Host Hotels & Resorts Inc (HST) 2011 Q1 法說會逐字稿

Good day, everybody and welcome to the Host Hotels & Resorts Incorporated. 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 to the Executive Vice President, Mr. Greg Larson. Please go ahead, Mr. Larson.

Thank you.

Before we begin, I would like to remind everyone that many of the comments made today are considered to be forward-looking statements under federal securities laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed. We're 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 in today's earnings press release in our 8-K filed with the SEC and on our website at www.hosthotels.com.

This morning, Ed Walter, our President and Chief Executive Officer, will provide a brief overview of our first quarter results and then we'll describe the current operating environment, as well as the Company's outlook for 2011. Larry Harvey, our Chief Financial Officer, will provide greater detail on our first quarter results, including regional and marketing performance. Following their remarks, we'll be available to respond to your questions. And now, here's Ed.

Thanks, Greg. Good morning, everyone. We're pleased to report another solid quarter of operating performance. Increased pricing strength during the quarter resulted in our strongest average rate growth since 2007.

Our first quarter results were in line with our expectations and, accordingly, we are reconfirming our RevPAR guidance for the full year and as a result of our acquisition activity, slightly increasing our earnings and adjusted EBITDA guidance. Before I get to our outlook, let's talk specifically about our first quarter results.

First quarter RevPAR for our comparable hotels increased 5.4% driven by an increase in average rate of 4.8%, combined with an increase in occupancy of 0.4 percentage points. While these results were in line with our expectations, our reported RevPAR increase was negatively affected by substantial renovations at both our Sheraton New York and Philadelphia Marriott Hotels where RevPAR declined approximately 18% for the quarter. In addition, it's worth noting that due to the timing of our reporting period, our first quarter does not include the operating results for a significant portion of the portfolio for the month of March, which was the strongest month of the quarter. Comparable hotel RevPAR for the calendar quarter omitting the two disruptive renovations, increased 8.4%.

Our comparable hotel adjusted operating profit margins which, which declined by 10 basis points, were meaningfully impacted by year-over-year increases in property level bonuses, significant increases in state-assessed payroll taxes and a reduction in cancellation fees. Larry will give you more insight in each of these issues in his comments. Adjusted EBITDA for the quarter was $144 million, an increase of 14% over last year. Our first quarter FFO for diluted share of $0.11 was negatively affected by $0.01 of acquisition costs associated with successful transactions .

Over all, we're pleased with our operating results in the progress we're seeing in lodging fundamentals. The first quarter demand displayed the same positive trends we experienced in the second half of last year. As group demand continued to increase and transient demand shifted to higher-priced customers. Operating results in the quarter were negatively affected by poor weather conditions in the northeast and the threatened government shutdown. Overall, average rate growth was better than we expected as we continue to narrow the GAAP from peak rate levels of 2007.

Starting with our transient segment, business trends continue to be positive with an overall average rate increase of 6.2% for the quarter driven by an 8.7% increase in our premium and corporate segment and a 5-plus percentage increase in our special corporate segment. While overall transient demand slipped by 0.7 of a percent, demand was in these more highly rated segments was up more than 5%. Discount room night fell 6% as hotels relied less on lower-rated channels and we were able to replace this business with higher-rated corporate demands. The net result was a increase in transient revenue of 5.4%.

Turning to our group business, we benefited from a demand increase of 4% and an average rate increase of more than 2%, resulting in an overall group revenue increase of 6.4%. The main driver for the results was a 24% increase in demand from our higher-rated corporate group business, as that segment continues to recover ground lost in the downturn. Our association business, which has longer booking lead times, was off this quarter by 17% but it is expected to recover significantly over the course of the remainder of the year. Every segment of our group business experienced average rate growth, and all but the corporate segment are now exceeding 2007 rate levels; however, given overall group demand is still more than 13% behind 2007 levels, we were still expecting to see increase in group business drive our recovery.

Looking at the remainder of the year, our booking pace outlook improved over the course of the quarter and especially in March, and exceeds 2010 and our booking pace from last quarter. We expect over all group revenues to increase meaningfully this year as the increased booking pace is complimented by progressively increasing average rate growth throughout the remainder of the year.

