Host Hotels & Resorts Inc (HST) 2010 Q2 法說會逐字稿

Good day and welcome to the Host Hotels & Resorts, Incorporated second 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 second quarter earnings call. Before we begin, I'd 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 reconciliation 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 2010. Larry Harvey, our Chief Financial Officer, will then provide greater detail on our second quarter results, including regional and market performance. Following the remarks, we will be available to respond to your questions. And now, here's Ed.

Thanks, Greg. Good morning, everyone. We are pleased to report that, for the second straight quarter, our operating results and trends were significantly better than we expected. The improving economy and resulting ramp-up in demand generated sequential improvement in RevPAR throughout the quarter. This positive momentum has enabled us to increase our estimates for the second time this year, which I will discuss further in a moment. We have also been successful in placing some great hotels under contract, which will further enhance the quality of our portfolio.

First, let's talk about our second quarter results. Our comparable hotel RevPAR for the second quarter increased 8.1%, driven by an increase in occupancy of 6 percentage points and offset by a slight decrease in our average rate of 710. Our average rate was $175 and our average occupancy was 73.8%.

Strong group business helped drive an 8.6% increase in food and beverage revenues. Overall revenue growth of 6.2%, combined with flat comparable hotel adjusted operating profit margins, resulted in adjusted EBITDA of $250 million for the second quarter and FFO per diluted share of $0.23. On the year to date basis, comparable hotel RevPAR increased 3.5% and food and beverage revenues grew 3.1%. Total year to date revenue growth of 1.7%, combined with comparable hotel adjusted operating profit margins that declined 110 basis points, resulted in year to date adjusted EBITDA of $376 million and year to date FFO per diluted share of $0.31. I should note that RevPAR improved throughout the quarter, with period six achieving RevPAR growth of nearly 10%, aided by our first overall rate growth in over a year and a half. On a calendar year basis, our second quarter RevPAR was up nearly 10%. In general for the quarter, the occupancy increase was better than we had expected and the average rate declined less than we anticipated, resulting in a better than expected RevPAR and EBITDA.

Turning to our business mix for the quarter, we continue to see positive demand trends, which resulted in a substantial increase in overall room nights for the quarter of almost 9% compared to last year. More importantly, we are seeing demand recover specifically in our higher rated business segments for both group and transient. This is an extremely positive sign and suggests that hotels are becoming less reliant on discounted bookings as demand continues to strengthen. Transient room nights increased 8%, led by an 11% increase in our premium and corporate segments and a 33% increase in the special corporate segment. The recovery in business travel that we experienced in the first quarter continued to gain momentum this quarter. In addition, the average rate in our premium and corporate businesses increased by more than 6%, resulting in revenue growth of 18% in those segments.

Conversely, we experienced a 1% decrease in discount room nights, which was the first decline in this segment since 2007. This should be viewed as a positive sign that hotels are more confident in their ability to attract higher rated business travelers. Overall, the combination of higher rates and the positive shift in business mix resulted in a transient average rate increase of almost 3% for the quarter, the first such increase in two years, leading to an increase in transient revenue of 11%. The recovery that began in group business at the beginning of the year accelerated, as total group demand increased 10% for the second quarter, led by a 16% increase in corporate group. These trends were even more pronounced in our luxury hotels, where group activity increased by 27% and corporate group was up by 34%. In the quarter, for the quarter bookings in the discount segment grew approximately 33%, while higher rated association and corporate bookings grew 121%, indicating that hotels are starting to rely less on the discount market for short-term bookings and focus more on higher rated business.

The strong group demand, combined with the gradual shift in business mix, held the average rate decline in group to less than 5% and resulted in nearly a 5% increase in group revenues. Group booking activity in the third quarter is showing material improvement compared to 2009. At the beginning of the second quarter, booking pace for the third quarter was down about 2%, but by the end of the quarter booking pace compared to the prior year had improved to an increase of roughly 8%, which reflects the continued short-term nature of our group bookings and our limited visibility. Our fourth quarter booking pace has also demonstrated sequential improvement, albeit at a more moderated pace. The positive results in the first half of the year, combined with the strong third quarter booking pace, should result in a meaningful improvement in group room nights for the full year compared to 2009.

Transient bookings for the third and fourth quarter are also trending slightly ahead of last year, especially during the holiday period. Overall, improvement is still relying on the strength of the economy, but we are seeing signs of improvement in business travel, which is the key component to driving the recovery in lodging demand. On the investment front, we have several transactions to talk about. First, we signed an agreement to acquire the 270-room W New York - Union Square in a joint venture with Union Square Real Holding Corporation through a prenegotiated reorganization plan requiring US Bankruptcy Court approval. Host will participate as a majority partner in a venture with Istithmar World to purchase the hotel. A subsidiary Host will provide asset management services to the venture. The hotel is located on the northeast corner of Union Square at Park Avenue and 17th Street, adjacent to preeminent commercial and residential neighborhoods, near cultural attractions, fine dining, and entertainment, as well as some of the best shopping in the city. The building was renovated, converted to a W Hotel, and opened in November of 2000.

