Host Hotels & Resorts Inc (HST) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Host Hotels and Resorts, Incorporated second-quarter 2011 earnings conference call. Just a reminder that today's program is being recorded.

At this time, I would like to turn the call over to Mr. Greg Larson, Executive Vice President. Please go ahead, sir.

Well, thank you. Welcome to the Host Hotels and 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 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 2011. Larry Harvey, our Chief Financial Officer, will then provide greater detail on our second-quarter results, including regional and market performance. Following their remarks, we will be available to respond to your questions.

And now, here's Ed.

Well, thanks, Greg. Good morning, everyone. We are pleased to report another strong quarter of operating results, which were driven by improvement in transient demand and substantial average rate growth. We have also been successful in placing two great hotels located in very desirable markets under contract -- one in our consolidated portfolio, and one in our European joint venture fund.

First, let's talk about our second quarter results. Our comparable hotel RevPAR for the second quarter increased 6.7%, driven by an improvement in our average rate of 5%, combined with an occupancy increase of 1.1 percentage points. Our average rate was $184 and our average occupancy was 75.2%.

As we discussed last quarter, we expected our operating results to be significantly impacted by substantial renovations at our Sheraton New York and Philadelphia Marriott Hotels in the second quarter. Excluding results from these hotels, our RevPAR increase for the quarter would have been 7.6%. In addition, it is worth noting that our comparable hotel results do not include the performance of the $1.7 billion of acquisitions we have completed over the last 12 months, which are performing exceptionally well and have generated an average RevPAR increase of over 18% for the quarter.

Comparable hotel SMB revenue growth of 4.4% contributed to overall revenue growth of 5.6%. This increase, when combined with our comparable hotel-adjusted operating profit margin increase of 115 basis points, and our acquisition activity, resulted in a 25% increase in adjusted EBITDA to $313 million for the second quarter, and a 30% increase in FFO per diluted share of $0.30. FFO for this quarter was negatively impacted by $0.01 per share for acquisition and debt repayment costs, as well as a non-cash impairment charge.

On a year-to-date basis, comparable hotel RevPAR increased 6.1%, driven primarily by rate improvement. Total year-to-date comparable revenue growth of 5.2%, combined with operating profit margins that increased 65 basis points, resulted in a year-to-date adjusted EBITDA of $457 million, representing an increase of 22%, and FFO per diluted share of $0.41. Year-to-date FFO per diluted share was negatively affected by $0.02 for acquisitions, debt repayment, and impairment costs.

Our business mix trends for the quarter were quite favorable, as we saw strong demand increases from our Higher-rated Customer segment and solid rate growth across the board. Rate growth in Q2, driven by exceptional growth in transient demand, was the best we had seen since 2007. Overall, transient room nights in the quarter increased more than 3%, led by a nearly 7.5% increase in special corporate demand and a more than 3% increase in our Premium Corporate segment.

Reflecting the changes in our mix, discount room nights increased just over 1%. On the rate side, special corporate rate increases of more than 6% helped improve our average transient rate by more than 5%, leading to overall transient revenue growth of more than 8.5%.

Group demand for the quarter was essentially flat with last year, as increases in corporate and association business were essentially offset by reductions in discount groups. The growth in these higher priced segments was even more pronounced in our luxury hotels, where they grew by more than 16%, leading to a luxury group room night increase of more than 8%. The combination of positive mix shift and rate increases in all three segments drove group rates up by 4.7%, which represents more than twice the rate of increase in Q1. Overall, group revenues were up by almost 4.5%.

Looking at the remainder of the year, our group booking pace continues to be positive, with third-quarter pace up more than 3% and fourth-quarter up nearly 2%, and average rates are higher in both quarters. While not occurring at last year's accelerated pace, short-term bookings are still quite strong by historical standards, and we are seeing signs that the booking window is starting to lengthen, as our pace for 2012 is well ahead of last year's levels.

In addition, our transient booking pace is quite strong. It reflects an average demand increase of more than 7% for the next four months. Stronger advance bookings, especially in our larger hotels, is certainly a positive sign, and will be very helpful in our hotel managers' efforts to push transient rates higher in the future.

On the investment front, we have two new transactions to discuss. First, as we reported this morning, we signed an agreement to acquire the 888-room Grand Hyatt Washington for $442 million. The hotel is located in the heart of downtown Washington, D.C., just two blocks from the City's Convention Center, and convenient to over 40 million square feet of office space, the Verizon Center, the National Mall, and the Smithsonian Museums. In addition, the hotel is located opposite the City's old Convention Center site, which is being redeveloped into over 300,000 square feet of retail space, more than 1 million square feet of office space and 700 residential units.

The hotel includes over 43,000 square feet of meeting space, including a 17,000 square foot ballroom and a 8,500 square foot junior ballroom. We are pleased to acquire another hotel in D.C., which is a historically top-performing market with a diversified demand base.

Turning to our European joint venture, as we discussed last quarter, we completed an expansion of our joint venture through the establishment of a new fund with approximately EUR1 billion in investment capacity. As part of the expansion, we transferred the Meridian Picadilly to this new fund in June. In addition, the joint venture signed an agreement to acquire first acquisition in France, the 396-room Pullman Bercy Hotel, for EUR96 million. The Hotel is located in Paris, near the banks of the Seine River, in a newly redeveloped neighborhood that includes high-end office buildings, one of Paris's largest railway stations, and the French Ministry of Finance. The Hotel has 17 meeting rooms totaling more than 19,000 square feet.

