Host Hotels & Resorts Inc (HST) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Host Hotels & Resorts Incorporated fourth-quarter 2011 earnings conference call. Please note today's conference is being recorded.

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

Well, thank you. Welcome to the Host Hotels & Resorts fourth-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 and our 8-K filed with the SEC, and on our website at HostHotels.com.

Before we begin, I'd like to introduce our new Vice President of Investor Relations, Jeanne Lindberg, who is here with us today on the call. Jeanne has been with Host for 18 years, most recently in our Treasury Group.

This morning, Ed Walter, our President and Chief Executive Officer, will provide a brief overview of our fourth-quarter results and then will describe the current operating environment as well as the Company's outlook for 2012. Larry Harvey, our Chief Financial Officer, will then provide greater detail on our fourth-quarter results including regional end market performance.

Following their remarks we will be available to respond to your questions.

And now, here's Ed.

Thanks Greg. Good morning, everyone.

In spite of the more difficult macro environment, our 2011 results were strong. Although some markets proved to be slightly softer than expected, overall we were quite pleased to see accelerating banquet activity, combined with improved group bookings which are important indicators of our business and reflect a positive trend that we expect will continue into 2012.

Before I get into the details, let's review our results for the quarter and the year. Comparable revenues increased 6.1% for the quarter and 5.6% for the full year. Fourth quarter RevPAR for our comparable hotels increased 5.9% with full year growth of 6.1% as rate growth generated about 70% of the increase.

The RevPAR growth for our recent acquisitions was nearly 13% in 2011 and combined with our comparable portfolio reflects a pro forma RevPAR growth of 6.7% for the year. Our average rate for the year for our comparable hotels is $180 a night, our average occupancy was 72%.

We had our strongest quarter of the year in food and beverage as revenues at our comparable hotels increased 6.8%. Increased catering demands in our group business led to a 9.5% improvement in banquet revenue with audiovisual revenue up nearly 11.5% and meeting room rental up over 13%. With almost 69% of our food and beverage revenues coming from catering related activity, we benefit from a very strong flowthrough and a 13% increase in profit.

For the year, food and beverage revenues increased 5.5%.

Comparable hotel-adjusted operating profit margins increased 100 basis points for the fourth quarter and 90 basis points for the year, resulting in adjusted EBITDA of $349 million for the quarter and $1.018 billion for the full year. The latter reflects a 22% increase over 2010.

Our adjusted FFO for diluted share was $0.32 for the fourth quarter and $0.92 for the full year which exceeded consensus estimates and reflects a 24% increase over 2010. It should be noted that both adjusted EBITDA and adjusted FFO for diluted share were negatively impacted by the forfeiture of the $15 million deposit, resulting from our decision not to acquire the Grand Hyatt Washington DC.

Throughout the course of 2011, we saw favorable trends in our business mix, as higher rated segments continue to increase share. More importantly, we experienced increases in average rates in all segments within (inaudible) group.

For the full year we experienced strong demand in rate performance in our [transient] business, as mix shifted from discount to higher rated special corporate business. In fact, our Special Corporate segment led the way with a balanced combination of demand in rate growth to the nearly 6% increase in demand and a nearly 5% increase in rate, resulting in an 11% increase in annual revenue.

Overall transient demand increased more than 2%, and average rate increased more than 4.5% resulting in transient revenue improvement of nearly 7% for the year. While our full year transient demand is nearly 3% better than 2007 levels, ADR remains 13% below the prior peak indicating a meaningful opportunity for additional rate growth in 2012 and beyond.

Turning to our Group business, we continued to see a positive shift from the Discount Group segment to the higher rated Corporate segment. Overall, Group results kept pace with our Transient business this quarter with rate up more than 3.5% and an increase in demand of more than 2% resulting in increased revenues of nearly 6%.

This was the first time during the last several quarters that Group revenue growth matched Transient growth, reflecting a trend we think can continue into 2012 based on our strong booking pace. This quarter's positive results were led by our Corporate Group business which experienced a 15% increase in demand, and when combined with a more than 4% percent increase in rate, resulted in a nearly 20% improvement in Corporate Group revenues.

For the year, our Corporate Group demand was up more than 14% and, combined with a more than 3% increase in rate, resulted in nearly 18% increase in revenue, which more than offset the lag we experienced in association demand.

For the year, our group demand was up nearly 2%, rate was up nearly 3.5% which resulted in an overall increase in group revenues of more than 5%. Compared to 2007, group revenues are still down by more than 14% primarily because group room nights are still down more than 11% due to a shortfall in our corporate and association business. We expect to continue to close this gap as the mix continues to shift to more profitable demand in our higher rated Group segments.

Looking at 2012, we expect revenue growth to be driven by a combination of increases in rate and occupancy. While we are expecting to see the majority of this year's increase driven by higher rate, we finished the year with occupancy of 72%, compared to portfolio occupancy of 74% in 2007 and 78% in [2000], suggesting that we'd still have room to improve on that front.

Bookings during the fourth quarter for both the current quarter and future years were quite strong, exceeding 2010's accelerated pace and we were pleased to see an increase in association bookings which have lagged during the recovery.

Looking more specifically at 2012, roughly 70% of our Group nights are currently on the books, bookings are up in every quarter particularly in the second and fourth quarters, and we are currently showing a full year room night increase of more than 5% at slightly higher rates. While less of a long-term indicator our transient bookings started the year quite strong, which helped generate a comparable hotel RevPAR increase of roughly 6.5% year to date.