While the hotel was heavily impacted by the downturn, which led to the recent bankruptcy filing, both New York and lifestyle oriented properties are recovering quickly, as is evidenced by the year to date 34% RevPAR increase at our W New York Hotel on Lexington Avenue. We also recently signed an agreement to acquire the 424-room Westin Chicago River North for $165 million. The hotel is situated in a primary commercial center of the city and is close to major tourist attractions, including The Magnificent Mile, the Navy Pier, and Millennium Park. The hotel is in excellent condition, with large guest rooms and approximately 28,000 square feet of well designed meeting space, including an 8,400 square foot ballroom. We expect to close this transaction in mid-August.

Finally, we signed an agreement through our joint venture in Asia, to develop seven Accor branded hotels, at a total cost of $325 million, in three major markets in India -- Delhi, Bangalore, and Chennai -- through a partnership with Accor and InterGlobe, both of which have a proven track record of successfully developing and operating hotels in India. The portfolio consists of approximately 1750 rooms, will have a strong upscale focus that will cater to India's growing corporate market. The time line for opening these hotels ranges from early 2011 to early 2013. Our Asia joint venture expects to invest approximately $50 million in the transaction. We will continue to look for acquisition opportunities that meet our investment criteria and our guidance for the remainder of the year assumes that we will complete at least one additional deal beyond what we've announced today, given our very active pipeline. Additionally, we have not included any added dispositions in our guidance for the remainder of the year.

Capital expenditures for the second quarter totaled approximately $50 million and $100 million year to date, including $33 million of return on investment projects. For the full year, our expected capital expenditure estimate is $300 million to $320 million.

Now, let me spend some time on our outlook for the remainder of the year. Our performance in the second quarter was significantly better than we anticipated, and as I previously referenced, our advanced bookings for the third quarter are quite robust. As a result, despite the modest pull back in economic forecast for the remainder of the year, we believe it is appropriate to further increase our forecast of our full year performance. We now expect RevPAR for the year to increase 4% to 5.5%, with a comparable adjusted margin change of flat to a decline of 50 basis points. Based on these assumptions, full year adjusted EBITDA would be approximately $795 million to $825 million and FFO per diluted share would be $0.66 to $0.70.

In closing, we are optimistic about the trends we are seeing in our business. Demand is continuing to strengthen and we are focused on our pricing strategies for continued improvement on the rate side. On the investment front, we are excited about the transactions we announced today and we will continue to aggressively look for investment opportunities, both domestically and internationally. Thank you, and now let me turn the call over the 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 quarter, with a RevPAR increase of 9.9%. RevPAR for our suburban hotels increased 9.4%, while RevPAR at our airport and resort conference hotels increased 5.4% and 2% respectively. As expected, our top performing market for the quarter was Boston, with a RevPAR increase of 23.8%. Occupancy increased nearly 13 percentage points and ADR increased 3.7%. Transient ADR was up 6%, as the market benefited from compression with an increased group and citywide demand and a mix shift from discount rooms to retail and special corporate business. Some of the improvement was due to easier comparisons, as the Boston Marriott Copley Place and Sheraton Boston were under renovation in the second quarter of 2009. For the third quarter, we expect the Boston market to perform in line with the portfolio.

RevPAR for the New Orleans Marriott increased 22.4%, with an occupancy increase of 7.9 percentage points and a 10.5% increase in ADR. Group demand increased significantly, allowing for an increase in transient rates for the quarter of 12.5%. We expect the hotel to have an outstanding third quarter due to additional citywide and group business, as well as the benefit from demand generated by the Gulf oil spill containment and cleanup efforts. New York also had great quarter, with a RevPAR increase of 19.1%, as occupancy grew by 9.4 percentage points and rate increased 7%. Robust transient business and strong group bookings drove the improvement in demand. Transient ADR increased 14.2% due to a shift in the mix of business and rate increases. We expect New York City to have a strong third quarter due to high levels of business, transient, and leisure demand.

The Miami/Fort Lauderdale market outperformed our expectations, with a RevPAR increase of 14.3%. Occupancy was up 11.7 percentage points, while rate declined 2.9%. The outperformance was driven by growth in transient and group business, as well as the impact of the late 2009 ballroom addition at the Harbor Beach Marriott Resort and Spa. We expect the Miami/Fort Lauderdale market to have a weak third quarter, due to the impact of the public space renovation at the Miami Biscayne Bay Marriott and lower levels of group business. Orange County, a market that was extremely hard hit by the housing market meltdown, had RevPAR growth of 13.3% in the quarter. Both transient and group demand were strong, as occupancy increased 10 percentage points, while ADR was down 1.5%. We expect the Orange County market to slightly underperform the portfolio in the third quarter, due to a slight decline in group business.

RevPAR for our San Francisco hotels increased 12.1%, due to better transient and group demand. Occupancy was up 10.2 percentage points, while ADR declined 2.9%. We expect our San Francisco hotels to slightly underperform the portfolio in the third quarter, due to less citywide and group demand. The Chicago market recovered from a tough first quarter to post a 9.2% RevPAR increase that was driven by a significant increase in group and transient demand. Occupancy increased 7.6 percentage points, while ADR declined 2.7%. The Swissotel, with its recent addition of 38,000 square feet of meeting space, substantially outperformed the market, with a RevPAR increase of 20.6%. We expect our Chicago hotels to outperform the portfolio in the third quarter and for The Swissotel to continue to perform exceptionally well.