We will continue to look for acquisitions that meet our investment criteria, and believe we are in a great position to take advantage of additional investment opportunities as they arise. With that being said, given the unpredictability of the timing of these transactions, our guidance does not assume any additional acquisitions beyond those we announce. On the disposition front, our forecast assumes only the sale of the South Bend Marriott in the third quarter, a non-core asset which required significant capital investment.

During the quarter, we invested $75 million in return-on-investment projects, including the completion of the first phase of our redevelopment projects with the Sheraton New York and Sheraton Indianapolis Hotels, as well as an updated and expanded meeting platform at the St. Regis in Houston. For the full year, we expect to spend $220 million to $240 million on these types of projects.

In terms of maintenance capital expenditures, we spent $71 million in the second quarter, which included a completion of the Phase 1 renovation of 991 rooms at the New York Marriott Marquis. We also concluded the renovation of the meeting space and Main Tower rooms at the Philadelphia Marriott downtown. For the year, we expect to spend approximately $320 million to $345 million on maintenance capital expenditures.

Now let me spend some time on our outlook for the remainder of the year. Our performance in the second quarter was consistent with our expectations. We are expecting improved performance in the second half of the year, due to less disruption from renovation in our hotels, an improving macroeconomic outlook relative to the first half of the year, and solid group bookings for the third and fourth quarters. With that in mind, and given that we are past the midpoint of the year, we have decided to tighten our forecast estimates.

For the full year, we expect comparable hotel RevPAR to increase 6% to 7.5%, with adjusted operating profit margins increasing 90 to 120 basis points. This operating forecast, combined with our acquisition activity, will result in adjusted EBITDA of $1.020 billion to $1.050 billion. The midpoint of this guidance is $7.5 million higher than our first-quarter estimate. We project FFO per diluted share of $0.87 to $0.91, which has been reduced by $0.03 per share for acquisitions, debt repayment, and impairment costs.

Turning to our dividend, we increased our second quarter's common dividend to $0.03 per share. As operations continue to improve, we expect to modestly increase the dividend over the next two quarters, resulting in a full-year common dividend of approximately $0.14 to $0.15 per share.

In closing, while the overhang of uncertainty regarding national and international debt issues continues to cloud the economic outlook, the fundamentals of our business remain attractive. Transient demand has recovered to prior peak levels and group demand continues to improve. As RevPAR is increasingly driven by improvements in average rate, margin growth in flowthrough will accelerate. Additions to supply has been restrained and will likely remain well below historical levels for at least the next three years. Construction costs are beginning to increase again, which will further help limit new supply.

The combination of firming construction pricing and changes in our portfolio lead us to estimate the replacement cost to our portfolio at over $400,000 per key. Given that our current market valuation is roughly $260,000 per key, this suggests that there is a very solid upside for our market valuation over the next two years. We will continue to be aggressive but disciplined as we evaluate new investments to further enhance the value of our Company.

Thank you, and now let me turn the call over to Larry Harvey, our Chief Financial Officer, who will discuss our operating and financial performance in more detail.

Thank you, Ed. Let me start by giving you some detail on our comparable hotel RevPAR results. Consistent with the first quarter, our top-performing market for the second quarter was San Francisco, with a RevPAR increase of 17%. Strong transient demand contributed to an occupancy increase of nearly 6 percentage points, which led to an improvement of 8.5% in ADR. The ADR growth was driven by both corporate and special corporate rate increases. We expect RevPAR for our San Francisco hotels to continue to outperform our portfolio in the third quarter, due to excellent group and transient demand and further ADR increases.

As expected, our hotels in Hawaii continue to perform exceptionally well, with a RevPAR increase of 16.5%. ADR increased nearly 15% due to a shift in the mix of business to higher-rated transient and group business. We expect Hawaii to slightly underperform the portfolio in the third quarter, due to some disruption from renovation activity.

Our Tampa hotels also had an excellent quarter, as RevPAR increased 15.7%, driven by more than an 8% improvement in ADR and a 5 percentage point improvement in occupancy. Transient demand was exceptional. We expect our Tampa hotels to perform very well in the third quarter due to strong group bookings.

Our Miami and Fort Lauderdale hotels had a great quarter, with RevPAR up 14.9%. ADR improved 5.6% and occupancy increased nearly 7 percentage points, as transient demand was very strong, allowing the hotels to increase ADR. We expect our Miami and Fort Lauderdale hotels to have a great third quarter and to outperform the portfolio because of strong group demand, which should drive a significant increase in ADR.

The Phoenix market continues to recover. RevPAR increased 11.3%, as ADR improved nearly 10%, and occupancy increased 1 percentage point. The improvement in ADR was driven by both rate increases and a shift in the mix of business to higher-rated segments. We expect the Phoenix market to significantly outperform our portfolio in the third quarter, due to strong group demand and growth in both group and transient rates, particularly at the Westin Kierland, which will benefit from the new ballroom.

Our San Diego hotels had another good quarter, with a RevPAR increase of 9.2%, which was much better than our expectations. The outperformance was driven by an occupancy improvement of nearly 7 percentage points, as both transient and group demand increased. For the third quarter, we expect our San Diego hotels to underperform the portfolio, due to lower levels of group business, which will result in weak transient pricing through the summer months.