On the investment front in 2011, we closed on approximately $1.2 billion in acquisitions by purchasing the Manchester Grand Hyatt San Diego, the New York Helmsley Hotel, seven properties in New Zealand and a 75% preferred interest in the Hilton Melbourne South Wharf Hotel.

Acquisition activity was up meaningfully in the first half of 2011, but slowed in the second half due to the contraction in equity prices and continued uncertainty in Europe. However, based on improving economic conditions we expect to see transaction activity to pick up again in 2012, especially during the second half of the year. Our focus will be on acquiring assets in our target markets at yields that exceed our cost to capital, while we fully intend to be active this year recognizing the unpredictability of the timing of completing transactions, our guidance does not assume any acquisitions.

For the year, we invested a total of $202 million in redevelopment and return on investment capital projects including the complete renovation of the rooms and mechanical upgrades at the Sheraton New York Hotel and Towers, a project we expect to complete in June of 2012. Other projects include the redevelopment of the Atlanta Marriott Perimeter Center, Chicago Marriott O'Hare and the Sheraton Indianapolis, where we are also converting an existing tower into 129 apartments. We continue to find construction pricing attractive and expect these investments to yield returns substantially in excess of our cost to capital.

In 2012, we expect to spend approximately $155 million to $175 million on ROI and redevelopment investments, a significant portion of which are the continuation and completion of some of these 2011 projects.

In addition to these investments, we are in that process of converting the New York Helmsley Hotel to the Westin Grand Central where we are renovating all guest rooms, meeting space, restaurants, lounges as well as mechanical and facade work. We will also implement a major room renovation at the Manchester Grand Hyatt in San Diego, where 1,625 guest rooms will receive a soft and case goods renovation.

We have spent about $13 million in 2011 on our acquisition capital expenditure plan. We expect to spend $80 million to $100 million on these projects in 2012.

In terms of maintenance capital expenditures, we spent $327 million in 2011 and expect to spend $310 million to $330 million in 2012.

The 2012 plan includes room renovations at the New York Marriott Marquis, the Hyatt Regency in Washington, the Orlando World Center Marriott and the Ritz-Carlton on Amelia Island as well as meeting space renovations at the Ritz-Carlton Buckhead, New York Marriott Marquis and the North Tower of the Orlando World Center Marriott.

Turning to dispositions, we continue to market selected properties for sale. However increased volatility in the capital markets during the second half of 2011, mainly as a result of instability in the Eurozone as well as political and economic uncertainty Stateside slowed our disposition pace. However, based on recent positive economic data combined with a rebound of REIT share prices, improving debt markets and a better outlook for 2012, we expect the volume of our asset sales to pick up and our guidance assumes $100 million to $115 million in dispositions during the first half of the year.

Now let me elaborate on our outlook for 2012.

While we remain concerned about the sovereign debt issues in Europe and the lack of political consensus in Washington, we expect a stronger economic recovery that reappeared in the fall of 2011 to continue into 2012. As I detailed earlier, group bookings are strong and transient activity has started the year well and should be supported by a projected 7% increase in business investment. New supply is quite low but should lead to solid occupancy increases as demand improves.

With all of this in mind we're expecting comparable hotel RevPAR and revenues to increase 4% to 6% for the year and adjusted margins to be up 25 to 75 basis points. This operating forecast, combined with our expected sale activity, will result in adjusted EBITDA of $1.090 billion to $1.145 billion and adjusted FFO per share of $0.97 to $1.04.

Looking at our dividend we are forecasting our first-quarter common dividend to be $0.06 per share. Dividends for the rest of the year will depend both on operating results and the gains we generate from asset sales.

I am pleased to say that the lodging recovery is continuing to progress. We believe this positive cycle will continue to gain momentum through 2012, and carry into 2013 and beyond. Continued increase in demand complied with low supply growth should support a solid and sustained recovery.

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. Our top-performing market for the quarter was Hawaii with a RevPAR increase of 23.6%. Occupancy improved more than 11 percentage points driven by strong group and transient demand which led to a 5% increase in rate.

Results for the quarter benefited from the renovations of the hotels in the fourth quarter of 2010.

Food and Beverage revenues for our Hawaiian hotels increased more than 18%, and as a general trend we saw stronger F&B revenue growth throughout our portfolio.

Hawaii also had an outstanding year with a RevPAR increase of 16%, the second-best market in our portfolio. We expect Hawaii to be one of our top performing markets in 2012, due to strong group demand which should allow us to drive pricing.

As expected, our Miami and Fort Lauderdale hotels had another great quarter with RevPAR up 16.3%. Occupancy improved 8 percentage points as group demand was very strong and ADR increased nearly 4%.

The renovation of the Miami Biscayne Bay Marriott in the fourth quarter of 2010 contributed to the RevPAR growth.

For the year, our Miami and Fort Lauderdale hotels had RevPAR growth of 9.7% and we expect them to have a good year due to growth and ADR in 2012.

The Phoenix market continued to perform exceptionally well with a RevPAR increase of 15.7%. Strong group demand aided by the construction of a new ballroom and meeting space renovation at the Westin Kierland in 2010 resulted in an occupancy increase of over 5 percentage points. The ADR growth at nearly 6% was driven by increases in both group and transient rates.