On the investment front, we're pleased to announce on this call that we literally just signed an agreement to acquire a 75% interest that includes a 12% return on the 364-room Hilton Melbourne South Wharf Hotel. The total purchase price for the hotel is approximately $150 million, including an $86 million mortgage loan, which leads to a host equity investment of $49 million. The hotel is a newly built, high-quality asset managed by Hilton, it's located in the South Wharf section of Melbourne, one of Australia's most important commercial and tourism centers.

The property is an integral part of the broader complex of the Melbourne convention and exhibition center, which provides direct access to over 484,000 square feet of meeting space, and which is located in a very rapidly developing area of the city. Australia's natural resource economy benefits from the tremendous growth in the Asia-Pacific region, and Melbourne is the most dynamic convention market. As a result, we're very excited about the acquisition and the potential of out performance by this hotel.

In addition, as we announced this morning, we signed an agreement with our partners in the existing European venture to form a second fund with a total equity commitment of 450 million euros. Host will own a one-third interest in this second fund and will serve as the general partner and asset manager. Assuming roughly 55% leverage, the new fund will be targeting to acquire approximately EUR1 billion worth of hotels. As part of the formation of the new venture, Host is contributing the Le Meridien Piccadilly for a transfer price of GBP64 million, which reflecting out cost related to the acquisition of the hotel, including the purchase price transaction cost other and costs related to the acquisition. In addition, the second fund will assume the debt encumbering the hotel.

We're pleased with our acquisition activity so far this year, which including the acquisitions we announced in February, totals more than $1 billion, and we continue to believe we're in great position to take advantage of additional investment opportunities as they arrive. We have a strong pipeline of acquisition opportunity and do expect we will purchase additional hotels during 2011. With that being said, recognizing the unpredictability of the timing of completing acquisitions, our guidance doesn't assume any additional acquisitions beyond those we announced. The $150 million acquisition that you see in our forecast is essentially the deal we talked about this morning.

During the quarter, we invested approximately $46 million in redevelopment and return on investment projects. As a result of the completion of the major of the extensive renovation at our San Diego Marriott Marquis and Marina Hotel, the property earned at the premier Marriott Marquis distinction. The renovation, including completely remodeled guest rooms, an updated lobby, state-of-the-art fitness center, which overlooks the vibrant and recently expanded and remodeled pool area. We're extremely pleased with the renovation and expect the hotel to benefit from this investment over the next several years. And, we were also in the midst of a comprehensive renovation at the Sheraton New York Hotel and Towers, including a complete rooms renovation and major mechanical and HVAC upgrade. This is the first step in a redevelopment of the hotel, which will include renovating the meeting space plus the food and beverage outlet. For the full-year, we expect to spend approximately $230 million to $250 million on these types of projects.

In terms of maintenance capital expenditures, we spent $48 million in the first quarter. The most significant project is the $56 million comprehensive room, bathroom, and meeting space renovation at the Philadelphia Marriott Convention Center Hotel, which will be completed in May and which will position the property to take full advantage of a strong convention calendar in 2012.

Other important projects that were completed this quarter, include ballroom renovations at the Sheridan Boston]and the Hyatt Regency Washington on Capitol Hill. As well as the rooms renovation at the San Antonio Marriott River Center Hotel. For the full year, we expect to spend $300 million to $325 million on maintenance capital expenditures.

On the disposition front, we anticipate that activity will expand just beyond the major markets and we're reviewing our portfolio for likely sale candidates. We expect that our disposition activity will pick up in the second half of 2011 and become even more active in '12 and '13 and with that being said, our guidance currently does not assume any dispositions. Now, let me spend some time on our outlook for 2011.

We remain optimistic the economy will continue to pick up steam this year. As the recovery continues, we expect demand to remain strong and average rates to keep improving as our business mix shifts to higher-rated of business segments. Given our first quarter results were in line with our expectations, and that booking paces is continuing to improve, we expect comparable hotel RevPAR will increase 6% to 8% for the year, with adjusted margins increasing 100 to 140 basis points.

It's worth noting that we expect the second half of the year will exhibit better relative performance than the first half on both the RevPAR and margin front, as we expect to be more significantly affected by renovation work in the first and second quarters. We anticipate the pricing will be better during the latter stages of the year. This operating forecast, combined with the recent acquisition activity, and improved projection for our previously announced acquisition will result in adjusted EBITDA of $1.01 billion, to $1.045 billion, an FFO per share of $0.88 to $0.93. Turning to our dividends we increased our first quarter common dividends to $0.02 per share. As our operations continue to improve, we expect to modestly increase the common dividend over the next three quarters, with the expectation of a full year common dividends $0.10 to $0.15 per share.