RevPAR fell 2.7% for our Hawaiian hotels, as occupancy increased 7.6 percentage points, due to strong transient demand, while ADR fell 12.8%. Group demand was weak in the quarter. However, we expect the Maui market to outperform the portfolio in the third quarter, due to continued improvements in airline capacity and stronger transient demand. RevPAR for our Phoenix hotels declined 3.9%, with a 6.3 percentage point increase in occupancy and a 12% drop in ADR, primarily due to significant discounting of group rates. Transient demand has remained relatively strong. We expect our Phoenix hotels to continue to struggle in the third quarter, particularly due to the renovation of a significant amount of the meeting space at two of our hotels and the construction of a new ballroom at the Westin Kierland.

As expected, the San Diego market continued to underperform, due to a substantial decline in citywide and group demand and the absorption of the new Hilton that opened in 2009. RevPAR declined 12.8%, with an occupancy decline of 1.6 percentage points and a 10.8% decline in ADR. However, we expect our San Diego hotels to outperform the portfolio in the third quarter, due to increased citywide activity. Year to date, Boston has been our top performing market, with a RevPAR increase of 18.5%, followed by New Orleans, with a RevPAR increase of 13%, New York with a RevPAR increase of 12.4%, and Miami/Fort Lauderdale with a RevPAR increase of 11.9%. Our worst performing markets have been San Diego, with a RevPAR decrease of 14.7% and Hawaii, where RevPAR declined 7.7%.

For our European joint venture, RevPAR calculated in constant Euros, increased 5.6% for the quarter. Occupancy increased 8.1 percentage points and ADR declined 5.8%. The Crowne Plaza Amsterdam, the Sheraton Skyline in London, and the Westin Palace Madrid outperformed the rest of the portfolio, while the Hotel Arts Barcelona was the poorest performer. On a year-to-date basis, RevPAR calculated in constant Euros increased 3.2%. For the quarter, adjusted operating profit margins for our comparable hotels were flat, consistent with the first quarter. Margins for the second quarter were significantly impacted by the level of cancellation and attrition fees in 2009. In the second quarter of 2009, cancellation and attrition fees were approximately $16 million higher than the second quarter of 2010, accounting for 100 basis point reduction in margins. In addition, property level bonus expense increased significantly in the quarter, resulting in a 25 basis point reduction in margins.

Strong rooms flow-through is a challenge when there's a substantial increase in occupancy and a decrease in rate. However, rooms flow-through was excellent for the quarter at 70.6%, as rooms cost per occupied room was flat. Food and beverage flow-through was also very strong at 50.7%. The shift in the mix of business to more catering and audiovisual revenues and a reduction in beverage costs as a percentage of revenue led to the outperformance. Contributing to the strong flow-through, productivity improvements led to a reduction in wages and benefits on a per occupied room basis. However, due to the overall increase in occupancy, wages and benefits increased 3.5%. Unallocated costs increased by 6% for the quarter. This increase was primarily driven by expenses that are variable with revenues, including credit card commissions, reward programs, and cluster and shared service allocations. In addition, as we mentioned on the first quarter call, the costs related to implementation of new sales and marking initiatives would impact margins for the rest of the year and they did in the second quarter.

Utility costs only increased 0.6%, reflecting the impact of energy saving capital improvements. Property taxes declined 2.8%, while property insurance increased 15.6%. Looking now to the full year, we expect comparable hotel adjusted operating profit margins to be flat at the high end of the RevPAR range and decrease 50 basis points at the low end of the range. These amounts have been reduced by 65 basis points for the year-over-year difference in cancellation and attrition fees and 25 basis points for incremental property level bonus expense. During the quarter, we redeemed approximately 4 million shares of our 8 7/8% Class E series of preferred stock for approximately $100 million. We finished the quarter with nearly $1.2 billion of cash and cash equivalents and the full $600 million of capacity on our line of credit. After taking into consideration the acquisitions detailed in our press release, we would have approximately $925 million in cash and cash equivalents. This completes our prepared remarks. We are now interested in answering any questions you may have.

(Operator Instructions) And we'll take our first question from Felicia Hendrix from Barclays Capital.

Hi. Good morning.

Good morning.

Just on that most recent comment you made on flow-through, which I thought was actually interesting, can you just remind us at the peak or when your business is going at full force what your flow-through typically is?

It depends on, obviously, what's coming from, in the rooms area, what's coming from rate or what's coming from occupancy. But, I'd say that we'll probably end up somewhere in the plus or minus 80% range on the room side when we're starting to get to the point where the bulk of the improvement is coming from rate, although we've had some quarters that have been higher than that. Food and beverage tend to -- is really tied more to whether the source of business is outlets or if the source of business is banquets. The 50% flow-through we had this quarter was quite good. We've had some quarters that have been a little better, but typically I think we would probably assume it would be slightly lower than that, more in the 40s.