Our Phoenix hotels had F&B revenue growth of nearly 29% in the quarter. They also performed very well for the full year with a RevPAR increase of 13.3%. We expect our Phoenix hotels to perform in line with our portfolio in 2012, due to solid group demand which will result in further ADR growth.

While our Philadelphia Downtown Marriott is no longer under renovation, our Philadelphia hotels had an outstanding fourth quarter with RevPAR up 13.5%. ADR increased nearly 12% and occupancy improved over 1 percentage point. Strength in Group bookings drove the outperformance and led to an F&B revenue increase of over 15%. We expect our Philadelphia hotels to excel in 2012, primarily due to strong group demand and no negative impact from the renovation.

Our San Francisco hotels continue their excellent performance as RevPAR increased 11.2%, due to an ADR improvement of nearly 9% and an occupancy increase of 1.5 percentage points. The improvement in ADR was driven by both rate increases and a shift in the mix of business to higher rated segments. Both Group and Transient demand was strong. For 2011 San Francisco was our top-performing market with a RevPAR increase of 16.3% and it will continue to perform well in 2012.

RevPAR for our Chicago hotels increased by 6.3%, driven by an increase in occupancy of nearly 3 percentage points and an improvement in average rate of over 2%. As both Transient and Group demand were good we expect our Chicago hotels to have another good year due due to strong group in citywide bookings which should drive ADR growth.

RevPAR for our New York hotels increased 5.4% due to a rate improvement of over 3% and an occupancy increase of nearly 2 percentage points. These results were below our expectations primarily due to lower rate growth and the effect of new supply. Even with the new supply we expect our New York hotels to have a solid 2012.

RevPAR for our Washington, DC hotels was essentially flat with occupancy increasing 1.5 points and ADR declining roughly 2%. Soft group and transient demand, along with discounted leisure rates, hurt ADR. 2012 will be a challenge due to a weaker citywide calendar, government travel cutbacks and an election year.

Lastly, a worst-performing market for the fourth quarter was Atlanta. RevPAR fell 3.9% with a 2 percentage point drop in occupancy and a 1% drop in ADR. The poor performance was due to a decline in citywide demand and renovations at the JW Marriott Buckhead. We expect the Atlanta market to continue to unperform our portfolio in 2012.

For our European joint venture, RevPAR calculated in constant euros increased 1% for the quarter as ADR increased 5.3% while occupancy fell 3.2 percentage points. In particular, the Sheraton Roma had a significant negative impact [when] RevPAR growth due to its major renovation. Excluding the Sheraton Roma, RevPAR would have increased 3% in the quarter in constant euros. The Westin Europa & Regina, in Venice, the Sheraton Warsaw performed the best in the quarter.

For the full year RevPAR calculated in constant euros improved 5.5%, solely due to growth in ADR. Excluding the Sheraton Roma, RevPAR would have increased over 8% in 2011 in constant euros.

For 2012, the European joint venture properties have projected RevPAR growth of 3% to 5%. However at the corporate level, we are more conservative in using lower RevPAR assumptions. Our portion of the euro JV EBITDA represents only 3% of our adjusted EBITDA.

For the quarter, adjusted operating profit margins for our comparable hotels increased 100 basis points, despite the recognition of $1.6 million in bad debt expense from the American Airlines bankruptcy. Margins for the quarter benefited from better productivity as wages and benefit on a per occupied room basis increased less than 2%. Room flowthrough was roughly 73%. As previously discussed Food and Beverage revenues increased significantly with a 6.8% revenue increase.

F&B flow-through was nearly 51%, a substantial improvement over the first three quarters of the year and significantly above our expectations. We saw improvements in catering, meeting room rental, and audiovisual revenues. Unallocated costs, which include general and administrative, sales and marketing, repairs and maintenance and utilities increased 4% primarily driven by expenses that are variable with revenues including credit card commissions, reward programs and cluster and shared service allocations.

Utility costs declined slightly. Property taxes increased in the fourth quarter after declining for the first three quarters of the year, resulting in an overall decrease in property taxes for 2011. For the full year, comparable hotel adjusted operating profit margins increased 90 basis points.

Looking forward to 2012, we expect that RevPAR will continue to be driven by both occupancy and rate growth. The additional rate growth should be lead to solid rooms flowthrough even with growth in wage and benefit cost. We expect an increase in group demand and higher quality groups which should help drive growth in banquet and audiovisual revenues and good F&B flow-through.

We expect unallocated cost to increase more than inflation particularly through rewards and sales and marketing where higher revenues will increase costs. We expect property taxes to increase roughly 9% and property insurance to increase due to higher replacement costs and rates. Together these two items reduce our margins by more than 40 basis points for 2012. As a result, we expect comparable hotel-adjusted operating profit margins to increase 25 basis points at the low end of the range and increase 75 basis points at the high end of the range for 2012.

During the quarter, we issued $300 million of 10-year senior notes at a 6% rate. The proceeds will be used along with available cash to repay our only meaningful debt maturity in 2012, the $388 million and 2 5/8% exchangeable debentures which we expect to be put to us in April. We also closed on a new $1 billion revolving credit facility, which is $400 million larger than our old facility. The new facility matures in November of 2015 with an option to extend for one additional year, subject to certain conditions.

Based on our current leverage level, US dollar-based borrowings would have a spread of 200 basis points. We currently have over $880 million of capacity on a credit facility and ended the quarter with over $800 million of cash and cash equivalents.

