Host Hotels & Resorts Inc (HST) 2010 Q1 法說會逐字稿

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

Well, thank you. Welcome to the Host Hotels & Resorts' first 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. 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 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 first quarter results and then will describe the current operating environment, as well as the Company's outlook for 2010. Larry Harvey, our Chief Financial Officer, will then provide greater detail in our first quarter results, including regional market performance. Following their remarks, we will be available to respond to your questions. And now, here's Ed.

Thanks, Greg. Good morning, everyone. After a challenging year in 2009, we are pleased to report that our first quarter operating results and trends were significantly better than we expected. As I will discuss in more detail, we experienced significant increases in transient demands and very encouraging trends on the group side of our business. While we still face challenges for building our average rates, our recent operating results returned positive on the top line and suggest that the industry is reaching an inflection point.

Turning to our results, first quarter RevPAR for our comparable hotels decreased by 2.3%, driven by a decrease in average room rate of 8.7%, which was offset by an increase in occupancy of 4.3 percentage points. For the quarter, our average rate was at $167 and our average occupancy was 65.5%. Our top line results improved on a relative basis each month of the quarter, and turned positive in March. As you may remember, due to the timing of our reporting period, our first quarter does not include the operating results for a significant portion of our portfolio for the month of March. Adjusting our results to reflect the inclusion of all of our assets for the calendar quarter would result in a RevPAR decline of only 1%.

Food and beverage revenues at our comparable hotels decreased 3.7% for the quarter and total revenues fell by 3.9%. While our managers continue to strive to control costs, the combination of increased occupancy, continued pressure on average rates, and a meaningful reduction in attrition and cancellation fees resulted in a decrease in comparable hotel adjusted operating profit margins of 275 basis points for the quarter.

First quarter adjusted EBITDA for Host was $126 million. FFO per diluted share for the quarter was $0.08, which included a reduction of $0.01 as a result of costs associated with the prepayment of debt and an accrual related to the potential San Antonio litigation loss. Overall, we are very pleased that our adjusted EBITDA and FFO per share diluted results materially exceeded our expectations.

Turning to our business mix for the quarter. The demand trends that developed over the second half of 2009 accelerated in the first quarter of 2010, positively impacting our business mix on a wider scale. For the third straight quarter, we experienced year-over-year growth in our transient business with an overall increase in transient room nights of more than 12%. More importantly, this increase in demand was led by our special corporate business, where room nights increased more than 28%. And our premium and corporate segments, where room nights increased for the first time in nine quarters at a rate of nearly 9%.

Special corporate demand growth was especially strong at our luxury properties, which experienced a demand increase in that segment of more than 50%. While average rates, in both of these corporate segments, were still down by roughly 8%, these are solid indicators of improvement in corporate travel, which is required for the industry to commence a true recovery. Overall, the positive shift in business mix in the transient segment for the first time since the summer of 2008, held a decline in the overall average rate to 7.7%, which led to a transient revenue increase of 3.6%.

On the group side frankly, we were pleasantly surprised by the pace of our short-term bookings during the quarter. At the beginning of the year, we faced a 4% shortfall in the first quarter, taking into account the record cancellations we experienced in the early months of 2009. And roughly a 6% shortfall for the entire year. At the end of the quarter, group demand improved by 0.5% for the quarter and our full year bookings are now trending ahead of the prior year's pace. Volume improvements for the quarter came primarily from a 14% increase in association room nights and more than a 5% increase in discount business.

While corporate groups continue to be a challenge, as demand decreased by 13% in the quarter, we saw a meaningful acceleration in corporate group activity, as companies began to rebook business. Interestingly, our luxury corporate room night actually increased more than 18%, compared to the first quarter of last year which suggests that companies are feeling somewhat less concerned about the potential political ramification of booking business at higher end properties.

Overall, group room rates declined 9% and combined with the increase in demand of a 0.5%, resulted in a decrease in group revenues of 8.6%. The rebound in group business compared to expectations, and association business in particular, helped our Big Box hotels as they slightly outperformed the rest of the portfolio.

Looking at the second quarter and the remainder of the year, our visibility continues to be fairly limited because of the short booking window. RevPAR growth for period four exceeded 5%, continuing the recent trend of improving results. Group bookings continued to be strong, as bookings in the first quarter for the second quarter have more than tripled when compared to last year and even slightly outpaced our 2007 level of activity. Transient bookings for the second quarter are also trending ahead of last year. Overall, improvement is still relying on the strength of the economy, but we are optimistic that businesses are beginning to loosen their travel budget, starting a recovery in lodging demand.

On the investment front, as I discussed with you last quarter, the combination of structural complexity and securitized transactions, and little pressure on banks to resolve troubled loan situations, has resulted in a limited number of assets actually coming to market. However, we are seeing investment opportunities in the form of distressed loans. Earlier this month, we purchased the junior tranches of a mortgage loan secured by a 1900-room portfolio's hotel in Europe. The par value of the tranches we purchased are approximately EUR64 million and we purchased the notes at a meaningful discount. While we cannot get into more specifics regarding this investment, the return we expect to generate on the notes meet or exceeds our return target for a levered investment.