Okay, that's helpful, thank you. And just on your announcement regarding the JV in India, I know it's such a small part of your overall business and it looks like a great opportunity. I'm just wondering, the hotels that the JV are investing in seem to be a little bit lower down the chain scale than you typically look at, so I was just wondering, is that just all part of the opportunity or is there anything to read into that?

Well, I think it is part of the opportunity, but we -- as we have examined the emerging markets, especially India and China, we have felt that there is a better opportunity to invest more in some of these middle tiers, although not all these hotels fit into that description. But, we've felt the midscale and upscale, versus upper upscale and luxury, probably present a better opportunity, in part because, as you look at the opportunity for increase in demand in India and China, it is as much driven by the increasing wealth of those populations and more people moving into the middle class, which should, based on history, suggest more people traveling. But that class, when they start to travel, are probably not going to be staying in luxury hotels. They're going to need something that's a bit more affordable. And that's really true whether it's for leisure or whether it's for business. So, bottom line is we've looked at both India and China. While we would be interested in opportunities that were in higher price points, our sense is that these are the right price points to be investing in those markets.

That makes sense. Thank you. And then you made two announcements regarding acquisitions. I was just wondering at this point what the temperature of the transaction market is. Obviously that's a hot topic for you guys.

I would say that clearly, as you've looked across the spectrum you have seen us and others announce acquisitions, certainly at a quicker pace than what we saw last year. So, by definition, the market's a little bit stronger. I would still say, though, that as we -- this is -- we're nowhere near a hot market yet. What you're seeing happen at this point is, I think, consistent with the way some of us had predicted, which is whether it's distress in the form of the W deal, where you have a deal that has essentially blown up, gone into bankruptcy, and needs to be worked out. Or it's a situation that we really faced in the opportunity on the Westin, where there wasn't a distressed situation, but simply there was debt coming due in the near term and that ultimately the owner made a decision that it was probably better to sell rather than try to refinance that debt.

You're starting to see that impending debt bubble start to create, in some fashion, some transactions. And I suspect that as we go forward over the next six to 12 months, we'll continue to see that those two forces are the primary motivation behind the transactions that happen. That doesn't mean that there won't be transactions that just happen because somebody has made a decision to take advantage of whatever capital they have in an asset and sell because they have a better place to deploy the capital. But, I think it's still -- in the near term it's more likely to be the other type of deal.

Great. Final question, just wondering, are there any encumbered properties that you have concerns about right now?

Any encumbered properties that we have?

Yes.

We don't -- the bulk of our portfolio is unencumbered. It's, frankly, one of the strengths of our balance sheet. The one property that we have debt on that we've disclosed as somewhat challenged is the Desert Springs Marriott. That property is encumbered with, Larry what is it, about $80 million?

$74 million.

$74 million loan. It is currently not meeting debt service. We're covering the shortfall at this point. We continue to evaluate whether or not that decision makes sense going forward.

Okay, thank you.

And will that be all, ma'am?

Yes, that's it, thank you.

Okay, great. Mr. Andrew Wittmann from Baird has our next question.

Hi. I want to dig a little bit more into the transaction market. You said you're not modeling any -- or guiding on any dispositions. Didn't see anything this quarter. Does that mean that we shouldn't really expect anything, or are you still considering potential sales of assets?

The short answer to that is that it's unlikely that we will sell anything this year. That doesn't mean that some opportunity might not present itself that we would end up deciding to take advantage of. But, our general sense right now is that while the -- in looking at the assets that we would like to sell, our sense is that we would be better off marketing those in 2011 and 2012 as opposed to in 2010.

Okay. That makes sense. And then just, again, on the acquisition side, to dig in a little bit deeper, just can you talk about where you see more relative activity around the world? Is it in your ventures? Is it here domestically? Where do you think you'll be more active at deploying capital? And then, where are -- where's pricing in terms of maybe first year cap rates or maybe second year cap rates, given that we're still coming off depressed levels? What prices are you seeing for assets that you're looking at?

Let's start with where we think we're going to be active. I would bet that if you look, in general, we'll be investing more dollars over the next couple of years in the US than we will be investing internationally. But, I think you'll find that the balance between our international activity and our domestic activity will be more even than it's been in the past. We certainly are seeing some interesting opportunities in Europe right now and are pursuing those. We also have some other things on the -- in the pipeline in Asia, although nothing that we obviously were prepared to announce at this point in time. And we have a number of things that we're looking at in the United States, too. So, we'll just have to -- some of it is just a function of how quickly do transactions go from the initial stages of activity to actually turning into a transaction.

When it comes to the pricing question, it is really difficult to give a short answer to that question, because the reality is -- as you look across the United States, for example, markets like New York where you have had -- you had a very deep decline over the course of 2008 and 2009, but where one would likely anticipate a very strong recovery, tend to lead you towards lower cap rates. Other markets, Washington, DC, for example, which is a market that, while it fell, fell, I think, roughly half as much as on the top line as New York. You would logically expect to see slightly higher cap rates because you're both working off of a better level of income to start and you're not necessarily expecting to see quite the same level of ramp-up over the next couple of years as you'd like to see in New York. So, without -- I think you could see, in certain markets, you could see some sub-five cap rates for this year. And on the other -- it's probably for the more stabilized markets you'd be a little bit above that.