I wanted to mention two more items prior to starting the question-and-answer session. In 2011 our taxable REIT subsidiary incurred a book loss primarily due to negative lease leakage, which resulted in our recording a tax benefit in 2011. The anticipated improvement in operating results in 2012 should lead to an increase in lease leakage, and as a result we are projecting tax expense for 2012.

This translates into roughly a $0.02 per share reduction in adjusted FFO for 2012. In addition, the mortgage note that we purchased in 2010 that has collateralized by six hotels in Europe matures in October, and we expect to get repaid at that time. Accordingly, we will only have nine months of interest in 2012, which results in a reduction in adjusted EBITDA of approximately $6 million or $0.01 per share in FFO when compared to 2011.

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

(Operator Instructions). Eli Hackel, Goldman Sachs.

Thanks, good morning. Just two questions. First, can you just talk further about your views of the Atlanta and DC market? Have your views of those markets changed over the last couple of years? And just building upon that, you said you were going to increase your dispositions. I mean, what markets are you looking to decrease your exposure to?

And then second, what is your current view on the next peak in margins? While it seems that some permanent costs have come out of the market via staffing and other means, maybe there's some higher costs whether it is taxes or insurance. Do you think the next peak in margins will be higher than the previous peaks? Thanks.

Well that is a lot in two small questions, Eli. Let's talk about the markets first. Yes, I think on DC, the [trivise] of the DC market for last year meaning 2011 and then also the fact that the market is going to struggle a little bit in 2012. We are pretty well chronicled.

We are still of a mind that DC is a great long-term market. As we have commented before and others have commented, at the end of the day DC is just not as volatile as markets like San Francisco, Boston and New York but over time it generates great strong growth. We still think that the federal government is going to be a strong source of employment and a strong source of activity in December. There may be some slowing in the rate of growth there, but in the end, DC has also matured into a more diverse market.

And perhaps most importantly is with the advent of the new convention center hotel that's coming into Washington, I think, in 2014, we believe that Washington will become even more competitive from a convention standpoint. And it's frankly the anticipation of that that is one of the reasons why 2012 is not as strong of a market in DC as it has been -- it might have been in the past and part because folks are waiting for that new convention center hotel in order to schedule their event in Washington and take advantage of what is a very nice convention center.

So as we look outwards while we are fairly well represented in DC already, DC is a market that ultimately we would still be comfortable in acquiring more in, especially in the downtown area. I think as we look out to the suburbs we have some concerns out in some of those markets, and so over time, we would probably be expecting to exit some of the hotels we own in the suburbs of DC.

Atlanta is a market that we have several great hotels in. But as we look at Atlanta, Atlanta is a market we feel is slowly but surely losing some of the convention share that it has had in the past. It has lost that share to a number of different markets. Vegas has been an issue but so have Orlando and San Diego.

And so as we think about Atlanta, the underperformance as Larry commented in the most recent quarter which seems to have been driven primarily by, in the market, has been driven by the fact that there just wasn't the same citywides in Q4 of 2011 as there was in 2010.

We're not necessarily expecting to see a big change in Atlanta in terms of increased citywide this year so we don't have that much, that optimistic of a perspective on Atlanta for 2012. It's a market that as we look at long-term, it's one we have said in the past and would continue to say we would like to reduce our exposure to. In part because we already own so many good hotels there but also, perhaps more importantly, we just don't see the long-term growth in Atlanta to be as strong as in some markets elsewhere.

And in some ways that gives you some hints into the disposition or -- your question about dispositions but I would say broadly speaking we are looking to reduce our exposure to non-core hotels in non-core markets. Some of the sales activity may see from us this year and next year though may be in markets that we have identified as primary, as say, for instance, some of the West Coast markets but what we are looking to do there is sell markets, sell hotels that might be located near airports or located in suburban markets where we think there will be investor enthusiasm because of the market but they're not necessarily assets we expect to hold.

Another driver that as we consider what we might sell in the near term is to look for hotels where a fair amount of the recovery back to 2007, levels of EBITDA has already occurred. So that we can feel comfortable that we are not leaving a material amount of value on the table by selling in 2012 as opposed to waiting a bit longer.

Overall over the course of the next two or three years, we expect to be an active recycler of capital. And so of course you can't count on doing that all at once. And that's one of the reasons why we intend to get started in that process in 2012.

Now coming to your question about the peak in margins. I mean, there's certainly some substantial room to grow from the margins where we were back to peak margins. And I think that applies across the industry.

Real estate taxes are certainly an issue in this year, as Larry described. But I don't know that other than if we suddenly become the target for a lot of local municipalities trying to balance their budgets and picking on the commercial real estate industry to achieve that, I don't know that we would necessarily see real estate taxes over the long term grow at any higher at any level that's much above inflation. So I don't think they necessarily in the long run will be a drag on margins.

I mean, frankly, in 2011 they were a help. It's in 2012 where they turn out to be a bit of a drag.

When we go back and look at what happened, say, from 2000 to 2007, I know we have commented in the past that one of the things that made it very difficult to achieve our 2000 margins was the fact that we used to make profits off our telephones and say in the 1990s right through to 2000. But when you get to 2007 it really had turned into a cost center.

I don't believe that other than maybe losing some charges around Internet connectivity that we necessarily have a major item of profit that is going to disappear from the hotel going forward that would impact our ability to recover to prior peak margins. The real issue, of course, in achieving margin growth comes down to revenue growth that exceeds inflation and then trying to minimize your cost increases to inflation or just above that. So to some degree the speed with which we achieved those prior peak margins is really going to be based upon how quickly if the recovery accelerates to higher levels of RevPAR growth. I hope that helps.