In terms of fee acquisitions, as the operating environment stabilizes and begins to improve, our pipeline of potential transactions has increased both domestically and internationally. And we are well positioned to take advantage of opportunities as they begin to arise. Our guidance continues to not reflect any benefit from property acquisitions, even though we expect to complete at least some acquisitions during the second half of the year.

During the first quarter, we sold the 370-room Sheraton Braintree Hotel for $9 million. We also signed an agreement to sell the Ritz Carlton in Dearborn. This asset is in one of the most challenging markets in the country, generates negative net operating income, and has significant capital needs. Since the transaction is not yet closed, we cannot provide any additional details of the deal at this time. While we expect to market additional assets this year, we have not included any additional dispositions in our guidance.

Capital expenditures for the first quarter totaled approximately $50 million, which included $23 million of return on investment projects. During the first quarter, we completed the renovation of over 95,000 square feet of meeting space at the San Francisco Moscone Marriott Marquis, one of the preeminent group hotels in San Francisco. Subsequent to the end of the quarter, at our San Diego Marriott Hotel and Marina, we renovated the south tower rooms.

And during the quarter, we completed the construction of a new health club. These projects are part of the first phase of what is ultimately projected to be $190 million reinvention of this hotel. In addition to the complete renovation of the rooms, this project will provide significant upgrades to the pool, food and beverage, and entry experiences.

We are also in the process of planning a new 40,000-square foot exhibit hall and a 40,000-square foot ballroom, which will have views of both the nearby marina and the downtown area. Construction on that phase of the project is expected to commence in March of 2011. We are also adding a new 15,000-square foot ballroom and a 5000-square foot terrace to the Westin Kierland Resort and Spa in Phoenix as part of a broader meeting space renovation project.

Given the strength of our balance sheet, combined with currently low construction costs, and the fact that occupancy levels are still below peak, we believe that the timing is ideal to accelerate the pace of some of our planned capital expenditures projects. As a result, we are increasing our expected capital expenditures estimate for the year to $300 to $340 million, and we will continue to evaluate other projects as we work through the year.

Now, let me spend some time on our outlook for 2010. While we remain concerned that employment growth has lagged, consumer spending trends are still inconsistent and there are continuing risks to the financial system, it is clear that the broader economy is in recovery. Assuming that recovery continues, our better than expected first quarter results combined with the improvement in our near-term booking pace, and positive results in April, have led us to a more positive outlook for the remainder of the year.

As a result, we are increasing our estimate for RevPAR for the year to an increase of 1% to 4%, with a comparable adjusted margin decline of 125 basis points to 50 basis points. Based on these assumptions, full-year adjusted EBITDA would be approximately $750 million to $800 million and FFO per diluted share would be $0.58 to $0.65.

In closing, we are certainly more optimistic than we were on our call last quarter. We are seeing signs of recovery in demand and will continue to work with our hotels and monitor our pricing strategy for improvement on the rate side. On the investment front, we know from experience that early stage acquisitions tend to outperform, so we will continue to aggressively look for investment opportunities, both domestically and internationally.

In addition, we will continue to develop reinvestment opportunities within our existing portfolio, in order to take advantage of favorable cost and occupancy levels. We took significant steps last year to improve our balance sheet and we are well prepared for opportunities as they arise. Thank you, and 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. Our airport hotels performed the best during the quarter with a RevPAR decline of 0.9% as the hotels benefited from the poor weather in the northeast that led to numerous flight cancellations and layovers.

RevPAR for our urban hotels decreased 1.7%, while RevPAR suburban and resort conference hotels fell 2.4%, and 4.8% respectively. Before I address individual market performance, I wanted to mention that half of our top 20 markets had positive RevPAR for the quarter.

Our top performing market was Philadelphia, with a RevPAR increase of 12.3%. Strong transient, city-wide, and group business contributed to an occupancy increase of nearly 9 percentage points and an ADR decline of 2.8%. For the second quarter, we expect the Philadelphia market to underperform the portfolio due to lower levels of both transient and group demand.

As expected, the Miami's Fort Lauderdale market performed very well, with a RevPAR increase of 10.3%. Occupancy was up 6.4 percentage points and rate was up 1.7%. Yes, that's right. I said rate was up in the market. The outperformance was driven by growth in transient and group business, generated by the Super Bowl and Pro Bowl, as well as the impact of the late 2009 ballroom addition at the Harbor Beach Marriott Resort and Spa.

We expect that Miami/Fort Lauderdale market to have a weaker second quarter, but still have positive RevPAR. The San Antonio market also performed very well, with a RevPAR increase of 7.3%, a strong city-wide calendar drove an increase in compression days, leading to an increase in occupancy of 5.4 percentage points, and limiting the rate decline to only 0.8%. We expect San Antonio to have a decent second quarter, and a strong second half of the year.

RevPAR for Boston increased 6.7%, due to better transient and group demand. Occupancy was up 5.7 percentage points and ADR declined 5.1%. Some of the improvement was due to easier comparisons, as the Boston Marriott Copley Place and Sheraton Boston were under renovation in the first quarter of 2009. We expect our Boston hotels to have a great second quarter, with double-digit RevPAR growth, due to strong city-wide activity and improvement in transient demand.