I am pleased to say that the lodging recovery is continuing the gain momentum. Our portfolio is positioned to take advantage of the strong trends over the next few years and combined with low supply we would expect strong earnings growth. Thank you, and let me turn the call over to Larry Harvey, our Chief Financial Officer, who will discuss our operating and financial performance in more

Thank you, Ed. Let me start by giving you some detail on our comparable RevPAR results. The top-performing market in the first quarter was San Francisco with a RevPAR increase of 24.3%. Strong group and transient business contributed to an occupancy increase of over 7 percentage points. The incremental demand and related compression led to an improvement of over 12% in ADR. We expect RevPAR for our San Francisco hotels to continue to outperform our portfolio in the second quarter due to excellent group and transient demand and further ADR increases.

Our San Diego hotels had another great quarter with a RevPAR increase of 22.6%. Driven by an ADR increase of nearly 9% and an occupancy improvement of 8 percentage points as both transient and group performed well. For the second quarter, we expect our San Diego hotels to under perform the portfolio due to fewer citywides and overall reduced group demand, only partially offset by improvements in transient demand and rates.

RevPAR at our Hawaiian hotels increased 18.7% through occupancy improvements of nearly 6 percentage points, primarily driven by incremental group demand and a nearly 10% increase in ADR. We expect Hawaii to have an outstanding second quarter due to further improvement in group and transient demand and as well as increases in ADR.

The New Orleans Marriott performed very well, with a 14.6% improvement in RevPAR. Even with fewer citywide events, group demand increased 15%. Occupancy increased over 4 percentage points, and ADR improved over 8% as the hotel benefited from a positive shift in our transient mix of business. We expect the New Orleans market to under perform the portfolio in the second quarter due to a decline in group demand.

Our Phoenix hotels officially turn the corner with a RevPAR increase of 7.6%. As ADR improved by over 12%, while occupancy decreased roughly 3 percentage points, the improvement in ADR was driven by rate increases and the shift in the mix of business to higher-rated segments. We expect the Phoenix market to outperform our portfolio in the second quarter, due to strong corporate group demand and ADR gains.

RevPAR for the Boston hotels increased 6.9%, even with the Sheraton Boston's meeting space being renovated and bad weather conditions, which affected both transient and group demand. ADR increased nearly 4%, and occupancy increase, 1.5 percentage points. Our Boston hotels are expected to under perform the portfolio in the second quarter due to the reduced citywide demand and the displacement of business as we wrap up our meeting space renovation at the Sheraton Boston.

Due to a reduction in citywide events in a rooms renovation at the San Antonio River Center, our San Antonio hotel struggled in the quarter with RevPAR improving only 1.3%, as rate was essentially flat and occupancy increased roughly 1 percentage point. We expect our San Antonio hotels to have a great second quarter and to outperform the portfolio because of strong group demand, which should drive a significant increase in ADR.

Due to renovations at the New York Marriott Marquis and the Sheraton New York Hotel and Towers, as well as poor weather and the impact of additional supply in the city, RevPAR in New York decreased 2.5% as occupancy fell roughly 7 percentage points and rate increased nearly 8%. With the renovations continuing into the second quarter, we expect our New York Hotels to continue to under perform our portfolio; however, we do believe our New York Hotels will have a great third and fourth quarter.

Lastly, the worst performing market was Philadelphia. As RevPAR fell 14.3%, primarily due to the disruption from the renovation of ballroom and guest rooms at the Philadelphia Marriott. The hotel experienced a RevPAR decline of 23% in the quarter. The Philadelphia market will continue to struggle in the second quarter, due to the renovation of the hotel, which is expected to be completed in August of this year. However, we expect our Philadelphia hotels to have a strong second half of the year.

We also very pleased with the performance of our 2010 acquisitions. As the four hotels experienced average RevPAR growth in excess of 11%. For our European joint venture, the RevPAR calculated in constant euros increased 9.9% for the quarter as five of the 11 hotels had double-digit RevPAR increases, led by the Crown Plaza Amsterdam, the Westin Palace Madrid and the Westin Palace Milan. Occupancy increased 2.7 percentage points and ADR increased 4.9%.