All of these, the cap rates, are probably based on a theory, though, that you're going to see relatively healthy growth in the US domestic market looking out the next couple of years. If you look at Europe, you're probably looking at a situation that is somewhat analogous to Washington, DC. Maybe slightly lower cap rates there because of a historical level of cap rates that typically have been a little bit lower than the US. But the key European markets, London, Paris, and some others, have not necessarily -- did not necessarily get hit as hard as some of the prime markets in the United States. And so you'll see that reflected in the pricing. Asia cap rates are far more varied because you have a combination of both stabilized or mature markets, combined with some of these other places where people are projecting very strong economic growth. And the cap rates in some of the markets will, again, vary based upon the opportunity, whether it's development or existing. But in the -- in those markets that are less mature, you're typically going to see both a higher cap rate, but more importantly, a higher projected overall level of return.

I'd probably circle back on the whole point of cap rates is that for us, certainly the current cap rate is important. Most certainly the relationship to replacement cost is important. But, ultimately, when we're looking at an acquisition, we're looking to achieve a premium to our cost to capital in our acquisitions, and that's calculated in the form of a 10-year unlevered IRR. And so that becomes the basis for how we decide if an acquisition makes sense or not.

Okay. That makes sense. Great. And then I just want to ask one final question, maybe for Larry here. Just as cash flows are improving here, wanted to just get a sense on your sense for the taxable income and perhaps give us some relationship, if you can at all, between what FFO could be and how that might relate to a special dividend in the fourth quarter. Can you give us any guidance as to what to expect or how to handicap that?

For this year?

For this year, yes.

Yes. At this point, we would be continuing with our $0.01 per share dividend. So there -- it would take an improvement over and above our forecast to get to that point of anything over the $0.01.

Yes, I think we addressed that and we probably talked about that on the last call, in that we would need a meaningful improvement over the EBITDA level even with the reforecast that we're generating to be a taxable income. I think the one thing that you might have been remembering when you were asking that question is we had suggested that there's always a chance of a special dividend in the event that we were to be active in the sale market and that sale would generate taxable gains. Given my response earlier and in my comments about the fact that we're not likely to be an aggressive seller in 2010, it is less likely that that would end up creating the need for a special dividend.

Okay, great, thank you very much.

And our next question comes to us from Jeff Donnelly from Wells Fargo.

Good morning. Ed, I guess a kickoff on the acquisition in Chicago of the Westin. I'm curious if there's something that might be unique about that asset that drove the per key consideration up? Just because, looking at the comps over the last three to four years, most of the full-service hotels in the downtown Chicago area sold around $300,000 a key. And I think even the one adjacent to it sold right around that price. So, I was curious what pushes this one up to $390,000?

The answer to that, Jeff, is a couple of things. The first off is that, I have to admit, I'm not totally familiar with some of the other deals that you had referenced in your note this morning, but my sense, at least on a few of them, is that there were fairly material CapEx needs for those hotels, which was probably not built into the -- was built into the deal, but not into the quoted price. In this instance, we have a very minimal capital program for this hotel based on our acquisition analysis. So, we don't feel a need as we have in other acquisitions to where we're going need to invest a lot into the hotel. So, that might be one area of difference. And certainly this hotel, from a standpoint of its performance and from the size of the rooms, the overall quality of the box, I think, stands in the relatively top number of hotels in this class level within the Chicago market.

I'd also note that one of the things that was attractive to us about this acquisition is the fact that this is a fairly advantageous management contract. It expires in 2020, or rather to say it differently, we had -- the owner has the right to decide to extend it in 2020, not the operator, which is a bit unusual. And when you think about what that means in terms of that quality of asset in that type of a location, you at least have the flexibility around what flag the hotel might fly. It certainly does lend to a better cap rate on a sale in a pro forma that we might be using to analyze the assets.

That's helpful. To switch gears, the increase in your guidance for full year 2010, it was certainly a little bit stronger than I was expecting. Maybe this is a nuance difference, but is the -- is the booking window lengthening, or are you just becoming more confident that maybe, despite a shorter, or relatively short period of visibility the business is just materializing?

Probably a combination of both. I wouldn't want -- well, I wouldn't necessarily say that the window is lengthening necessarily, although there are some properties where you are starting to see some signs of that. I think what we're taking comfort in was the fact that we haven't seen consistent short-term booking pace strength, and that's been happening now for two or three quarters in a row. And, while the out quarters are probably still tracking a little bit behind where they might have been in the prior year, the reality is, is the gap between where they are and where they were is closing and so we're seeing, as we look forward, I think we're getting more optimistic about the fact that we will continue to see, as we get to the start of each quarter, that we will be seeing more of a group room nights on the books than where we had been in the prior year.