Orange County, a market that is extremely hard-hit by the housing market meltdown had RevPAR growth of 6.7% in the quarter. Transient demand across all segments showed signs of recovery. Occupancy was up 10.2 percentage points, while ADR was down 7.9%. We expect the Orange County market to continue to perform well in the second quarter.

We were also pleasantly surprised by the outperformance of New York City, where RevPAR increased 2.6% as occupancy grew by 7.7 percentage points, and rate declined 7.7%. Business transient and short need group bookings drove the improvement in demand. We expect New York City to have an outstanding second quarter due to high levels of business transient demand.

RevPAR for our Chicago properties fell 11.2%. Due to significant decline in city-wide activity, which was partially offset by an increase in special corporate and discount business, albeit at a lower rate, as ADR fell 9%. The Swissotel, with its recent addition of 38,000 square feet of meeting space, substantially outperformed the market with a RevPAR decline of 7.7%. We expect Chicago to perform much better in the second quarter and for the outperformance of the Swiss hotel to continue.

Forward group demand and weak pricing across all segments affected RevPAR performance at both of our Hawaiian hotels resulting in a 14.1% decline in RevPAR, substantially all of which was due to a 13.5% drop in ADR. We expect the hotels to perform much better in the second quarter, but we need to see further increases in airline capacity for a sustained recovery.

RevPAR for our DC hotels declined 15.9% with a 2 percentage point decline in occupancy and a 13.4% drop in ADR. As expected, year-over-year comparisons for the market were difficult due to the 2009 Presidential Inauguration and related activities, as well as record-breaking levels of snowfall in 2010, both of which were significantly affected group and transient business. Excluding DC from our comp set for the first quarter, RevPAR would have only declined 0.6%. Our DC hotels had positive RevPAR in period three and we expect DC to have positive RevPAR in the second quarter.

As expected, the San Diego market struggled, due to substantial decline in city-wide demand and the absorption of the new Hilton that opened in 2009. RevPAR declined 16.9%, with an occupancy decline of 3.5 percentage points and a 12.2% decline in ADR. A rooms renovation at the San Diego Marriott Hotel and Marina also negatively affected our performance. We expect the San Diego market to continue to struggle in the second quarter, but improve in the second half of the year.

For our European joint venture, RevPAR calculated in constant Euros decreased 1.8% for the quarter. Occupancy increased 5.2 percentage points and ADR declined 10.7%. The Westin Europa and Regina in Venice, the Sheraton Skyline in London and the Sheraton Warsaw outperformed the rest of the portfolio.

For the quarter, adjusted operating profit margins for our comparable hotels declined 275 basis points. This performance was better than expected due to the challenges created by four items. The first item was the substantial impact of cancellation and attrition fees. In the first quarter of 2009, cancellation and attrition fees were over $12 million higher than the first quarter of 2010, accounting for 110 basis points of the overall margin decline.

The second item was due to our RevPAR decline, driven by a combination of an increase in occupancy and a drop in rate, which is a challenge from an operating profit perspective. However, we were still able to reduce overall rooms cost per occupied room to improvements in productivity and reductions in several controllable cost areas.

The third challenge was the loss of high profit banquet and audio visual revenues, which declined 7.3%. However, food and beverage flow-through was quite good as our managers continued to refine and implement efficiencies in their staffing models. The fourth item was a treatment of the ground lease payments on the New York Marriott Marquis. As we discussed last year, in the first quarter of 2009, $3 million of our rent payment was applied to fully fund the deferred purchase price of the land.

In the first quarter of 2010, our entire payment was treated as ground rent expense, which reduced EBITDA to $3 million -- which reduced EBITDA by $3 million. We have the ability from today through 2017 to buy the fee interest in the land under the hotel for an incremental payment of $19.9 million.

Overall, wages and benefits decreased 1.3%, or 8.2% on a per occupied room basis, and unallocated costs declined by 2.7% for the quarter, as hotels reduced management head count and lowered other controllable costs. Utility costs also decreased 8.4% through a combination of lower usage, lower rates and the impact of energy saving capital improvements. For the quarter, real estate taxes were flat.

Looking out to the rest of the year, we expect occupancy to increase further, which will likely lead to growth in wage and benefit costs at inflation, after taking into consideration the benefit from productivity gains. We expect unallocated costs to increase at inflation, except for utilities, where rates will increase and occupancy improvements will drive higher utilization and sales and marketing, where higher revenues will increase costs. We will also incur costs for the implementation of new sales and marketing initiatives. We expect property insurance to increase at inflation and property taxes to rise in excess of inflation.

As a result, we expect comparable hotel adjusted operating profit margins for the year to decrease 50 basis points at the high end of the RevPAR range, and decrease 125 basis points at the low end of the range. I previously mentioned the impact of cancellation and attrition fees in the first quarter of 2010 results. For all of 2010, cancellation and attrition fees will be significantly lower than 2009. Adjusting 2009 to a typical year of cancellations would result in an improvement in the above margin guidance of 70 basis points.