For the quarter, adjusted operating profit margins for our comparable hotels decreased 10 basis points. The decline was driven by four items. The first is higher state unemployment taxes. As several states raise pseudo-taxes to replenish the unemployment funds. The tax is on a fixed amount of wages. While it was anticipated in our forecast, it disproportionately affects the first half of the year.

The second item is, higher hotel level bonuses. In the first quarter of 2010, the minimal hotel level bonus accruals were made due to the generally poor prospects at the time. For the first quarter of 2011, bonus accruals were at normal levels. As 2010 improves, the bonus expense accelerated, resulting in higher levels of expense in the second half of the year. On a full-year bases for 2011, hotel level bonuses are expected to be roughly flat to 2010.

The third item is lower cancellation and attrition fees. In the first quarter of 2010, we received cancellation and attrition fees in excess of a typical year and for the full-year 2010, we received fees reflecting a typical year. In the first quarter of 2011, cancellation and attrition fees were well-below the levels, the typical level, and that trend is expected to continue throughout 2011.

The last item is business disruption from our capital program. While we had 18 hotels under various stages of renovation, two of the hotels had meaningful, highly disruptive renovation activity, the Sheraton New York and the Philadelphia Marriott. Both of which had double-digit RevPAR declines and negative EBITDA driving margins for our portfolio down 60 basis points for the quarter. In total, these items reduced our margins for the quarter by 145 basis points. Even with these items, we still expect comparable hotel adjusted, operating profit margins to increase 100 base points at the low end of the RevPAR range and increase 140 basis points at the high end of the range.

For the quarter, rooms flow-through was good over 73%, given the challenges of higher payroll taxes and bonuses, as well as the impact of renovations. Unallocated cost increased 6.2%. This increase was primarily driven by expenses that are variable with revenues, including credit card commissions, reward programs, and cluster and shared service allocations. While incremental bonus expense and sales expenses also contributed to the increase. Utility cost increased 4.2%.

Looking forward to the rest of the year, we expect the RevPAR increase to continue to be driven more by rate growth and occupancy, which should lead to strong rooms flow-through, even with growth and wage of benefit cost above inflation. We expect some increase in group demand as well as higher quality groups, which had helped to drive growth in banquet and audio-visual revenues and solid FNB flow-through particularly through the second half of the year as payroll tax and bonus expense comparisons become easier. We expect unallocated cost to increase more than inflation, particularly for utilities, where we expect higher growth, due to an increase in rates and volumes. And, sales and marketing cost where higher revenues and implementation of new sales and marketing initiatives will increase cost. We also expect property taxes to rise in excess of inflation.

In February, shortly after closing on the acquisition of seven hotels in New Zealand, the city of Christ Church experienced an earthquake that caused considerable damage to the city. Two of the hotels in the acquired portfolio, Novotel and Ebus, totaled 348 rooms were damaged and are in the government-declared red zone, it has limited access. The two properties represent approximately 25% of the value of the portfolio. Based on preliminary assessments, the structural damage appears limited to 39 rooms in the Novotel's historic Warner Building. We're engaging structural engineers to prepare comprehensive formal assessments and they're hoping the properties can be opened later this year or by mid-2012.

We believe that we have adequate insurance as part of a New Zealand insurance program to cover the property damage. Our deductible is 3% of the loss, up to $14.4 million or 5% of replacement value of the property if the claim is over the $14.4 million level. Which does cap the deductible at $3.2 million. The coverage period for business interruption is 36 months for the Novotel and 24 months for the Ebus. Now that some access is granted, we should have a better assessment of the situation by the second quarter earnings call.

We ended the quarter with over $150 million in cash and cash equivalence and roughly $440 million of capacity in our credit facility. During the quarter, we raised approximately $100 million under our continuous equity offering program. We also repaid our only 2011 debt maturity, the $132 million in mortgage loans on our four Canadian properties with $29 million of cash, and $103 million draw on the credit facility.

After paying off the mortgage loans, 108 of our 122 consolidated hotels do not have mortgage debt. Our credit facility matures in September this year, where we have the right to extend the facility to September of 2012, as long as our leverage level is below 6.75 times. A standard, we're more than comfortable that we will achieve.

This completes our prepared remarks. We're now interested in answering any questions you may have.

(Operator Instructions)

We'll pause for just a moment. Chris Woronka, Deutsche Banc.