That was great. Thank you very much.

Robin Farley with UBS.

Great, thanks. Two questions. One is can you give us a little bit of color on what your Company guidance assumes for European RevPAR from your JV? And then also I wanted to ask about flowthrough. You mentioned a couple of the items, insurance and things, that I think you said combined were like 40 basis points burden on 2012 margins. But I guess is there anything else that is keeping more flowthrough, given that you expect rates to be more of a driver of that 4% to 6% in occupancy that we might have expected to see more flowthrough than just the 25 to 75 basis points even with the little items you mentioned?

Larry mentioned, on the first question relative to European RevPAR -- Larry had mentioned the properties were I think up 4% to 5% or 3% to 5% in terms of their estimate for RevPAR. We are generally using a number that is just barely positive, close to flat. Not because we necessarily are convinced that's where it's going to come in but we thought from a budgeting perspective, that that was probably fairly prudent. Just the whole European situation is so difficult to get your arms around.

It's interesting when you look at Europe is that while, clearly, there's a lot of concern coming out of the sovereign debt issues and that is leading to Europe looking to be likely in a recession for the fourth quarter and most likely in a recession for the first quarter of this year, that one of the things we have to remember about that market is that 40% of the business at least as characterized in our hotels comes from countries outside of the EU. That is four times to five times what we typically see in the US.

So one of the reasons why you end up with -- you can end up with positive RevPAR growth in Europe despite the fact that the economy is relatively weak is that if some of the surrounding economies do tend to send folks there to visit and vacation, if those economies are doing well you can see Europe do a bit better than you might otherwise expect.

Now on the flowthrough really circling back, I think Larry did a great job of explaining the primary reasons for what appears to be weaker flowthrough in 2012 than what we experienced in 2011. At the end of the day when you look at what is really happening at the operating level, at the hotels -- so in other words if you think about hotel revenues minus department expenses minus direct department expenses and leave out issues like real estate taxes and insurance, we are actually expecting to see better operating results and better flowthrough in 2012 than we saw in 2011.

But unfortunately what's happening in 2012 is instead of seeing flat versus actually slightly down real estate taxes, we are seeing real estate taxes increase fairly significantly year over year. And because of some of the natural disasters that happened in 2011, we are expecting to see insurance go up again, unfortunately, on top of a fairly significant increase last year.

So the combination of those two factors really account for the bulk of the GAAP in flowthrough.

Josh Attie with Citi.

Thanks. What do you expect in terms of quarterly progression of RevPAR or even just if you look at the first half or the second half, do you feel like it's going to be spread evenly or is the growth weighted toward a particular half or quarter?

You know, Josh, we obviously have stopped providing quarterly guidance so I don't know that we have a specific response to that question. But what I would say in general is at this point, our Group bookings look stronger in the second quarter and in the fourth quarter so that might -- since one of the things were looking to see this year is continued recovery on the Group side, that might have supported some outperformance in those quarters compared to the other two. But by and large I think our sense is that it will be a relatively even year.

Okay, thanks. You know how does your RevPAR growth guidance of 4% to 6% compared to maybe what your view of the industry is? Or how do you think -- do you think the portfolio is going to outperform or underperform what you think the industry will do? And what are the different headwinds and tailwinds affecting that?

Overall, I think what we have generally been tracking over the course of the last 18 months is what has been happening with upper upscale. And I think you have seen upper upscale perform a little bit differently from the industry as a whole, for two reasons. One, luxury has helped drive up the overall industry because luxury has fallen so far in the downturn that the bounceback there has been a pretty powerful driver in terms of overall industry RevPAR growth.

And I think the segments below upper upscale have performed slightly better in some instances, in part because they're primarily beneficiaries of Transient business demand and they do very little Group. And as we identified in our comments earlier, Group is the element of our business that has lagged a bit.

So as we look to 2012 I think one of the things that encouraged us the most about 2012 was the fact that, as we looked at the fourth quarter we started to see it was the first quarter this past year where we actually picked up group room nights in the quarter for the quarter. We hadn't seen that in most of 2011 but it did happen in the fourth quarter. When we looked at our booking page for out period outside of the fourth quarter of last year, our bookings were running 9% ahead of what we had for the prior year. In other words the number of room nights we picked that we booked in the fourth quarter of 2011 was 9% better than what we had done in the fourth quarter of 2010.

So that's not just for 2012 but it's booking out over a broader time period.

So when we see groups start to improve like that, we think that's going to be beneficial to upper upscale. We certainly think that is going to be beneficial to us.

The ability to start to layer in more Group, which will most likely mean trust more occupancy, I think that's certainly one thing you should take from this call is we are expecting to see a mix of rate and occupancy growth this year. The more that we can layer in that Group and the sooner we can layer in the Group the more aggressive we can start to get on Transient pricing. When you match up that Transient pricing with good solid results on the Special Corporate side, figure in a range of 5% to 7% as an average, when you look at government rates going up, when you look at all those factors, we feel good about the way 2012 is going to play out and we see no reason other than in selected markets where we may be affected by a capital project or two, we don't see any reason why we wouldn't perform in line with upper upscale and potentially a little bit better.

And it sounds like it's -- based on the way Group bookings have accelerated you feel like the performance gaps between your portfolio and upper upscale versus the total industry could start to narrow in 2012 or close completely?