With respect to our balance sheet, we finished the quarter with over $1.2 billion of cash and cash equivalents, and the full $600 million of capacity on our line of credit. In the quarter, we redeemed the remaining $346 million at 7% Series M senior notes due in August of 2012 and repaid $124 million mortgage on the Atlanta Marriott Marquis, where the interest rate on the loan was set to increase 200 basis points to 9.4%.

As a result of these repayments, we reduced our outstanding debt by $470 million to approximately $5.4 billion, and we currently have 99 assets unencumbered by mortgage debt. Orders of our $325 million in exchangeable senior debentures had the right to put the securities to us on April 15 of this year. None of the securities were put to us and the next put date to holders is April 15, 2014. This completes our prepared remarks. We are now interested in answering any questions you may have.

(Operator Instructions) We'll take our first question from Bill Crow with Raymond James.

Good morning, guys. Couple of questions.

Good morning.

Ed, given the revision of the guidance. Does that -- should we interpret that maybe the dividend will come back a little bit quicker? What is your thought on the dividend?

I think the fact that you're seeing our business recover faster, ultimately does mean that the dividend will recover more quickly. But we didn't have enough taxable income to support the dividend we had talked about paying on the last call, the $0.01 a quarter. I think within -- a little hard to tell where taxable income is going to come out, especially when you start to take assets sales into account.

I don't -- wouldn't envision that even if we were at the high end of the guidance that we have provided that we would necessarily need to increase the dividend because of the need to distribute taxable income.

Okay, on the debt purchase, you did that on balance sheet. Why not in the joint venture?

That may ultimately go in the joint venture. This was one of these situations where we needed to move relatively quickly to consummate the purchase. And so, at least initially that's on balance sheet, but depending upon how the transaction evolves, it may end up in the joint venture.

Is that loan currently performing? Can you tell us that?

It is currently performing.

Okay. And then finally, I know it's a little bit sensitive, but any backlash or any other challenges in the Naples Ritz?

You mean relative to the litigation of the potential litigation that's been filed there? The short answer is that we are trying to get a better understanding of exactly what happened in the hotel. We're obviously fairly concerned with the allegations that have been raised by the employee and working closely with Ritz to get a true understanding of the details there.

But no big cancellations or anything like that?

Not that I am aware of.

Okay, great. Thank you.

We will now move on to Will Marks with JMP Securities.

Thank you. I had a question on New York and you gave the figure -- RevPAR growth figure and said that it sounded like you were pleased. But it seemed like it was well below the market and I only have general market stats, but are we seeing any acceleration in the second quarter?

Yes. In fact, New York, at least for Marriott hotels, had a strong period four. So we have definitely seen acceleration there. As I said in my comments, we expect a very strong second quarter overall, mainly due to really strong corporate and special corporate transient business.

One of the things that I would point out that I know has been causing some, I guess, just questions around our results this quarter is to remind folks that as I said in my comments. All of our non-Marriott hotels, so that is Starwood, Hyatt, Ritz Carlton, Four Seasons, are all on a monthly reporting system. And for Host, just because of the way we time our quarters, we don't capture the March results for any of those monthly hotels in our numbers.

New York, my recollection in general for New York is that it did better sequentially through the first quarter. We are missing the March results from both the W on Lexington Avenue, as well as the big Sheraton near Times Square. So my guess is that those results were added in. I don't know that number off the top of my head. But my guess if those results were added in, you would see a little better performance in New York in the first quarter.

Right. It did seem that March was a huge month in New York (inaudible) through February is more consistent with the broader industry, at least not as much relative to that performance. Okay. That's all for me. Thank you.

Thanks.

We will now move on to David Loeb with Baird.

Hi. I know -- good morning. I know you don't want to say much about Dearborn or too much about the European strategy, but I have a couple of questions. Can you give us any color on price of Dearborn and will you once that closes, if you can't now?

We certainly, David, at the point in time that the transaction closes. We'll, as we've always done, give you some insight as to what the price is. I would tell you that it is, it is a relatively -- relatively is not a fair word. It's a low price, but it is reflective of the fact that the asset, as I mentioned in my comments, is losing money this year. It lost money last year.

I think it might have been right on the margin in 2008 in terms of whether it made or lost money. So unfortunately we've been facing some big challenges in that market, not surprisingly given the challenges that the auto industry is facing. We've postponed a fair amount of CapEx at that hotel, because we've been trying to sort out the right resolution for it.

While there is I think an effective way to invest certain amount of capital dollars in the hotel, we've concluded that it would be better off selling hotels at this point than pursuing that path. So it's going to be a pretty low number and with any luck, the transaction closes in the next 60 days and we'll be happy to tell everybody about it.

Great. And on the European debt purchase, Can you talk a little bit about what your strategy is or what return hurdles you are looking for. Is this loan-to-own or are you hoping to perform that thing?

I guess I would like to say, David, there, I want to be careful about what we say because we've agreed to certain confidentiality provisions in our acquisition agreement. But what I would tell you is we would certainly expect, if we're generally looking for a return, say, in the plus or minus 10.5%, 11% range on an unleveraged acquisition. We adjust our return expectations when we pursue a leveraged opportunity. Where we've invested in this asset and given the underlying leverage compared to what we think the value is, we're comfortable that as just as a debt investment, we will likely exceed those leverage return targets. The strategy for what happens with the investment will in part be based upon how the economy improves.