Hello, good morning. A quick question on-- do you have any estimate of what percentage of your room nights have an airline reservation attached to them?

I would say a very high percentage of them do. We've always felt with the fact that the bulk of the portfolios located in gateway markets, that we are probably more of a fly-in hotel company than a drive-in hotel company. To give you a specific percentage would be a pretty rough guess.

Okay. Fair enough. I guess are you talking with your operators or are they talking with some of their larger clients about potential impact of higher airfares and things like that?

Yes, Chris, I think that is clearly why those Marriott concerns that set out there right now. In fact, we were thinking of talking with them a little about that before. What we have found in the past and, of course, some of this comes down to the degree of the increase in airfare, is that typically while the increase in airfare starts may-- even at this point, I don't know that it's necessarily significant in the cost of the airline portion of the trip. The increase in the fare compared to the overall business trip, which is driving most of our activity, tends to be relatively low. Just because you have a myriad of different elements to any business trips. That in and of itself, we have not found in the past that increasing fares are that impactful to us.

Where we did see a bigger change before, when airline prices went up, is that they did start to see that as airlines started to rationalize higher fuel prices, they started to look a little bit more carefully at some of the longer-haul trips that they were taking. And try to understand whether or not they were getting affective pricing on those trips. If you remember back to '08, we had some disruption in Hawaii that we really reprieved the economic downturn that we tied to-- in our minds, was tied to what was happening with the airlines. You might remember at that point in time, two airlines went out of business at that stage, which accentuated the problem.

As we look at what is happening right now, we have heard no signs of a reduction of flights into Hawaii. I think pricing is probably creeping up there a bit, but we have actually had strong, I think Larry reported, we have had very strong results in Hawaii in the first quarter and the outlook for the rest of the year continues to be very positive. So, I'd say it's one of these things we're watching but at this point, we're not feeling any impact.

Okay, that is great color. And just another question on your potential asset sales in the second half of the year. I assume that most or all of those are non-core assets. Do you see any opportunities to maybe monetize something larger like you did in 2006? I know that was an alternative use situation, but are there any of those out there yet?

Think it's probably early for those types of transactions. We will be opportunistic about selling some of our larger hotels, but I think the focus initially will really be as you were suggesting on the non-score assets.

Got you. And finally on the dividend, is there anything specifically that, you know, you're tying that to? Is there a specific payout ratio on cat or something like that? Are you benchmarking the yield to come kind of index? Just getting a sense as to what would-- might enable you to raise that further as we go down the road.

At this point, we have not changed the philosophy that has been in place, really since we became [Narite] which is to pay out our taxable income.

Okay.

So, it's at a lower level now, but given that I think we all expect that we will be seeing healthy EBITDA growth the next several years, that should likely result in significant taxable income growth and ultimately-- which will then translate into a much higher dividend.

Okay. Very good. Thank you, Ed.

Joshua Attie with Citi.

Thanks. Can you talk about your outlook for the Washington D.C. market the next year or so? And do you think the Federal Government shrinking at all will have an impact on the hotel market and trends?

You know, Josh, the first quarter for Washington was relatively weak. And I think as we talked with some of the individual properties, our sense was that they were, that this was a market that was affected by the potential government shutdown. And I think it didn't necessarily show itself because people weren't coming in to see the government. But what we were hearing is that some of the agencies that were looking at having group events were sort of in a position where they couldn't sign a contract and couldn't commit in February and March, because they didn't know if they had the authority. I am hopeful that, that business wasn't lost, but was simply postponed.

But I think as we look at Washington for the next year or so, I think in general the way I would respond to that is that Washington was one of the markets that held up the best in the downturns. So, it declined the least. As all these different markets start to work their way back to where they were before and then move beyond that, we've generally assumed that Washington growth would be fine in a historical context, but in the short-term, would likely be lower than markets like New York, Boston, and San Francisco. Not because it's not a healthy market, but because the overall level of decline there was just lower.

So, you think it's more just a comparison issue than that demand is actually going to be weak over the next 12 or 18 months because of lower federal activity.

Yes, I mean frankly the best thing that could happen to the hotel business in Washington is the big tax bill. Because as you can guess, just about everybody would be in town trying to work their various perspectives on that. We don't necessarily see the market being-- we certainly don't see the market being weak here. I do think that you have also seen a little bit of an impact this year from the Republicans changing the calendar for the congress. This new system, which I think has them in session for three weeks and off for a week, so that they can go back and visit their constituents, has forced a little bit of a revamping of the meetings calendar in Washington. So, I think the city is probably working through a little bit of that, too. Overall, as we look into '12, we're not necessarily thinking that the Washington market is going to be particularly weak and for the full-year this year, we're generally expecting it to be in line with the rest of the portfolio.