Well, I mean if I look at us compared to upper upscale there really is a -- look at the current quarter and you look at the current calendar quarter based on the data that Smith Travel published at the end of the year, the monthly data as opposed to the weekly data, we are right on top of upper upscale in terms of performance. So I think the number that I have is [63] for the fourth quarter of the year and we have just 1/10 underneath that. And I think the difference is really due to some construction projects in Seattle and some activity down in Tampa of course some hotel just essentially the meeting space was taken out of operation and it hurt the hotel in a fairly significant way.

So I don't think that there really is a material gap there that we need to close. If you layer in the new properties we have added that are not part of those stats, I think ultimately we come out ahead especially on a full-year basis. So I think my comments should be read to be more that I think we're beginning to see the opportunity for upper upscale to catch up to the rest of the industry and, ultimately, you know the point we can't all forget and it's really evidenced a bit by our numbers this past quarter is that Group business is not just about what it does to RevPAR. It's about what it can also do to Food and Beverage.

And so if you look at -- if you come back to our EBITDA and you layer in the $15 million we paid on -- that we lost on the deposit to on the Hyatt transaction, I think we really outperformed on the EBITDA lines compared to most folks' expectations and the primary reason that happened was because we had really strong Food and Beverage growth.

Part of what we are hoping to see this year and obviously need to see if it plays out this way is that momentum we started to see in the fourth quarter on Food and Beverage carries into 2012. And as you know, banquet business is a heckuva lot more profitable than outlook business and that can really help in terms of driving improved EBITDA.

Thank you very much.

Smedes Rose with KBW.

Hi, it's Smedes. I just had a couple questions. I wanted to ask you on your disposition activity, if you could just talk about maybe some of the buyers you're seeing and how are they thinking about financing on the assets they want to buy. And then for you you guys specifically, are you thinking more towards international opportunities or domestic as you think about acquisition activity? And then also in your guidance -- are you -- does it assume any issuance on your ATM program in the share count you've provided?

Okay, on the disposition side, you know part of what happened and as I mentioned in my comments when you look at what happened in the second half of the year by and large the REIT activity dried up in part because it was difficult for REITs to raise additional capital given what had happened with the share prices. I don't know that we have necessarily seen a change in that yet but I think what we have been seeing for the assets we have been marketing is it's kind of the normal group of owner operators that are interested in taking on a property and benefiting from a quality brand and a franchise fashion.

We're also looking at some what I would describe this in private buyers who are -- maybe had a different source or a committed source of capital earlier in the year that had not been fully expended and consequently are in a position to be active in the market.

I would tell you that for a decent -- a borrower with a good reputation, there's a fair amount of debt capital out there. It's not available at the levels of leverage that we saw back in 2006 and 2007. So clearly lenders are looking for more conservatively financed transactions. But the level of debt that is available on the market right now is actually pretty good and as you can tell from some of the pricing that I'm sure you have seen, we are really seeing -- because underlying rates are so low, even though while spreads might be a bit wider than they have been historically, the reality is is that pricing for secured loans has been pretty attractive. And that's obviously the debt source that folks would be accessing if they bought a property from us.

As we think about acquisitions for the year, I think the trend is going to continue to be as it has in the past, which is that the bulk of the acquisitions we're going to do are going to be in the US. We are going to be very careful and cautious in Europe. It's one of those interesting dynamics that we think there will be some distress in Europe, or it least there will be debt coming due in Europe that is going to be difficult for folks to refinance. So that may lead to some opportunities.

But at the same point in time we need to be cautious and just be thoughtful about what the level of growth is going to be there and what returns are smart or acquired in order to invest in Europe. By and large, I would say we would be looking for slightly higher returns there than we have in the past, reflecting the increased risk.

In Asia, I think the primary focus is going to be in established markets like Australia and we are going to look a little bit harder in Singapore, to see if we can identify an asset there.

And then coming back to the US, our primary focus here is really going to be the West Coast of the US. And I think we'd like to identify some assets down in the Miami market. Those are two places that we are under represented in our portfolio, based on our assessment in our markets where we would love to try to add some incremental exposure.

And what was your last question?

I just was wondering if you had issued on your ATM during the quarter and if your guidance assumes any continued issuance?

If you look at page 12 of our press release our total of shares in [L.P.] units outstanding right now they're about 716 million. If you look at the back of our press release where we show the total shares for the year it's basically taking that 716 million and adding in the converts, the 38 million of converts, and so the answer is, no, there are no additional shares in our guidance.

Bill Crowe with Raymond James.

Good morning, guys. A couple of detailed questions on the guidance. I know some markets you are more specific on your outlook than others. Do you have any sort of specific RevPAR growth goals for New York and DC, in particular?

Bill, New York is a market that we ultimately expect will probably perform about in-line but I would tell you that our situation in New York is a little complex this year because we are continuing the renovation of the big Sheraton. We have rooms and meeting space that are happening at the Marquis and we are also doing the rooms at the W Union Square so we're trying to (technical difficulty) during a period of time where it will be less impactful. In some cases, that work is matching up with a time period of time last year where we are also doing work.

So that's one of the reasons why we're thinking in, generally, in-line result, as opposed to something more conservative than that. But by and large that's how we're looking at New York.

You know, New York has been in the press a lot lately and I think the one comment we have more broadly on New York is that while it did underperform our expectations a bit in the fourth quarter of last year, it still was just a hair underneath average RevPAR growth for the portfolio. And realistically, we think that was generally supply-driven but we also think the supply growth in New York is going to moderate some this year and then moderate much more significantly in the next couple of years.