Obviously in Europe and as it relates to these individual assets, we would be very comfortable if this just continues to be a performing loan, that we get paid off in due course, which based on the terms of the loan documents, would generally come due no later than about two and a half years from where we are right now. On the other hand, we obviously are very comfortable being an investor in Europe and if the property's performance does not improve enough for us to be paid off, we would be comfortable being an owner.

Okay, and I know you've answered part of this with Bill, but would you be comfortable owning hotels on balance sheet in Europe, or would you -- if you end up in an ownership position for these hotels, would those more than likely go into the joint venture?

I think the, in answer to that, is more than likely, wholly owned -- assets that when we would be acquiring would ultimately end up in the European joint venture. We would be comfortable investing directly in Europe, but I think generally we have found that we like the joint venture structure that we have put together to operate over there. We've been very -- we're very comfortable with the perspective on investment of our partners and we would like to see that relationship continue. So in general, I would expect that our European efforts will happen in the joint venture, but there may be individual transactions that happen outside of that structure.

And can I ask one more? Sorry to ask so many. Can you just comment a little bit on the single asset acquisition market and the portfolio market, and if in the single asset market you think this is a better time to be a seller and might there be more? I know you've done a couple. Might there be more?

The market is evolving on the asset acquisition side. What -- I would break what we're seeing up. And again, as I have mentioned in my comments, it's still not a flood of opportunities, although our pipeline is clearly larger than it was just even 65 days, 70 days ago. I would say that the opportunities are splitting into two camps.

There is one group of opportunities that are happening because pricing has been recovering. And I think you're seeing fairly low cap rates and fairly high EBITDA multiples, reflecting both the outlook for the future, as well as the fact that we're at trough EBITDA levels. But with the recovery in pricing, you are seeing certain sellers who face debt maturities in the near term who are thinking perhaps it's worthwhile testing the market to see if there is an opportunity to sell an asset today and at least recover some of their initial investment.

I think there's another group of sellers, again, relatively small group, but there's another group of sellers who are evaluating their business, now are maybe more confident about investing in their own business, but might be looking to liquidate certain of the assets they have in order to then reuse those proceeds in a different direction within their individual business.

I describe that a little bit as a strategic seller because that type of a seller is really doing this because of strategic aspect of their business as opposed to because they necessarily think this is when they are going to get the maximum price for an asset. I suspect that we will see more activity in both of these camps as we work our way through the year. But as you can tell by the volume of transaction activity that's been recorded, in each instance, the volume is still relatively light. But we are relatively encouraged by at least the trend that we're seeing there and the number of conversations that we're having.

And portfolios?

Well, there's been more activity on the single asset side than on the portfolio side. We're fortunate with our scale that we can look at portfolio deals. But to date, with the exception of some -- the debt opportunities similar to the one that we moved forward with in Europe, we really haven't seen a lot on the acquisition side that's in the portfolio.

That's great. Thank you very much.

We'll now take our next question from Joe Greff with JPMorgan.

Good -- excuse me. Good morning, guys. Most of my questions have been asked and answered. Just with respect to your 2010 outlook. If you were to look at it on a quarterly basis, I know you don't break out, but just broadly, when do you see rate recovering to exhibit year-over-year growth? And I guess when would you see comparable operating profit margins start to show some year-over-year increases?

Well, that's probably the trickiest question that we're trying to contemplate right now. What I would say to you is, as you well know, is that the recovery in rate is going to happen on a market-by-market basis.

And, some of the markets that Larry talked about that I think we've got a chance to see some rate growth relatively quickly would include some of the big East Coast markets, like Boston, New York, and DC. I think New Orleans, surprisingly, is having a pretty good year and we would expect to see some rate growth there. Miami, in part because of the burst around the Super Bowl, but I also think in general we're seeing some strength in that market.

So that's another market where we think it's likely we'll see some rate growth in the relatively near-term. Portfolio-wide, I would bet that it's probably at best the second half of the year. It's certainly within the realm of the guidance that we provided. We're really not anticipating that it happens until the end of the year. And I think it's a little touch and go on whether or not we actually get the true rate growth for a full quarter by the end of the year. It's probably at the high end of our guidance, there's a shot at that.

On the margin front, I think you -- our estimate is that we're looking at a 50-basis point decline tied to a 4% overall full year RevPAR growth rate. Again, my guess is that the margin -- because margin growth is going to be tied to both overall level of RevPAR increase, as well as to some degree whether that's happening because of rate or because of occupancy. If there's an opportunity for positive margins, it's certainly near the end of the year.

Great. And I don't know if you have this information, guys, but if you were to adjust your first quarter for reporting outside of, I guess [Marriott] reporting system, what would have been a quarterized EBITDA number for your entire portfolio?

For EBIT, we don't -- from a standpoint of EBITDA, we haven't calculated that number.

Okay. Good enough, thanks.

We'll now move on to Chris Woronka with Deutsche Bank.

Hello guys. Ed, if I look at the guidance for full year now, at the high end of the range stripping out the effect of the [cancel] and attrition fees, 4% RevPAR would be flattish to the margins, maybe plus 20[%]. Does that imply you need 4% RevPAR growth going forward to get those flat margins?