Thanks, that is helpful.

David Loeb with Baird.

I have a couple. Ed, maybe you can give us a little insight on this. When you look at hotels in the same market over the same period at mixed disruption, are you seeing any differences in trend by brand? Are you see anything differences in group? Clearly, what I'm getting at is Marriott's comments versus more upbeat comments you start with this morning. And you owners of hotels in both of the brands. Can you give us any insights?

I would say that we haven't seen big differences by brand that aren't explainable by the differences in which markets the hotels are located in. In other words, as you look at our portfolio, you saw differences in performance between the different major brands that were associated with. So, some are always underperforming or outperforming others, but I don't a tribute that to any broader question, brand or strategy or program. I think what that is really attributable to is what markets you're in. When New York was falling, everybody was affected by that. As New York has come back and everyone has been benefited by that.

In markets where-- you have had obviously a lot of disruption in Boston, New York, Philadelphia. But in markets where you didn't have disruption where you have convention hotels with both brands, you're seeing similar trends in the same periods?

Yes.

Okay. And second and last question, your guidance on corporate expense is $99 million versus last year's $108 million. How do you account for that being down? We like that, by the way, but how you account--? (laughter)

Well, you may like that, but since I think the major reason for that is currently projected lower compensation, I am probably not as happy about it as you are. Some of that just has to do with the fact that there are probably a variety of factors to feed into that, but one of the bigger factors is just the way our compensation program works. The amount of shares we earn depend primarily on our relative performance, compared to the rest of the market. At this point in the year, we tend to just use target for a number and then we refine the number later into the year. Last year, because we performed so well against Nareit and so well against the lodging companies that are in our index, the compensation was higher and that is why you saw the number being higher.

Got it. Okay. That makes perfect sense. Thank you very much.

Sure.

Jeffrey Donnelly, Wells Fargo.

Just a follow-up on a question David just asked concerning the brand performance. Looking ahead, Ed, Marriott has been rolling out a new sales force initiative, I think, chain-wide. I think Hilton's been looking at doing something with customer loyalty systems. Some of these systems are fairly expensive and probably only possible because of the scale of their distribution systems. How do you view these initiatives? Do you think the brands with the large distribution systems are going to be developing a competitive advantage that could translate into tangible incremental earnings for you, as an owner of those hotels? Is it too early to say? Or do you just think this is-- I guess I'll call it the cost of being a large chain?

Jeff, that is a great question. I don't know that anyone really knows the answer to that yet. What I would say that I do think if you look back over time, a number of these initiatives have ultimately led to-- when it's revenue management and things like that, they've come up with programs that I think, more than on the margins have made a difference in profitability at the hotel. And I think as the larger brands try to look for ways to become more efficient in how they handle marketing or how they handle customer relations. And we're comfortable in trying to work through those different programs with them to both look for ways that we can save, but more importantly, look for ways that we can drive more revenue. None of those programs proceeds without a few bumps along the road and I think that's probably a bit what is happening with Marriott with the Sales Force One program.

I would tell you that as we look more specifically at that program, we think the fundamental goal of midsize and smaller customers and a more rational and organized way is something that does make sense. And we have been working closely with them as they've been implementing that program to make certain that we see both the revenue and the benefits and the cost savings we were supposed to get. Not, as I sort of alluded and my earlier comment, none of these things proceeds without a few bumps along the road. And we have seen a difference in benefit from the program. Net net, as we look at our Marriott Hotels over the last 3 years, we have seen an improvement in share. We don't believe that the program, that Sales Force One or other initiatives is dragging down our performance.

What we have noticed is that have done much better at our larger hotels than we necessarily have in our smaller hotels. I think some others have commented on the same phenomenon. And one of the things that we're working with them on, is to consider how to refine the program in order to make certain that our smaller hotels start to do better. I would caution everybody that market share is a great statistic in the sense of summarizing activity. There is a lot of different factors that go into that and we all have to be careful about attributing what is going to market share to any one program.