RevPAR for our Chicago hotels increased by 6.7%, driven solely by improvements in average rate. Higher transient demand offset lower levels of group business, and our hotels benefited from a shift in the mix of transient business to higher-rated categories. We expect the Chicago market to perform very well in the third quarter.

Due to the continuing renovations at the New York Marriott Marquis and the Sheraton New York Hotel and Towers, as well as the impact of additional supply in the City, RevPAR for our New York hotels increased only 2.9%, as ADR improved over 11%, while occupancy fell roughly 7 percentage points. We expect RevPAR for our New York hotels to improve significantly for the rest of the year.

RevPAR for our Washington, D.C. hotels increased 2.5%. ADR increased nearly 4% and occupancy fell roughly 1 percentage point. Results were affected by Congress's implementation of district weeks and continuing concerns surrounding the budget and debt ceiling, which led to less government and government-related group and transient business. Our urban hotels performed much better than the suburbs, with a RevPAR increase in excess of 5%. We expect the DC market to continue to underperform the portfolio in the third quarter. However, our urban hotels will continue to significantly outperform the suburban hotels.

RevPAR for our Boston hotels decreased 0.4%, with a slight increase in occupancy and a 1.2% drop in ADR. Results were negatively affected by the overall lack of city-wide and group demand. Our Boston hotels are expected to continue to underperform the portfolio in the third quarter, due to lower levels of group demand.

Lastly, our worst-performing market for the second quarter was Philadelphia, as RevPAR fell 2.4%, primarily due to the disruption from the renovation of the ballroom and guest rooms at the Philadelphia Marriott. RevPAR fell as occupancy declined over 8 percentage points, while ADR increased nearly 9%. We expect the Philadelphia market to outperform the portfolio in the third quarter as the renovation wraps up and group demand increases.

Year-to-date, San Francisco has been our best performing market, with a RevPAR increase of 20.2%; followed by Hawaii with a RevPAR increase of 17.4%; San Diego with a 14.9% increase; and Houston with a 11.6% increase. Our worst-performing markets have been Philadelphia, with a RevPAR decrease of 7.5%, and New York City with a 0.9 increase.

For our European joint venture, RevPAR calculated in constant euros increased 10.1% for the quarter, as seven of the 11 hotels had double-digit RevPAR increases, led by the Crowne Plaza Amsterdam, the Westin Europa & Regina, and the Brussels Marriott. Occupancy increased 3.5 percentage points and ADR increased over 5%. Group demand was quite strong, as it increased over 14%, primarily through improvements in tour and travel group demand. Group ADR increased 4.1%, resulting in roughly a 19% increase in group revenues. Transient demand was up 1% and average rates were up over 6%, leading to a 7.4% increase in transient revenues. On a year-to-date basis, RevPAR calculated in constant euros improved 10%.

For the quarter, adjusted operating profit margins for our comparable hotels increased 115 basis points. The business disruption from our capital program continued to have a negative impact on our margins. The renovations of the Sheraton New York Hotel and Towers and the Philadelphia Marriott reduced our margin growth for the quarter by 40 basis points.

Food and beverage flowthrough was roughly 24% for the quarter. The renovation at the Sheraton in Philadelphia Marriott also had a significant negative impact on food and beverage flowthrough, which would have been 10 percentage points higher, excluding those two hotels. Unallocated costs increased 4%. This increase was primarily driven by expenses that are variable with revenues, including credit card commissions, reward programs, and cluster and shared service allocations. Utility costs increased 5%.

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 room flowthrough, even with growth in wage and benefit costs above inflation. We expect some increase in group demand as well as higher-quality groups, which should help to drive growth in banquet and audiovisual revenues, and solid F&B flowthrough. We expect unallocated costs to increase more than inflation, particularly for utilities, where we expect higher growth due to an increase in both rates and volume, and sales and marketing costs, where higher revenues will increase costs.

We also expect property taxes to rise in excess of inflation, and property insurance to increase well in excess of inflation, due to an increase in insurable values and premium increases in the second half of the year. As a result, we expect comparable hotel adjusted operating profit margins to increase 90 basis points at the low end of the RevPAR range, and increase 120 basis points at the high end of the range.

In February, shortly after we closed on the acquisition of seven hotels in New Zealand, the City of Christchurch experienced an earthquake that caused considerable damage. Two of the hotels in the acquired portfolio, a Novotel and an ibis, totaling 348 rooms, were damaged and are in the government-declared Red Zone as Limited Access. The two properties represent less than 25% of the value of the portfolio.

We have engaged structural engineers to prepare comprehensive formal assessments. Progress in the government-declared Red Zone is slow. We are hoping that our properties will reopen in mid to late 2012. We believe we have adequate insurance as part of Accor's New Zealand Insurance Program to cover the property damage, and we recorded an expense in the second quarter of $3.2 million, which is the maximum amount of the deductible. Coverage period for business interruption is 36 months for the Novotel and 24 months for The ibis. While we ultimately expect to be compensated for the business interruption loss, we have not included any such proceeds in our results of operations or in our guidance.

During the quarter, we raised approximately $190 million under our continuous equity offering program to fund acquisitions. We also issued $500 million of senior notes that bear interest at five and seven-eighths, and have an eight-year maturity. These notes have the lowest coupon of any bond we have ever issued.

