is in one of the more hard hit markets across the U.S, and think about what we are going to do with the asset, we just don't see an expectation that we would hold the asset for a longer period of time which would then allow the value to recover to the original investment. I think it's an unusual circumstance that leads to this conclusion. It's not something that we would expect to see in more than a couple of other assets in our portfolio, even thinking out over -- through the next several years. But in this particular case, when you just went through all of these steps that you are supposed to go through as part of your regular impairment analysis, the fact that we really just didn't see this as a long-term hold at all under any circumstance drove us to the correct accounting conclusion that we needed to take an impairment.

And that does conclude our question-and-answer session for today. I'll now turn the call back over to Mr. Walter for closing remarks.

Great. Well, thank you for joining us for this call today. We appreciated the opportunity to discuss our second quarter results and outlook with you. We look forward to providing you with more insight into what will be left of 2009 in our third quarter call in October. Have a great remainder of your week.

Once again, that does conclude our conference for today. Thank you, again, for your participation.