You touched on it in your response. A lot of those programs, in my sense, is they tend to be designed with the a larger more urban flagship property in mind. For the brand, do you think, given your experience and your expectations for the future that, generally speaking, you guys tend to be disproportionate beneficiaries of these types of initiatives? Vis-a-vis, say other Marriott products within the same system, subject to Sales Force One, or [of course] Hilton or other products?

It's certainly not hurting us to own those types of hotels. That's for sure.

Okay, thank you guys.

Thanks.

Ryan Meliker, Morgan Stanley.

Just a couple of things. First for clarification purposes, the guidance you that issued this morning in the press release, that does include the Hilton Melbourne acquisition or does not?

Yes, it does. As you look in the full press release, you will see back in the section where we sort of provide the support for our guidance, that there is a $150 million acquisition that is referenced. We were -- .

Right.

And as you can tell from the fact that this was not in the press release, we were just not certain what the timing on the transaction was going to be. The net of it is, that $150 million is the deal I discussed in my comment.

Okay, great. I just wanted to make sure that was in there. And the other question I had was, if I look at your market type RevPAR growth, looking at urban lag at this quarter. Looks like over the past, you know, certainly all through 2010 and, you know, urban was one of the better performers within your market types and certainly was the case within the STR data the first quarter. I am wondering what happened? Obviously, you had the 150 bps from the renovation of the Sheraton and Marriott in Philadelphia. But was there something else you've seen and is that starting to be a trend going forward or not?

We would not look at it as a trend. It's two things. It's the way our quarter works, first of all. And the best example, the Philadelphia Marriott to downtown; you have a major urban hotel under renovation, down 23%. While the market, Philadelphia market as a whole, is up almost 10%. We have the Marriott Marquis under renovation didn't talk too much about that. We had a lot of our bigger boxes shared in Boston under renovation. You go down the list and that is what you will see.

So, it's really just the renovation timing?

And the timing in the quarter. The best part of the quarter was March. So, if you look at our 8-4, that would show you the difference and that is excluding Philly, Sheraton, New York properties.

Right. Okay. I wanted to -- thanks a lot.

Sure.

Sean Kelly, Bank of America.

Just wanted to go back to the group business for a quick second. Marriott specifically called out the in-the-quarter, for-the-quarter group as being one of the changes that they saw. Could you give us a little bit more granularity? I caught your comments up front, but how you saw some of that business materialize over the course of the quarter. I know you don't provide quarterly guidance, but maybe what you're seeing because the wiki windows are fairly short. Maybe what you're seeing the next couple of months for that, you know, for that and that segment of business.

You know, Sean, that's a good question, because there was one thing that happened in the first quarter that was a little different from what we have seen in the prior quarters. It would be interesting to see how this plays out as we work the way through the rest of the year. The thing that was a little bit different, is that we did see that our in-the-quarter, for-the-quarter bookings were just a little bit lower than what they had been in the prior year. Now that is not necessarily surprising, because last year we started to set records for in-the-quarter, for-the-quarter bookings. The pace of those bookings in Q1 was moderated compared to what we had seen.

I do think that, the governmental shutdown comments that I had before may have had some effect on that, but I don't know that that is big enough in effect to actually change the answer there. Conversely, what was encouraging, was that our bookings for the next three quarters, that would be Q2, Q3, and Q4, were actually far stronger than what we had experienced in 2010. So, while I don't know-- as we talked to the operators. I don't know that they would sit down and say yes, the booking cycle is lengthening, which would be a good thing for us, certainly for us.

I think what they are finding, at least, is that more people are willing to book a little bit further out than where they were before. So, as a result, we're looking at-- where as last year, we continued each quarter, 90 days out, we tended to be showing negative room nights compared to the prior year. At this point, for this year, we're showing solid room night growth in Q2 and Q3. And the negative that we started the year in Q4 has declined materially, although we're still showing a shortfall. I think I want to reiterate a point that was in my comments, because I think we also think that this is important, is that the rate growth that we're seeing in Q2-Q3, and Q4 is continuing to grow as you work your way through the year. And at this point, on booking pace, is better than the rate growth that we experienced in Q1. I think that's a good sign.

The real driver of this, for us and I would suspect, the industry, is going be what is happening on the corporate group side. The association business tends to book longer out and there is a attendance issue there but there is not that much of an event around association business. Corporate group has clearly been improving, the pricing has been improving. It still fell so far that it has a long way to go to recover, but the trends in that area are pretty good right now.