In the second quarter, we used some of the bond proceeds to redeem the remaining $250 million of seven and one-eighth Series [K] senior notes, and repaid a $50 million draw on our credit facility. We also called $150 million of our 2004 exchangeable debentures, $134 million of which were exchanged for approximately 8.8 million shares of our common stock, and approximately 16 million of which were redeemed for cash after the end of the second quarter. We currently have 175 million of the 2004 exchangeable debentures outstanding.

Lastly, subsequent to quarter-end, we transferred the Le Meridien Piccadilly and related property level debt to our European Joint Venture Fund II. When combined with the exchangeable debenture transaction and an additional $41 million credit facility repayment, our outstanding debt balance dropped approximately $300 million to $5.6 billion subsequent to quarter-end.

We ended the quarter with over $630 million in cash and cash equivalents. We have over $475 million of capacity on our credit facility, which matures in September of this year, but we have the right to extend the facility to September 2012 as long as our leverage level is below 6.75 times, a standard we are more than comfortable that we will achieve.

There is one last item worth noting related to the accounting for our deferred tax liabilities for our Euro JV Fund I. In conjunction with the establishment of the Euro JV Fund II, we extended the life of Fund I. The five-year extension of the Fund requires us to record an additional deferred tax liability in the third quarter. This additional lap liability is a non-cash charge that reduces FFO by $5 million for our pro rata portion of the JV's tax expense. Similar to all income statement items related to the JV, the charge will be reflected in the equity and earnings of affiliates, not in income tax expense in our Statement of Operations.

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

(Operator Instructions). Ryan Meliker, Morgan Stanley.

Congratulations on a great quarter. I just had a quick question. I wanted to -- I was hoping you could talk a little bit about D.C. and particularly the acquisition that you made.

I know Marriott last week came out saying that they expected D.C. to be somewhat soft over the next, I guess, six quarters or so. Obviously, Marriott is a little more exposed to the suburbs and you talked about the CBD being a little bit stronger; but can you just give us some indications as to how you're feeling about the CBD versus the suburbs going forward? And how you got to your valuation, which seemed a little high at about $500,000 a key? Thanks.

Sure. Let's start with the market first. I mean, there's no doubt that the downtown area has outperformed the suburbs this year. I think as you -- I think Larry made a comment in his comments that our RevPAR growth in the City was about twice the level that we had for the market overall.

As we look at D.C. this year, it's obviously clear that D.C. is underperforming a bit. I think that there is a variety of reasons for that. I think one, fundamentally, is that the D.C. market did not fall as much as a number of other markets, so there is less of a rebound effect there. I think that this year, we've seen -- we have seen and felt the pain from all of the disarray in the federal government around both the budget issues that related to this year's budget, as well as the current concerns relating to extending the debt amount -- the debt ceiling, as well as what that may mean going forward.

The consequence of that uncertainty has been that government, which represents -- call it 15% to 20% of our business in the Washington area -- government has not booked rooms, specially group rooms, at the level that they had in the past. And so, as a result, we've seen a little bit of a group decline in Washington. And in most other markets, we've seen a little bit of a group increase. So I think that accounts for a large amount of the decline. I think -- or the weakness, rather.

And I think the other point to pick up, which some of you have already commented on, is that this is, as I already described, it's a little bit higher government market than what we normally experience. And with government per diem rates down this year compared to last year, that's also been a little bit of a wind that D.C. has been fighting against.

Leaving out the problems for this year, we firmly believe that Washington is a great market to invest in. If you look at Washington over the course of -- call it the 10 years ending in '08 before we went into the downturn, or the severe part of the downturn -- Washington was really one of the best markets in the country to be invested in. Working its way through the downturn, it fell far less than any of the other markets across the country. It has recovered quickly. It is, generally, at least for our portfolio, we are back to '07 levels.

And as we look forward and look at Washington, while it is true that this year is a bit weaker, we see the outlook in a very positive fashion. As the Convention Center that Washington has is one of the best on the eastern coast of the United States, it is -- the projected bookings for that Convention Center, especially as you look out to '15, '16 and '17, are very attractive.

Just as importantly, there's a lot of activity happening in downtown Washington that is making -- some of that I referenced in my comments is happening immediately across the street from our new asset. There's a lot going on that's making Washington a more exciting city, a more of a 24-hour city, all of which we think is only going to drive better results in our hotels over the course of the next decade.

So, at the end, it's clearly Washington is going through a little bit of a soft patch. I think next year -- election years actually tend to be decent in Washington, but I think the current next year that we'll be fighting is a little bit weaker convention business. But I think once you get past '12, we are very optimistic about the outlook for the future beyond that.

Speaking specifically about the hotels, we think we've got a great hotel in one of the best locations in Washington. From our perspective, looking at owning that much of fee-simple property in the heart of D.C., we think that we're buying this at probably a 10% discount to replacement costs. That's a little bit richer than where some of the other transactions we have done have been completed at.

But the other thing I would point out with this particular acquisition, is you may remember that we also own the Capitol Hill Hyatt. One of the benefits we think we see of owning the two hotels is, as we've been able to do in other markets, we think there will be an opportunity, especially because it's the same brand, to take advantage of some synergies, combine some positions, and enhance cooperation between the hotels, which will not only help this hotel bill but will also help our other Hyatt over on New Jersey Avenue.