I think it's a correct assumption as it relates to this year. Going forward, ultimately margin growth looks, ties to the relationship between revenue growth, which is of course more than just RevPAR growth and inflation.

So if we continue to see inflation stay at a fairly low level, plus or minus 2%, then I would expect that we would be able to see margin growth in 2011 and 2012 at below a 4% RevPAR level. Now, I suspect that if the recovery continues, that won't be a problem because we're going to be seeing stronger levels of RevPAR increase than that. But I think you could see margin growth at less than 4%.

As we've commented in the past, the transition year when one goes from having been in free fall to starting to see RevPAR recovery in business recovery is always a tricky year for margins. Well, I would say there's tremendous strides made at all of our properties at taking out costs. There clearly are some costs that came out of our operations that are not sustainable.

And so typically in that first call it eight months to 12 months of RevPAR recovery, some of those costs trickle back in, which usually lead to the first year of positive RevPAR growth having less than impressive margins. But normally, especially if we're doing our job on the asset management side, as -- once you get past that initial recovery of some expenses, you get back into a more traditional relationship. And as long as RevPAR revenue growth are outpacing inflation, we should see margin growth.

Right. Can you remind us of what maybe the incremental, you said for first quarter $12 million, incremental cancel attrition fees? Can you tell us what it was full year in '09, maybe relative to '07 --

It's $40 million incremental.

$40 million, okay.

Over a typical year.

Great. One final one on the asset front. You guys have sold some non-core stuff, and I don't think anybody looks too hard at the prices per key or anything like that. But with all this capital that appears to be available, do you think about selling what might not be a non-core asset, but maybe not trophy asset. But something where you get a pretty substantial price per key, just demonstrate the value that I know you guys think is in the portfolio?

Chris, I don't know that there would be -- I wouldn't do it necessarily to demonstrate value, but you raised a good point. Pricing has certainly recovered more quickly than some folks had anticipated. And as operations begin to improve, one can get more comfortable with selling some of the assets that we don't expect to be owning in 2014 or 2015 a bit sooner.

We're in the process right now of evaluating the portfolio and looking at a number of assets to determine if it is better to sell those assets now, to take advantage of a fair amount of capital that's not able to be deployed or whether we're able to, whether we would be better off waiting for the NOI to recover a bit more and then put those properties on the market.

That's one of the reasons why we made the statement that, well, we're not putting any more sales -- not contemplating specific sales in the context of our guidance, we are intending to market a few properties and we'll see how that plays out. But what I would say on that is because of the amount of capital we have, we do not need to effect a sale for liquidity reasons. So we will be very, very price sensitive in any of those marketing opportunities.

If we're not hitting the number that we want, we will not be a seller because the only reason to do it is the one that you outlined, to take advantage of a strong market and sell some assets that while they are non-core for us, could clearly be a good acquisition for somebody else.

Right, okay. Very good. Thanks.

We'll now move on to Jeffrey Donnelly with Wells Fargo.

Good morning, guys. A few questions actually on your 2010 RevPAR outlook. Are you able to break out for us the composition in your outlook between occupancy rate and I guess I would call mix shift?

Not as precisely as you would probably like, Jeff. I think that's the tricky part when you're in this a transition. As we clearly saw tremendous occupancy growth in the first quarter, and that was unfortunately offset by rate declines. We work our way through the quarter, though, we probably would be expecting to see the occupancy run at a fairly heavy rate.

But the question's going to be how quickly can we eliminate negative rate and move into positive rate. Let me give you a couple of other insights around why we got more optimistic relative to RevPAR for the rest of the year. The big driver for us was what was happening on the transient side. As I mentioned, we were up 12% in overall transient demand. We are practically for the first quarter at least back to where we were in 2007.

But the biggest key for us was the fact that you were -- when you combine corporate and special corporate business, we were up 15% in room nights. Now, while we were still down in rate in those segments, the fact that, that demand was coming back was pretty key for us. Because we had not really seen that happen even in the fourth quarter of last year, and hence, when that starts to occur, that's a great sign for the fact that the business is going to rebuild.

I think the other piece of it, as you look at what was happening on the group side, we started out the quarter at a deficit for both the full year and for the quarter. We very quickly closed that deficit in the first quarter and ended up positive in room nights. A lot of that was because on the association events, people showed up and in fact we started to run into some situations where more people showed up than we had rooms available.

And even on the corporate side, we started to find that our booking pace was accelerating beyond what we had expected. So as we look at the activity for the second and third quarter, it's very solid. There's still a little bit of weakness in the fourth quarter, but we're up for the full year in terms of group booking pace now, which we haven't been able to say for quite sometime.

And I think we felt that because that's such an important component of our business. And because when you go back and look at where we were compared to '07, we had really lost the most in terms of group room nights compared to the other segments in our business. The fact that that was beginning to recover led us to look at much more optimistically at the rest of the year.

That's great color. Sticking with RevPAR, I'm curious, I mean Marriott obviously had a pretty robust outlook for the US and the market expects Starwood -- if history proves true -- to ratchet their outlook above Marriott. Both of those brands comprise the majority of your earnings and you arguably own the best hotels on average within their portfolios. I guess why is it that your 2010 RevPAR outlook of 1% to 4%, I guess is where it's at? Because typically your guidance is much tighter in line with someone like Marriott International. Is it, I guess I'll call it conservatism for the sake of conservatism, or do you think that their expectations for the back half of the year are a little more aggressive?