But I think the other part that drives our sense of how the rest of the year will play out relates back to some of the comments that I made relative to what we were seeing from corporate demand. Our corporate demand has really been growing, both at the special corporate level and in terms of just regular business travel. That's the segment of our business -- the latter one -- that pays the highest rate. The fact that we were actually able, across the portfolio, to see an increase in those rates, we took as quite a good sign. But we're also finding that our hotels are feeling less of a need to offer discounts in order to attract business and I think that's key because that means you are really not sacrificing rate any more to attract business. You're really getting more comfortable that you are going to see additional -- that the business is going to materialize from your better paying customers. Going back to the group side for a second, one interesting theme for most of our operators is they are finding that the group -- the business that they're booking now is at higher rates than where they booked last year. So, not only is the pace of booking up, but the rates that they're booking at are also higher.

So, when we put all of that together, while obviously some of the press around the economy has not been ideal, and we did have -- do have some concern around some of the most recent measures of consumer confidence -- we see that being somewhat offset by the outlook for business investment, which continues to improve and the net of it is we just felt better about the second half of the year. You see in that our revised guidance.

That's really helpful. I think it explains why you're seeing the brands get more aggressive certainly as well. And that is bringing them back to, I think I'd like your opinion on this, instilling or reinstating their brand standards. In the first part, do you think that could result in you having maybe higher capital spending in 2011 versus 2010 because of that, and maybe more importantly, do you think it could also be a catalyst for acquisitions for you to the extent that there are people out there who are maybe cash poor and can't put through some of these reinstated brand standards?

Given the money that we've consistently invested in our portfolio over the course of the last, really, four to five years now, I'm not concerned that reinstitution of brand standards by the operators would lead to any more capital spending by us. But, on your second question about whether it leads to acquisition opportunities, I think that's a really interesting question. I don't know that brand standards, per se, is going to necessarily create an investment opportunity. But what I will say, what will create the investment opportunity, is that hotels that were bought in 2006 or 2007 and overlevered are now starting to get to the point where they may be facing, in 2010 and 2011, their third year where capital spending has been materially constrained because the property has not been generating the cash flow that's adequate to both service the debt and service the property.

And so, while brand standards alone aren't going to create the problem, the reality is, is that, as you well know in the hotel industry, that you get to a tipping point with an asset where, if you don't maintain it to a certain level, customers ultimately understand that, see that, feel that, and stop showing up at that hotel. That ultimately starts the hotel in a spiral. So, as lenders begin to understand that a hotel is getting to that tipping point, they would logically be more aggressive about demanding action, either in the form of a debt paydown or investment in the hotel in some fashion. And I think, in a lot of cases, that could create opportunity. But it'll come more out of the overall physical condition and not just simply the reinstitution of brand standards.

Yes, that's exactly what I was thinking. Thanks.

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

A couple of questions here. Could you talk about the quantity of bidders on the Westin River North asset?

Bill, what I would say there, is it was a relatively small group. That was not a widely marketed transaction.

Okay. You said you anticipated, perhaps, one other acquisition this year. I believe that's what you said in the prepared remarks. Have you identified that asset? Is it under contract yet?

We do have a couple of assets that we've made material progress on and one that we've made a lot of progress on and so, to tell you, I think we would feel relatively confident at this point that one of those two will happen and one could happen in the relatively near term.

Okay. I assume you don't want to provide any other details or you would have done so.

You are assuming correctly.

On the W Union Square, we had heard that CapEx requirements in that hotel might be $25 million, something like that. And that maybe cash flow would be negative for the next couple of years. Any thoughts on what you're seeing for the next few years?

Well, we want to be careful about what we say about that deal because we're subject to confidentiality provisions. But, I guess what I would say is, we certainly don't expect cash flow to be negative at the hotel and, while we do have a capital program for that hotel, it is nowhere near a $25 million number.

Okay. And two final questions. You talked about some of the economic data points that have been a little bit weaker. Any -- you're just not seeing any indication, though, that corporate travel, transient travel has weakened over the past three or four weeks. Is that fair?

That is fair. That is correct. We have -- I think that our performance over the last three or four weeks has been quite good. I wouldn't really view that, with that performance, other than the anomaly that, of course, that everybody has identified about where the July 4th holiday fell, which caused a little bit of confusion for a period of time there, I think, about what was going on in the middle of July. We still see -- the trends in July have still been quite good and the source of business has continued to -- we've seen good strength out of that corporate travel. We haven't seen any change yet in that area, nor have, as we look at group bookings, have we sensed anything other than a normal pace relative to the time of year on what happens with group bookings from that segment.

All right. And then finally, I thought it was interesting that you participated in development in your joint venture. Should we expect you to be increasingly in the development financing business and would you bring that state side as well, or is that something strictly relegated for joint ventures in international markets?

I would think in the near term it's -- you're going to primarily see that type of activity in Asia as part of our joint ventures. It could happen in -- where development makes the most sense, from our perspective, is in markets where you have similarities to the description I gave around India and China, where you have that dynamic occuring where there's just tremendous lodging demand growth that would seem to support new development.