Great. And are both hotels operated by Hyatt?

Yes, they are.

Wonderful. Thanks so much. And again, great quarter.

Ian Weissman, ISI.

Maybe you could talk a little bit about a potential dislocation of demand, if you're seeing any in Europe with talks of sovereign debt crisis in Italy and potential double dip in Europe.

You know, it's interesting, is that Larry commented in his comments that our RevPAR in Europe was up 10%. And I think it's 10% for the quarter and about 10% for the year. So that's actually been stronger performance in Europe than what we have seen in the United States. So, despite the fact that those issues have been out there for quite some time, the performance in Europe -- both in the southern markets, Spain and Italy, which are some of the countries that get talked about, as well as the Northern markets -- has been quite strong.

I would say, in general, that one of the reasons why we're seeing that is that in the northern European countries, I think the results are driven a little bit more by stronger economic growth. In the southern European countries, despite the economic concerns that those countries have, and the fact that they are caught up in some of the same issues that Greece is facing -- although not yet quite to the same degree -- those markets or the lodging industry is also driven to a great degree by tourism. And as a result, we've seen a big increase in tour groups throughout Europe this year. I think that a better economy in the rest of the world has ultimately contributed to better results in Europe.

So, I think we may see that trend moderate a little bit for the second half of the year only as we start to move out of the tourist season. But the bottom line is, is so far -- we've had our fingers crossed on this -- Europe seems to be holding up relatively well.

Thank you. And finally, one last question. Obviously, you're in the market for acquisitions; REITs have accounted for 60-plus-percent of the deal so far this year. As you're underwriting new deals today and especially, obviously, looking at the D.C. acquisition, are you seeing more private capital competing for deals? Or is it still a REIT market?

You know, I would say it's a little spotty. I think there are some transactions that where -- that we have looked at where our sense is that private capital has become a more aggressive player. Generally, I think it has been the REITs that -- so, as you were commenting, that have been the majority of the transactions this year. As the debt markets improve, we would expect to see private capital become an increasingly competitive player in the acquisition world.

Okay, but not yet. All right, I appreciate it. Thank you so much.

Felicia Hendrix, Barclays Capital.

Ed, in your prepared remarks, you mentioned that you have seen an increased booking curve. I was just wondering if you could quantify that a little bit? And what is it typically in a normalized environment?

Now, it's so hard right now, Felicia, to kind of -- to put, like, days around how far advanced bookings happen. But I think what -- let me describe it maybe in a little bit more of a qualitative way, which is, last year, what we were finding is that we were typically running behind the prior year's pace until about 90 days out. And then our bookings in that last 90 days before our quarter was going to begin were incredibly robust, and that usually what was driving that subsequent quarter to turn out to be better than the prior year.

This year, what we have found is that we are coming into every quarter ahead of where we have been, but the bookings in that quarter, while they're still ahead of what we would have had in '06 and '07, and a magnitude of 40% to 50% better than what we would have had in those prior years, well, they're not quite as robust as last year. But the bookings looking further out, say, looking two quarters out; three and four quarters out, have been stronger.

And so I think while you'll still get -- if you talk to an individual GM, they will all tell you that it's still a short booking cycle. And they're right, because they're all booking more than a normal amount of business in a relatively near-term time periods when the event happens. The reality is as you look at the data, more and more rooms are being booked six months, nine months, 12 months out, as we start slowly to work our way back to a more normal booking cycle.

And then is that part of the reason why your guidance is what it is now? Because the second half definitely implies some improvement. And you also touched on that a bit in terms of your view of the economy. But is that part of it? Or are there other things too that give you confidence in your second half guidance?

I think there's a couple of things that give us confidence in our second half guidance. The first is, if you leave out the renovation impact from the two hotels that we've been commenting on -- the Sheraton New York and Philadelphia Marriott -- and you look at our performance in the first half of the year, we were running at a RevPAR rate in the first half that was over 7%. So as we think about the second half of the year and we recognize that our renovation disruptions should go down a bit, we think it's -- just to run at the same level as the first half would suggest that the second half of the year is going to run over 7%.

I think as we also feel that, as we look at the group booking pace as it carries into the second half of the year, does seem to be a little bit stronger; the rate does seem to be growing. So that gives us a fair amount of confidence that things should be a little bit better.

The trickiest part of this whole process is to try to assess the economy. If you look at the blue-chip consensus and use that as at least a measure of how folks are looking at the economy, they're essentially calling for better than 3% GDP growth in the second half of the year, compared to about 2% in the first half of the year. So, if that's true, that should clearly help us in general because, of course, our industry is dependent on economic growth.

As we look at business investment, while the outlook for business investment is a bit more conservative than where it was at the beginning of the year, it is still quite robust. That, in our mind, has been one of the factors behind the strong transient demand and a rate growth that we've seen. And we don't see any reason why that's going to slow a little bit.

So I think at the end of the day, you put all those factors together -- and especially as you look at the fourth quarter, which is where our forecast is showing the most strength -- we generally think that we're going to be in much better shape in the second half of the year than in the first.

That's really helpful. Thank you. And just finally, over the past year, you've had some pretty robust acquisition activity. And obviously, a lot of those hotels aren't in your comp set yet for RevPAR, but as they anniversary and they come in, in the third and fourth quarter, I was just wondering if you could take a stab at how that might affect your RevPAR outlook?