My guess is it's a combination of us being a little bit more conservative and of course recognizing that ultimately we are -- it's not just RevPAR and it's EBITDA for us, whereas for them they are much more sensitive just as the top line changes, because management fees don't represent anywhere near as big a component as their earnings and EBITDA does for us.

At the end of the day, I think I would reiterate what I said the last quarter when there was a little bit of a gap between where we were and where both of them were, which is that there's really no reason, given -- that I would agree with your point, that we own some of their best hotels and we typically perform pretty much in line with them. There's no reason in our mind why we would underperform either of them.

I think it's just -- obviously we're moving our expectations a fair amount from one quarter to the next, and I think we would rather -- we don't want to necessarily get ahead of ourselves. We -- you should take from our call, we feel very good about what we're seeing in the first quarter. But we're still in a recovering economy. And we want to take note of that.

Just one last question. We've heard some anecdotes that group hotels might be benefiting from recovering attendance, effectively that group size is proving larger than the rooms that blocked -- that was booked back in 2008 and 2009 and for this year providing hotels -- group hotels, such as yours, with an upside to group rates at the margin from that overflow business. Is there any truth to that reality or that rumor? Are you guys seeing that so far this year?

On an anecdotal basis, we've certainly had situations where more people showed up than we had expected. I think what we are finding, though, is that the hotels are constantly in touch with the bigger groups to understand what their room nights are going to ultimately come out to be. And what they have been finding is that where a lot of times last year, we might have expected 800 rooms and by the time we got two weeks out, we were starting to find that 800 was turning into 700 or 750. What we're hearing from our GMs at this point is holding at 800, it may be coming in higher in some cases.

The key for us on that is to really understand that and start to build that into our revenue expectations, because as we begin to get more confident that those associations will not only fulfill their full block, but actually begin to exceed it, that allows us to begin to do some mix shift by cutting off some of the cheaper channels that we might have available and save rooms either for that higher-priced group or simply save -- make certain we save enough rooms in certain markets where we're able -- we're only selling rooms to that higher price corporate customer as opposed to that lower price discount customer.

Great. Thanks, guys.

We'll now move on to Ryan Meliker with Morgan Stanley.

Good morning, guys. Just a couple of quick questions. First of all, in terms of the RevPAR front and where things are looking right now, can you give us any, any additional detail on, how much your group booking pace moved up in the quarter, for the quarter and first quarter. And how it moved from last time we spoke to, say, for the full year and both in terms of rooms and rate?

Let's see, we gave some data before. Let me try to approach it a slightly different way. If you look at what was happening on a net booking pace in for the first quarter, we generally found that in the first quarter itself, our net bookings were up by over 100% compared to where we were in '09. And those bookings actually exceeded the pace that we had in 2007, which we tend to use as a stabilized year by more than 25%.

If you look at what -- how it played out for the quarter, we were -- we started off down about 6% and ended up slightly. So you can see that the fact that we booked so many more rooms in the quarter than we traditionally have done allowed us to close the gap in a way that we probably wouldn't have in the past. On a full year basis, you're finding that -- the bookings are short-term.

There still is not -- we haven't hit that magic moment that I can tell yet, where somebody calls up, wants to do an event in four weeks and finds out that there's no room available at the inn. So we haven't quite gotten to that point because of where our occupancy levels were. So you're finding that the most of the success in the bookings pace side is relatively short-term, which is why our third -- our second quarter bookings are up, almost over 250%, compared to 2009.

Now, recognize the -- there weren't a lot of short-term bookings happening at this time last year, but the reality is even the, even the second quarter bookings when you go back and compare them to 2007 are slightly positive. So we would take that as a good sign, too. The net of it is that when we started off the year being negative in terms of overall room nights, we've closed that gap in a material way and in fact now using -- adjusting the number of nights booked to reflect what we thought were the cancellations that happened last year. Because I think that gives you a cleaner sense of the data, instead of being down I think 6%, we are now up, call it 3% to 4%. So I think that's -- that obviously is a pretty good change in a relatively short period of time.

Yes, that's a great change, certainly helps. Now, so that makes sense in terms of bookings. How do rates look, looking at today versus rest of the year compared to last year?

I think you should still assume that rates are probably the short-term rates that we're booking at are generally lower than the rates that are on the books, but there are some markets where that's beginning to turn.

And can you clarify to what degree lower? Are we talking 0% to 5% or 5% to 10%, et cetera?

Not in a way that I think would be meaningful.

Okay, and one last question I had was -- as you guys are obviously, looking at dispositions and looking at acquisitions, what is your general sense in terms of the way you're approaching valuation for potential acquisitions and dispositions and the way some of -- competitors that you're going up against for bidding on these properties are looking at them?

Seems like cap rates right now are at historically low levels, which makes sense given the historically low net income, but I feel like most people aren't looking at evaluational cap rates. Are you focusing on value relative to replacement costs or price per key? How are you guys generating your numbers and how do you think your competitors are?