The bigger key that I see in New York is not so much the fact that the performance in 2011 might not quite have been what we had hoped. It's really the fact that in the last two years demand has increased there by about 15%. So supply was up 10%, demand was up 15%, net is good solid growth in occupancy but it's not surprising with that much supply growth coming into the market that you might have seen a little bit weaker rate growth. And unfortunately, that's what we ran into in the fourth quarter of last year.

I think in DC we are expecting relatively modest to flat RevPAR growth in DC. And it's the combination as Larry described as a weaker convention calendar combined with the fact that we are expecting that for all intents and purposes a paralyzed Congress is going to lead to not a lot of legislative activity. And we are going to be finding that in a lot of cases that Congressmen are going to be out working on the reelection campaign as opposed to working on passing legislation.

So both of those two factors will result in a relatively weak year in DC, which is I think what we have all been expecting.

Right, right. Okay and then you talked about the renovations and lapping some of the renovation disruptions from last year. Do you think that net net, you will benefit from -- as far as 2012 goes, the renovations relative to last year or is it a wash given the disruptions this year or how do we think about the impact?

I, net net, think it's about a wash. Market by market it's going to -- you'll see some dramatic changes that will be renovation influenced. Last year, our outperformance in Phoenix was driven both by vastly improved hotel in the form of our Westin Kierland asset but some of that number was due to the fact that the meeting space had been out of commission the prior year. Consequently we got a lot of lift.

I will be very disappointed if we don't post tremendous returns in Philadelphia this year because as we recounted on the first three calls of the year, Philadelphia -- the combined meeting space and room renovation in Philadelphia helped drag down our results a bit. So consequently, we are expecting we are going to see better numbers this year as we benefit from both a good convention calendar as well as the fact that the hotels are not under renovation.

But broad brush strokes, you know, it seems to us if you look at the dollar amounts we are spending, the low end of our -- of the guidance we gave is roughly equivalent to what we spent last year. Probably our expectation is we will probably come in a little bit higher than that.

Some of that money being spent on hotels that doesn't show up in our comp results like the work we are doing at the Helmsley. But net net, I think it's probably going to be about a wash.

And one final question from me, which is as you look at this building group strength and you start to dissect it a little bit by type of group are you seeing any change in demand by financial services or are you seeing any reduced demand or sensitivity to for example Ritz-Carltons or other high-end brands versus Marriott or Starwood typical brands? Anything you can give us there that would help us look out and see if there are any negative or positive trends we need to be aware of?

I haven't heard of any new trends, relative to the financial sector. I don't think the financial sector is back to where it was in the middle of the last decade but I think generally it's been growing at a reasonably good rate. And despite the fact that we have, of course, know some layoffs in some markets, we're not aware nor have I heard of a trend of financial business being cut.

By and large, we have been pretty encouraged as we've talked about the fact that we're continuing to see Corporate Group business come back and that's coming back both at the Marriott, Starwood, Marriotts and the Westins, and the Sheratons as well as in our Four Seasons and our Ritz-Carltons. And there has been a consistent theme over the course of the last 18 months of continuing growth in Corporate Group business at what I would describe as our luxury hotels.

As I have talked with RGMs and our brand partners there, while I'm sure there is the occasional company that is still concerned about going to a luxury hotel for an event, it seems that the fear of ending up on the front pages for doing that has largely dissipated. So I don't think that is going to be a major issue going forward. Luxury hotel still has some room to run in terms of getting back to where they were in the 2006, 2007 timeframe but I don't think at this point that there's necessarily an impediment to accomplishing that because of the market attitude.

Harry Curtis with Nomura.

Good morning, guys. Ed, I wanted to quickly follow up on some comments you made earlier about the group booking pace you said that's for 2012. I think demand was up about 5%, that slightly higher rate. Going back to your earlier comment, when is it appropriate to begin pushing that rate and is it really the -- in the quarter for the quarter demand that should lift that and how much could it lift it?

Well, I sure wish I knew the answer to the last question because it just gets so tricky to try to calculate that. But I think you have identified a good issue there, Harry, which is that I think we're getting to a point now where we are able to start to do that.

In other words, if you look at, if you kind of look broadly at what's been happening on the Group Business side, we are probably -- right about at 70% of our room nights are booked for 2012 at this point. About half of that 70% was booked in 2011. The other half was booked to prior to that point in time. And I suspect the bulk of that happened in 2010.

What we are finding now as we talk to the properties and talk with our operators is their expectation for this year, and not just in the quarter but really for the bookings that we are going to accomplish throughout the year, they are generally of a mind that the business that we will book for the rest of this year should come in at higher rates than where the business that we booked for the same period last year.

So I do think it's we are starting to transition to that point. It's sort of logical if the portfolio is running in the low 70s, we're getting to the point now where with our groups we're starting to have some pricing power. And as a result of that, you should start to see some rate growth. So, I think our -- it's always difficult to try to figure out exactly how this is going to play out. But at the end of the day it would not surprise me if we didn't see -- if we didn't start to see some much better rate growth as we work our way through the year in group business.

The second question that I had is going back to redevelopment and renewal expense which in 2011 and expect for 2012 will be plus $500 million. That represents over 10% of your revenues and so just a couple of questions there.