Just to clarify, we have a very conservative approach to what constitutes a comparable hotel. So the reality is, is that those hotels won't come into our comp set until we've actually owned them for a full calendar year. So they -- unfortunately, because of how well they've been performing, those hotels won't be coming in, in the third or fourth quarter, despite the fact that we will have owned them for 12 months.

I can tell you, though, that in a rough justice sort of way, if those hotels were in our comp set right now, we would probably -- our RevPAR results would be about a point higher.

Okay, great. That's great. Thank you.

Joe Greff, JPMorgan.

Ed, earlier, you had mentioned that 2012 group pace is in excess of what it was a year ago for 2011. Can you comment on the pricing on the [2000-and] group business on the books -- how much higher is the ADR relative to what you're experiencing in 2011 group?

You know, what I would tell you right now is that we're probably up 6% to 7% in terms of group bookings for '12. The bulk of that increase is in occupancy, not in rate. Rate is up. But one of the trends that we've been seeing for most of this year, that the -- we're seeing more rate improvement as we get closer to the actual quarter, which at least -- which suggests that what's happening is, as we get closer to -- the bookings that we're doing in the real short-term are apparently coming in at better rates than some of the longer-term business that we had booked.

If you think about some of the business that's happening in '12, a lot of that would have been booked during some of those weaker time periods in 2009. So it's probably not surprising to see that rates are improving.

Okay, great. And I know it's probably early in the game for this, but maybe directionally you can help us understand how you're thinking about ROI capital investment in 2012. And with regard to the Washington, D.C. Grand Hyatt asset, does that property need any capital investment?

You know, we're about to go through -- we probably start in about two weeks -- our capital planning process for 2012. So I will be in a much better position to answer that question for next year. I think you should assume, though, in general, both of our ROI CapEx will be meaningful next year just because some of the projects that we started this year carry into 2012.

The Grand Hyatt is in pretty good physical condition. There was a fair amount of work that was done there a couple of years ago. So I think, all in all, as we look out over the next three years, we're looking at spending somewhere between $10 million and $12 million. So it's just nothing -- there's nothing material that's associated with that acquisition that we feel we need to do.

One of our opportunities, which is the one place where this probably could get more expensive, is that we do want to carefully think through the food and beverage platform at that hotel. And some of the changes that are happening in the immediate neighborhood offer us some opportunities that perhaps generate higher profit -- to put in restaurants or other activities that might be better profit-generating to what we have today. But some of that we've got to get into the property and assess how quickly things are going to happen in the neighborhood, to determine how quickly to move on those items.

Great. Thank you.

Smedes Rose, KBW Financial.

I guess I wanted to ask you a little bit -- you mentioned you don't have a lot of dispositions in the works for this year, but as you look at some of your non-core assets, what is demand like in those secondary and even tertiary markets? We know it's obviously very strong in the Tier 1 markets, but what's -- are there a lot of buyers in those secondary markets here? Is it improving quarter-to-quarter?

Smedes, I would say there's still not a lot of evidence of transactions happening in those markets, but I think overall, our sense is that things are slowly but surely picking up. A lot of this starts on the financing side. And I think the indications that we've been getting is that the lenders who initially were only focused on the top five or eight markets have now realized that -- have gotten more comfortable with the overall levels of recovery, and are starting to expand out into other markets, which is then creating a basis for transactions in secondary markets to happen.

So as we look forward, we will most likely be marketing at least a few properties in the fall. And as we think about '12 and '13, we're hoping that we're going to be able to accelerate our sales base. That will involve a number of deals in secondary markets. And we're anticipating that the levels of demand in those markets will have improved.

Okay. And then you sort of -- I wanted to ask you about your CapEx thoughts for next year, which you kind of answered. But, I mean, are there -- I mean, do you see any kind of -- these kind of top-to-bottom renovation programs that will start taking place next year? Or is it really more just finishing up the ones that are underway, which I guess are like San Diego and Philly and New York or --?

At this point, I don't think we've identified any other hotels besides the -- really the five or six that we have that are going through this. I'd add Chicago O'Hare, Atlanta Perimeter, Sheraton Indianapolis to that mix in addition to the one in New York and the San Diego property. But I -- it's -- I wouldn't rule out that something like that might not be logical. I just -- at this point, we don't have anything that we've identified specifically.

Great. Okay. Thank you.

Jim Sullivan, Cowen and Company.

Ed, just kind of a follow-up question, I guess, in terms of your prepared comments on New York. You attributed the very weak occupancy there to the combination of new supply as well as the renovation activity. And I know this is a difficult thing to do, but can you -- if you think about each of those separately, how much of the 500 to 600 basis point occupancy decline would you attribute to the supply variable?

Well, Jim, I don't -- you know, I think it's tricky to try to carve that up a little bit between the two -- between the different factors. Supply in New York is up 4% or 5% this year, if I remember correctly. So, certainly that has to be causing a point or two of disruption. I don't know that it would be more than that.

I think some of that depends a little bit also -- I think that affects us probably a little heavier in the beginning of the year than it was in the second and third quarter. As occupancies start to pick up, and are naturally stronger in the city and carrying into the fourth quarter, where a lot of our hotels are full all year long, I think the effect of the supply becomes less important. In the first quarter, where occupancies are traditionally the lowest in New York, I think the supply increase was a bit more impactful.