I've learned never to say never, so I'm certainly not going to sit here and say we would never do a new development transaction in the US. But, if you step back and look at just the fundamentals of our business, if you look at the degree to which EBITDA has fallen, if you look at where construction pricing is, if you look at the discounts between from where value is in the states to where replacement cost is, it's going to take a while before that equation falls -- gets back into enough balance to where we would see adequate returns to contemplate new development. So, again, I wouldn't say never, but I wouldn't see that as a near term priority in the US for sure.

Good enough. Thanks.

And we'll take our next question from Joe Greff from JPMorgan.

Good morning, everyone. Ed, if you went back to the second quarter and calendarized it where you included the April, May, and June, the complete months there, what would have been the RevPAR growth over a comparable period last year?

Joe, it's just a shade below 10%.

Got you. And with respect to your -- the incremental EBITDA guidance on a full-year basis, how much of that increment comes from contributions from acquisitions?

Joe, because of the fact -- the one thing that everyone should watch this year with acquisitions, is that obviously there's one thing you're trying to do is time the -- you have to look at the timing of when the acquisitions occur in the year, because obviously you're going to -- you're buying in the middle or closing in the case of the W, where we're looking at a September closing, you're really only going to get the fourth quarter in terms of ops.

Not only do you have the partial year effect hitting you, but there are some new accounting requirements that Larry is far more qualified to explain than I am, that essentially require that we write off the acquisition costs associated with the deal at closing, as opposed to capitalizing them and amortizing them over the life of the deal. So that has the effect of reducing the initial year impact of acquisitions. When you cut through all that, our sense right now is, of the transactions that we've announced today, the contribution to EBITDA there is probably plus or minus $5 million for this year.

Got you. And I thought your comments on the group side of things was encouraging. Can you just talk about current terms with respect to cancellation fees or attrition fees? How relaxed are they now versus what the market bore in 2006 and 2007? We're trying to get a sense of how protected you are going forward from, God forbid, attrition on the group side versus other periods.

I think you're seeing -- that is an evolving story at this point in time. What you are generally seeing, and as I say this I think it'll make sense to most people, is that for business that is being booked in the relatively near term, from all practical perspectives you're seeing relatively minor cancellation and attrition fees. Some of that is the competitive landscape that we're operating in. Some of it is reflecting that it's not -- that's not a point that it's worth the hotel negotiating a lot over because, at this point, if you're negotiating for a group event in the next 90 days, odds are pretty good you are going to have it anyway. So, at the end of the day, if you had a choice between negotiating for a little bit higher food and beverage offering versus getting a cancellation fee, you are going to go for the money, not for the safety.

As you start to work your way longer term and look at businesses being booked for 2011 and 2012, the situation begins to shift a little bit more. I would say that our sense is that we're still not back to where we were in 2005, 2006, and 2007, where we were getting fairly significant cancellation fees. But, we're certainly negotiating for something in this time frame and that'll depend a lot -- it's a market by market phenomenon -- and it also depends a little bit on what time of year you're looking at as to whether the business is in a period where we are highly confident we can replace it, and therefore -- or a period of time where it's more aggressive, where there's more demand versus a period where there isn't a lot of demand and we really want the piece of business in that spot.

Great, thank you.

And our next question will come from Josh Attie with Citigroup.

It's Josh Attie and Michael Bilerman. Can you talk about RevPAR growth during period seven, which I think is at the first couple of weeks of your third quarter? It seems that if the calendar RevPAR was up 10% and business accelerated sequentially, then June should have been up over 10%. I'm just wondering how much of that continued into the third quarter just to get a sense for what the current pricing and occupancy trends are.

Now, Josh, our period seven, which combines June for the monthly hotels and a split of June and July for our Marriott Hotels, came in between 9% and 10%.

And what was the split between occupancy and rate?

I think it's -- off the top of my head, I don't remember. I suspect, though, that it was probably -- there was certainly some rate growth that was part of that. I just don't remember the number. We haven't actually gotten reported numbers yet for that because the periods -- the MI portion of that just finished on Friday. So we haven't really actually gotten any of the full reporting on that.

Ed, it's Michael Bilerman speaking. I had a quick question. We had an industrial company report results this morning and they talked about how the economic turbulence, which clearly increased during the second quarter, has started to leave their customers more cautious about making forward leasing decisions, taking less space, delaying decisions, and it at least sounds from your comments that, at least on the group side, that's really not having yet of an impact on any corporates pulling back. But, I'm curious as you start approaching the fall and your corporate rate negotiation, how you think that would trend and whether there is any concern, in terms of corporates and businesses, in terms of the amount of space that they're taking and the rate that they're willing to pay.

Clearly, having gone through the last two or three years, you should -- there is a level of concern that if the economy continues to slip, you'd have to be alert to the repercussions that that might have on your business. As I said before, so far, while we've all read the different economic statistics that have showed up in the press, we haven't necessarily seen an impact on that. But conversely, we've also been talking about the fact that primarily a lot of our near term demand has really been fairly short term. So it's certainly a trend that we're watching. As we think about the year, though, and we watch the trends that we're seeing and as I get feedback from the operators who are, of course, one step closer to this negotiation process certainly than we are, they're not sensing, at least so far, a desire on the part of companies to pull back. And, I think, they are sending a strong message, and I already talked about this a bit last week, that we're going to be expecting to start to make -- to look for meaningful rate increases in our special corporate negotiations for next year.