Now how much of that is really catch-up on deferred maintenance from the recession period? What percentage of your portfolio has been renovated versus targeted for renovations? And then when do you expect to get to the more traditional 5% to 6% of revenues as a kind of a total spend number?

I guess what I would say, Harry, is you really need to look at our capital. It's somewhat of a mistake to aggregate it to a number that starts to get at that $550 million to $600 million range.

We would view the maintenance CapEx, the $310 million to $330 million that I described in my comments as essentially the regular level of capital that we would need to spend. And I think that comes in that level as you see some more revenue growth is going to be in that 6% range that you had referenced.

The $80 million to $100 million that we're spending on acquisition CapEx is capital that we identified as part of our plan to buy the property. And it's just money that we knew needed to be spent and after that money is spent we should be looking at generally being able to live within the replacement reserve, the [FF&E] reserve going forward.

And then finally, the first category of items that we talked about which is what we used to call ROI and redevelopment capital. I mean, we've really tried to be thoughtful about what fits into that category and in each of those properties we've been referencing like is the Atlanta property or Chicago O'Hare or the Sheraton Indianapolis, we are really transforming those hotels. But maybe more importantly the decision to invest in those hotels and by the way in each of those cases we're actually shrinking the size of those hotel, in some cases because of the use of the property for an alternate use. In each of those instances, we have made the decision to invest the capital we're investing because we were confident that it would drive a pretty meaningful return.

And by that, I mean at least in the upper teens for each of those three projects.

So I don't think -- you know, when I look broadly at our portfolio we did not stop spending on the portfolio through the downturn. In fact if anything, in some cases, we accelerated some capital spending during that time because construction pricing was so much cheaper.

So while there are certainly individual assets that are going to need capital over the course of the next few years, the reality is is that if I look across the portfolio and look at what might be the average age of the different key components of the hotel, I am comfortable that we are if anything not only are we even, I would say we are slightly ahead in terms of long-term capital spending on the overall portfolio.

Again, there's always going to be an asset that needs additional capital and there will likely be a few that need a little bit more than normal. But looking at the portfolio as a whole, I think we're in really good shape from a physical condition perspective.

Jim Sullivan with Cowen and Company.

Good morning. Two quick questions for me, Ed. As you think about demand growth in 2012 and beyond, to what extent is the international inward bound demand a positive or a negative variable? We hear talk about some weakness from some of the European -- some of the major European sources of US travel. But that is being offset apparently by the emerging economy. So I am curious what your operators are telling you about that.

And then secondly, in the general area of costs, maybe could help us think about prospective wage and benefit cost pressures. Should we be thinking about that in connection with an overall employment rate or is there some other variable that we should be factoring into the projected increases in those costs?

Okay, on the international side, we definitely think the long-term trend is for that to be favorable. I think we -- in fact, we've been working with other folks through a variety of organizations to try to encourage a bit of that. If you look at international travel through November, which was as recent as we could get statistics, international travel to the US was up about 6% last year through November and if you think about that compared to overall demand growth, that is a big plus.

If you look at the components of that travel over for the 11 months' time period, Western Europe was actually up 5.8%. So despite the turmoil over there, the level of growth coming out of Europe was not that different from the overall average.

Now I will point out that in October and November, that growth rate slowed a bit; it was down closer to the 2% range. And frankly I think that is what we would all expect, given what was happening in Europe. So, if I were to look at this year I would probably be expecting to see a similar level of overall growth. But I imagine that Western Europe's growth will probably be a bigger disparity between the entire world's growth or all international growth than what we see out of Western Europe at least in the first half of the year.

I think you're right to identify some of the emerging markets is what is making up the gap. The two best countries in terms of year-over-year growth were China and Brazil. I think that is a natural outgrowth of the development of those countries, the expansion of the middle class. I also think it's benefited a bit from an industrywide effort to work with the State Department to try to figure out ways to accelerate the issuance of visas to folks who want to travel from those countries.

I'm sure most people know that we just don't have enough offices in some of these emerging markets. I think there's four or five visa offices in Brazil and in China. And if you went a year ago, we were looking at waits that were running at 70 days to 80 days or potentially longer in order to obtain a visa.

The State Department has worked hard to try to accelerate that process world and while it's still not perfect it is better than it has been and I think some of the growth that we are seeing from China and Brazil and from India are reflective of that. Our theory is that international travel is really one of the bright spots in terms of future lodging demand. And it's one of the reasons why, as we think about the markets that we want to focus our portfolio on, we are looking to the gateway markets we think will specifically benefit from that.

Now switching over to the cost side, I think the biggest determining factor, the biggest cost issue for a set looking out into 2012 and even past that is really what is going to happen on the wage and benefit side and benefits have tended to be running at slightly ahead of inflation a point or two above that generally, and wages have generally, I think this year, projected to be slightly above inflation. Some of that should be offset by what we hope is to keep our per occupied room costs that's well less than inflation as we try to continue to find additional ways to be more efficient in how we run the hotels. But I think I guess that's what we have to say in that area.

Thank you and that does conclude our question-and-answer session today. I'll turn the conference back over to Mr. Walter for any additional or closing remarks.

Great, well, thank you all for joining us for this call today. We appreciate the opportunity to discuss our results and outlook with you. We look forward to providing you with more insight into how 2012 is playing out in our first-quarter call in late April. Have a happy Valentine's Day, everyone.

Thank, you, that does conclude our conference for today. We thank you for your participation and you may now disconnect.