And so as you think about the outlook for RevPAR growth beyond the second half of this year looking out to 2012 and 2013, do you look at that supply that you cited, the 4% to 5% growth in room count in the market, as something that will have minimal impact on the RevPAR growth outlook for that two-year period?

I would think as you start to get into '12 and '13, it is definitely less of a problem.

Okay. Can you also update us on the spend and the timing at the Helmsley in New York?

Yes, the overall dollar amount that we're projected to spend net of contributions from our operators in the [$65 million to $70 million] range. Our plan at this point is to start construction in the fall of this year, and then we would hope to be done sometime in the second quarter of 2012.

Okay. Then a final question. In terms of asset valuation, EBITDA multiples, whichever metric you'd like to use -- when you think about acquisition opportunities in New York versus acquisition opportunities in D.C., how would you compare/contrast the warranted multiples that you'd be willing to pay?

I would say, generally, I would expect to be still be a little bit higher on the multiple in New York than the multiple in D.C. If you're talking about properties of a -- they're sort of similar properties in similar locations that don't have a particular story about them. And I think that really would just be a driver of the fact that, as you would look out to '12 and '13, we would be expecting to see somewhat stronger RevPAR growth than profitability growth in New York, in part because New York fell so much more than D.C.

Okay, great. Thanks.

Shaun Kelley, Bank of America Merrill Lynch.

I'd say that most of my questions have been answered but I did want to go back to the group business point for just a quick second. So, I guess the question I have is group revenues were up 4.5% in this quarter, if I caught it correctly. Could you just remind us of where group pace was coming into the quarter? And then how that -- just so we can kind of get a sense of how the group pace numbers you gave for 3Q and 4Q should kind of play out.

Shaun, I don't have that right in front of me, but my recollection is that the revenue number came in relatively close to where, if the revenues were ahead at the beginning of the quarter. I think what we found is that -- we ended up with a little bit fewer room nights than what we -- so I think we were positive on the room night side coming into the quarter. And we booked less in the quarter for the quarter than we had the prior year, so that declined a bit.

But the good news is, is that as the business all shifted around, the overall rate improvement that we experienced in the second quarter was better than we had forecasted. So we ended up with roughly a 4.5% revenue improvement that we had.

You know, I should note too, is -- I don't want to overdo the commentary regarding Sheraton New York and Philadelphia; but as I have found to try to understand how we're doing is that sometimes pulling those assets out, just because of the level of disruption there, gives me better insights into how the Company is doing. If you look at the group side and you take those two assets out, what you find is that group demand was up over a point -- leaving out those two assets. And the overall revenue growth was higher than what I described, in part because both of those hotels are big group hotels, especially Philadelphia. And they just weren't able to do the level of group business that they normally would have done.

So as you think about your question, which I think is a really good one, and think about it for the third and fourth quarter, what I would probably be expecting is that we might find that in the third quarter our group room nights is a little less than the 3% we're running ahead right now -- although we have healthy rate growth in the third quarter. So I think bottom line is that the overall results for the third quarter for group should be fairly positive.

The fourth quarter, I would still expect to see continuing a trend that we've seen all year. I would like -- expect that what we will find is there will be more rooms booked going into the fourth quarter when we're talking to you in October, than what we have right now, because the pace that quarter out or so has still been pretty good. So I would expect to see some additional strength in the fourth quarter.

That's really helpful, Ed. And then, I guess, the only other thing was -- just as you think about the renovations, obviously, you guys are doing these in anticipation of probably getting some additional or incremental performance, but just getting those hotels back in -- into the overall mix should boost your RevPAR, at least in the New York and Philadelphia areas.

So I guess what I'm wondering is, have you -- implicit in your forecast, is there additional improvement coming out of those hotels because of the renovations? Or is it simply that they go back to market averages? And that if there was additional upside based on what you spend, that that wouldn't really be contemplated into what you're guiding to today?

You know, as it relates to the Sheraton New York, we're sort of -- we're only about halfway through the process there. So we are looking at -- we expect to see good RevPAR growth from that hotel for the rest of that -- the year. Some of that in New York, some of that is the fact that the new room that we've done at that hotel is spectacular, especially compared to the rooms that we had before. So there I think we are probably getting some of the lift out of the work we're doing.

In the case of Philadelphia, one point I want to clarify is that we've finished the main Tower, the main building, which is the bulk of the hotel rooms there, but we still have the expansion that we did in that hotel about a decade ago called the Head House. We still have the rooms to do there. So, Philadelphia will not be completely done until the fourth quarter. I think the combination of the new rooms and the new meeting spaces is clearly going to make that hotel that much more attractive. And so we'll see some good lift.

It's unfortunate in some ways that the timing of this renovation -- we've been doing the Philadelphia renovation to be ready for the expansion of the Convention Center, and a tremendous amount of group business is going to hit next year. This year has also turned to be a very solid year in Philadelphia. And I think Larry had told me that if you pulled Philadelphia, our Philadelphia hotel out of our Philadelphia results, our Philadelphia RevPAR would be up 9% in this past quarter.

So it gives you a sense of the pain we're feeling to have the construction going on at this point in time. But, at the end of the day, it was better to be ready for next year than it was to delay the renovation, and then hurt yourself in what we think will be a very strong group year -- especially when we have the best situated group hotel in the market for convention business.