And I think we're also sending the message, as we start to talk about group business, that they should be assuming that group business will be booked at higher rates, not lower rates. And my sense is -- that is being -- that message is being accepted. It doesn't mean it won't ultimately get negotiated, but it is being accepted out there by the corporate customers that we're talking about. As we think about how to approach, certainly, the second -- the last few months of this year and the beginning of 2011 -- we're going to continue to emphasize what we think is the strength in our properties, which is our positioning on the group side. And are going to be looking to try to build a pretty solid group base and we're going to continue to try to do a fair amount of business on the special corporate side. We've been talking about so far this year the fact that we were, I think, we were up somewhere in the 20s in the first quarter. We're up 33% this quarter in special corporate business. Well, I suspect that we will lose some of those accounts as we work our way into 2010, because we will be priced a little too richly for some of those corporate customers to come back.

We're still going to be focusing on that as a key segment of our demand for next year, but next year at a higher rate, not a lower rate, like it's been this year. And an effort to just give ourselves a little bit of protection on the downside, in case some of this weakness in the economy lasts longer than we would all like it to.

Right, and then part of it could be self fulfilling also as corporates use some of the macro weakness in their negotiation.

Agreed.

Marriott said a number on their conference call that they think corporate rates could be up in the high single digits for 2011. Is that -- is that a level that you feel comfortable with?

It's certainly a level that I'd like to see happen. I think in the context of the discussions that have been had so far, our sense has been that those rates and rates at those levels would be appropriate for those customers. I would also caution you, though, that we're just at the early stages of that. A lot of our hotels, in part because they're liking where the trend is going right now, they're, to some degree, we're -- I wouldn't call it that we're in the driver's seat, but we are at a point where delay is better for us, because, as rates begin to recover and begin -- as we mentioned -- transient rates were up this past quarter, the rates overall were up in period six, as rates begin to recover, that discussion becomes easier for us in terms of the fact that there should be a meaningful rate increase because we're getting it on other fronts. And that's the best proof of it with them, is that we're getting it from the other customers.

Okay, thanks a lot.

And we will take our next question from Chris Woronka from Deutsche Bank.

Hi, good morning.

Good morning, Chris.

Just a real quick question on that property bonus. My calculation based on your 25 BPs impact, is that a -- like a $9 million number on an annual basis? Is that about right?

It's $11 million.

$11 million, okay.

$11 million.

Okay, great. And then maybe a little bit of color on where you are on 2011 on the group pace and just directionally what's locked and loaded right now versus where you hope to be or expect to be at the end of the year.

If you look at 2011 right now, it is still a little bit behind, probably by plus or minus 4%, but I would tell that you that is -- that's a couple of percent better than where we were the last quarter. And I think it's even a couple of percent or more better than where we were at the beginning of the year. So, we're seeing a good trend there in the sense that, while we were behind, we're chipping it away at it pretty quickly and the bookings that we saw in the last quarter for 2011 were picking up some momentum.

The interesting thing on that side is that on -- from a rate perspective, we're fairly flat right now, which is actually better than where we are in 2010. And I would be expecting, based on the feedback that we're getting about the ability to book business at higher rates than we could last year, is we'll start to see that tide turn as we work our way through the second half of this year. So, based on what we've been seeing, I would be expecting that we would start off 2011, at least as good as 2010 and hopefully a little better.

Okay, great. And is part of that, are the groups still hesitating to book or are you or your operators holding back because you don't want to overgroup if the transient continues to strengthen?

It's probably a mix and it depends on the individual property. I do think that you're still finding that everyone is -- think through some of the comments, especially some of the more recent questions we just had -- there is a level of uncertainty out there and, to some degree, it is probably leading people to be cautious about bookings. But again, remember that we -- remember the degree of occupancy decline that the industry suffered. And recognize that for the last 15 to 18 months we've trained people that you can afford to wait until the last minute to make a decision in order to get a room because the rooms have been there. Hopefully that's starting to change. Hopefully, in a call or two, we're talking about an extended booking cycle, which is suggesting that somebody has called up, tried to get a room, and it wasn't available or tried to get meeting space and it wasn't available, which starts to train people the other direction, which is basically forcing them to commit a little bit sooner.

I suspect we're in that evolving state of going from where it was -- you could assume that you could get space to now where you have to think a little bit more about it. You may have to make that extra phone call to find it and hopefully in another couple quarters, we're at a point where you start to see that booking cycle lengthen and we're starting to sell rooms a little bit faster.

Okay, great. Thanks.

And ladies and gentlemen, that does conclude today's question-and-answer session. I would like to turn the call back over to Mr. Ed Walter for any closing remarks.

Well, thank you for joining us on the call today. We appreciated the opportunity to discuss our results, our acquisitions, and our outlook with you. We look forward to providing you with more insights into what's proving to be an interesting year in our third quarter call in October. Have a great day, and enjoy the rest of your summer. Thanks.

And, once again, ladies and gentlemen, that does conclude today's conference. We appreciate your participation today.