That is helpful. Then, maybe as we think about the pieces, then I guess the question is, looking out and kind of more for your outlook, it doesn't sound you are really thinking that the mix between the group and transient changes for the remainder of the year. Is that a fair comment or how would you think about that mix as transient now, a little bit stronger and that kind of group [piece] gives you a little bit more pause? Or do you think it's more just the timing related like you talked about?

I think the transient in the first quarter was probably more effected by weather than the group was. And so, I think we certainly heard that in New York that the business transient, because the people were leary of getting caught in the city due to the frequency of the winter storms, that there was a lag affect or impact because of that. I think there are a couple of other markets that felt an impact from that, too. I am not certain-- as you look out the rest of the year, I would expect to see continued improvement in group occupancy. Maybe not at the rate we enjoyed in the first quarter, but continue to see growth on that segment. As I mention, continue to see growth and rate.

On the transient side, I think it probably is more likely as you look over the full-year, that rather than seeing a slight decline in room nights, you will start to see a slight increase. The bulk of the transient revenue recovery will be rate-driven, not occupancy driven. The net of all of that is that we would, I would say as you look at our overall business mix, that business mix should start to see an increase in contribution from the group side versus the transient side. That's , as I think we comment now for over a year, we are sort of expecting that and frankly want that, because for our portfolio, that would be a

That is helpful. My last question is just on New York. You called out, obviously, the renovation disruptions, but we heard a lot from operators in the market about supply issues as well and I know not all of that is in Midtown. But just kind of wanted to get your thoughts, particularly as you think about the back half rebound that you guys are thinking about. Kind of how much is supply and issue in New York and how much do you think that supply gets absorbed over the next few months here?

I think, my guess is that there was some supply impact in the first quarter, in part because the first quarter tends to be a weaker time in New York anyway. Because you're running slightly lower occupancies in the city during the first quarter, when you have several new hotels open that probably accentuates the impact. As we look broadly through New York through the rest of the year, certainly all of our properties are pretty optimistic about how the rest of the year plays out. Now we will still have some construction impact at the Marquis and the Sheraton New York in the second quarter. I'm not necessarily expecting that we are going to have big RevPAR growth in New York, because those properties are so important to us in Q2. As we look into the second half of the year, the outlook is pretty optimistic, and I suspect that was New York starts to work its way back to its stronger period, that you will find there is less impact from the supply given the high occupancy rate that New York traditionally runs at.

That is great. Thanks, guys.

Robin Farley with UBS. Robin, your line is open. (Operator Instructions)

We must have answered all of their questions.

Given no response, we'll move on to Joseph Greff with J.P. Morgan.

When you look back at the first four months of the year at your urban and say resort conference hotels and you look at the mid-week and Sunday through Thursday occupancy levels, where is that relative to peak? How close are you to mid-week occupancy levels at some of the business-centric travel markets?

You know, to give you a truly accurate answer, we probably need to look at least one or two reports. I guess what I would tell you, though, is across the board, we're still fairly short. If you look at us compared to '07 right now in this quarter, we're down about 6% in room night and about 9% in rate. Overall what that works out to is about 14% to 15% in terms of revenues. I would say that is generally, probably pretty evenly distributed over both weekday and weekend.

I think the weekends fell a little bit less during the downturn and then week days fell more, but the recovery has been a little of the reverse. So I suspect in general across the portfolio we're feeling that impact fairly evenly. Certainly, in some of the markets like New York that run very high occupancies, my guess is it's still more of a rate question than an occupancy question but other than that, it's fairly evenly distributed.

And when you look at the back half of the year, would you expect New York City to outperform your portfolio or how would it perform within your portfolio?

Well certainly over the course over the next few years, we would expect New York to meaningfully outperform.

And for the second half?

For the second half of this year, as I said, we assume its going to outperform.

Great, thanks, guys.

Ladies and gentlemen, that is all the time we have today for the question-and-answer session. At this time, it's my pleasure to turn the call back to Mr. Walter for closing remarks.

Well, thank you, folks, for joining us on this call today. We appreciate the opportunity to discuss our first-quarter results and outlook with you. We look forward to providing you with a more insight into how 2011 is playing out at our second quarter call in mid-July. Why have a great day. Thank you.

Ladies and gentlemen, that does conclude our conference call for today. Again, thank you for your participation.