That's helpful. Thanks very much.

David Loeb, Baird.

I wondered if you could just give us a little more color on the Hyatt acquisition. Can you give us any information on what you think the multiple was that you paid for it? What you think the first-year yield is? And how do you expect to fund that acquisition?

David, I would tell you that the multiple was just under [14], based on 2011. So it's in the same range of the other acquisitions of this caliber of the more stabilized assets that we've made.

In terms of -- you know, I think in terms of next year, we -- I don't think I want to get into disclosing what our expected deals are for next year. You should take some insight from my comments that we're not necessarily expecting tremendous growth in Washington in 2012 into account.

David, we're going to fund it through -- we have $630 million -- a little over $630 million of cash on the balance sheet. So, as you know, we did the bond deal in the quarter so we've raised some capital there. And we also -- our intent is to assume a mortgage on that hotel as part of the acquisition, so that that's where the financing for the acquisition will come from.

So you do expect to keep that mortgage? It was sort of vague in the release.

Yes, well, I think it was vague for a reason, where our goal would be to keep it; but we are in discussions with the lender and that is not fully determined at this point in time. So -- and I think it would be handy to be able to take advantage of the existing mortgage; but on the other hand, it's not -- as Larry detailed in his commentary about [the amount] of our cash position, if it -- if we ultimately cannot assume it, then we will close all cash and be happy with that result, too.

You have the cash, pretty clearly, but you don't have a ton of cash left. What's -- nor availability in the line of credit -- what's your expectation for how you might fund future acquisitions? Would that be from additional debt, secured debt and other unsecured offering, or further ATM (multiple speakers) --?

Yes, let me clarify one point. I mean, we have -- I think Larry said over $475 million of availability on the line of credit. So we do have pretty good liquidity on the line of credit.

I think going forward, we would generally be expecting to fund transactions through a mix of equity, most likely on the ATM program, and then debt. And we're starting to get to the point where I think we may start to -- we're starting to generate some cash flow from operations, too, which would also contribute to the mix.

And then the last thing to take into account -- I mean, we didn't -- we haven't made an incredible amount of progress on this front yet, but we are going to be selling more assets. So as you start to look out into '12 and '13, I think we will be -- we're looking less at external sources of cash and more effectively internally-generated, either from ops or from sales is the way to fund acquisitions.

I wasn't trying to be critical because it certainly is an impressive array of acquisitions that you've made this year; it's just that you're getting down to it, you're not in the same position you were at the beginning of the year, pretty clearly.

No, you're exactly right about that. Larry is getting sweaty just listening to you talk about that. (laughter)

He's thinking about the next $1.7 billion of acquisitions. (laughter) Great. Thanks very much.

And ladies and gentlemen, we have time for one further question today. That will come from Josh Attie, Citi.

Can you talk about how you expect RevPAR growth to break out between the third and fourth quarters? I think we all probably assume that the fourth quarter is a little better, but maybe you can quantify how much stronger in your internal forecast you expect the RevPAR growth to be.

Josh, I'm going to shy away from giving specific -- what would end up being specific guidance on the quarters. Because we've just made a policy decision not to do that at this point. But I think you correctly analyzed it, that we would expect the fourth quarter to be stronger than the third quarter.

I think that there's -- probably I would have two basic reasons for that. One is that I think that the current issues that are floating around out there probably have a little bit more effect on Q3 than Q4. And I think the economic outlook for Q4 for most people seems to be a bit more positive.

The other point that I would make on that is that not only do we expect the renovations that we've been doing this year to moderate a bit -- at least in terms of the two significant projects that we've been identifying -- but as you circle back to last year, you may or may not remember that our investment spend, our capital spend, in Q4 of last year was considerably larger than what we had done in Q's 1 through 3.

And so, as we think about overlapping that year with the fourth quarter of 2011, we sort of view it as there was construction disruption last year that was one of the reasons why our fourth quarter was a little bit weaker than you might have anticipated, given the way the rest of the year had played out. We will get the benefit of that sort of relative weakness as we come into the fourth quarter of this year. So, for both of those reasons, we would expect the fourth quarter to be stronger. And I think the big question is going to be, how much?

And so maybe thinking about the renovation disruption separately, the renovation disruption you said was a point and a half of RevPAR for the first half of the year. Will there be some impact from the renovations in the third quarter, and then that disruption -- that level of disruption subsides in the fourth quarter? Is that the right way to think about it?

It will be a little bit in the third quarter for two reasons. You'll have Philadelphia still finishing up its last set of rooms. So that has some drag. And an overall level of capital in the system is a little bit stronger in general. So I think we'll see the third quarter is a little bit better than the second quarter. Then I'd expect to see the fourth quarter be meaningfully stronger than that.

Great. Thank you very much.

And ladies and gentlemen, that does conclude today's question-and-answer session. At this time, I would like to turn the conference back over to our speakers for any additional or closing remarks.

Well, thank you for joining us on the call today. We appreciate the opportunity to discuss our second-quarter results and outlook with you. Look forward to providing you with more insights into how this year is playing out when we do our third-quarter call in October. Have a great day and enjoy the rest of the summer. Thanks a lot.

And once again, that does conclude today's conference. Thank you all for your participation and have a great day.