The way we are looking at acquisitions. This was in the model that we always expressed in terms of how we look at transactions. What we look at, we start with trying to understand what we think based on our projections is an unlevered rate of return from a particular asset.

So in each instance, what we're going to do with that, we're going to make certain assumptions about what the performance is going to be this year. And then we're going to assess what we think is likely to happen for that particular asset and that particular market over the next few years. And then I think having calculated in what we think the recovery is, we would probably stabilize it a longer term revenue and EBITDA or NOI growth rate and carry that out to ultimately get to ten year discounted cash flow.

If you think about how that works, obviously markets that have fallen further, but then are expected to rise faster are going to ultimately end up with lower cap rates today, but that's just reflecting the particular circumstances of their market.

The other major element that we would look at is the one you were referencing, which is trying to understand where you are in the discount to replacement cost. I think one of the key factors in employing that in your analysis is that to the extent that you are legitimately analyzing what your replacement cost is, if you're buying at a meaningful discount to replacement cost. Well, that in and of itself does not tell you that you're necessarily going to have a successful investment.

It does give you a sense that it is harder on a relative basis if the discount is larger, for a new competitor to come into your market simply because the cost to build that new competitor are probably not going to make sense in the context of the return on the investment until cash flows have appreciated meaningfully.

So discounts or replacement costs becomes a good gut check for us on whether or not -- if you underwrite very aggressive recovery for an asset that you thought was at replacement cost, you would probably have to ask yourself if you're really being fair about the likelihood of new supply in that market. Those would be the two primary things that we would look at. My guess is at the end of the day, I think most of our competitors are pretty sophisticated. They would each have their own take, but I suspect that they are looking at it in generally the same way.

Great. That's helpful. Thanks a lot.

We'll now move on to Josh Attie with CitiGroup.

Thank you. I just have a quick question on the margins. When I look at the high-end of your guidance of up 4% and margins down 50, and then I strip out the impact of the cancellation fees for the full year. I get 5% to 6% RevPAR growth 2Q to 4Q and call it 75 basis points of margin, adjusted for the cancellation fees.

Two questions, one, am I thinking about that the right way? And two, what do you think those margins would be in year two of the recovery on similar RevPAR, adjusting for the fact that you'll have some costs added back this year?

Josh, it might make sense, with respect to the assumptions that you're coming up for the second half of this year, I suspect that this may make sense for you to catch up with Greg to go over that, because it's a little hard to capture that on the fly.

What I would say with respect to the next year is, thinking about 2011, is I think you got -- I would go back to the comments that I made before. I think this year's tougher. The speed with which everything recovers this year will probably have played some role in looking at what happens in margins next year.

And to the extent that we begin to see a stronger recovery and so some of that cost creep that I'm expecting's going to happen, happens this year, it probably sets us up for a more normalized year in 2011 with respect to margin. When you step back and look at what would happen in 2011, if you were to have 5% RevPAR growth, I would be very disappointed if we didn't have some margin growth there. I'm not anticipating that inflation's going to be particularly high next year.

And so assuming that that plays out that way and that there is a reasonable gap between RevPAR/revenues and inflation, we should be in a situation where we should see some margin growth.

Hey, Josh, this is Greg. I think your math was right, for Q2 to Q4 from a RevPAR perspective. And as you know, Josh, even though Ed mentioned earlier in this call that rates could turn positive at some point in the second half of this year. When you're looking at the full year results with RevPAR of 1% to 4%, most, if not all of that is due to an increase in occupancy. And so of course next year, when you have a bigger part of the RevPAR increase will be rate, obviously that will be helpful for margins as well.

Okay, thanks a lot.

And we will now take our final question from Smedes Rose with Keefe, Bruyette & Woods.

Oh, thanks. I just wanted to ask you a quick question. Your ATM still has, what looks like, you could issue 3 million or 4 million more shares on that. Would you expect to exhaust that and reload, or do you feel like you're done on that side of the liquidity?

That's a good question -- it all depends upon how active we could ultimately be on the acquisition side. We obviously have a fair amount of capital right now. We -- as Larry mentioned in his comments, we got a pleasant surprise when the exchangeable that was puttable to us a couple weeks ago wasn't put.

So that gives us an extra $325 million of capital that we weren't counting on. So we'll take that into account in deciding what to do with the continuous equity program. At the end of the day, I think folks should assume that we are trying to add additional hotels to our portfolio and that we will ultimately draw on that capital in order to help fund that growth. In the long run, I would expect that we would have another continuous equity program.

We do want to have -- I think that's a very cost effective way to fund the equity portion of our balance sheet. But it's all going to be tied to exactly what level of growth we're having and because if you don't have the growth, then you don't necessarily need to issue the incremental equity.

Okay, thanks. You answered the rest of our questions. Thank you.

And that does end our Q&A session. I would now like to turn the call back over to Mr. Walter.

Well, thank you very much for joining us today. We appreciated the opportunity to discuss our first quarter results and our outlook. We look forward to providing you with more insight into how this interesting year is playing out in mid-July at our second quarter call. Enjoy the rest of your day.

And we would like to thank everyone for their participation and this now concludes today's conference.