Host Hotels & Resorts Inc (HST) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to the Host Hotels & Resorts, Incorporated first-quarter 2012 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Greg Larson, Executive Vice President. Please go ahead, sir.

Thank you. Welcome to the Host Hotels & Resorts first-quarter earnings call. Before we begin, I would like to remind everyone that many of the comments made today are considered to be forward-looking statements under federal securities laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed, and we are not obligated to publicly update or revise these forward-looking statements.

Additionally, on today's call, we will discuss certain non-GAAP financial information, such as FFO, adjusted EBITDA and comparable hotel results. You can find this information, together with reconciliations to the most directly comparable GAAP information, in today's earnings press release, in our 8-K filed with the SEC and on our website at hosthotels.com.

With me on the call today is Ed Walter, our President and Chief Executive Officer; Larry Harvey, our Chief Financial Officer; and Jeanne Lindberg, our Vice President of Investor Relations.

This morning, Ed Walter will provide a brief overview of our first-quarter results and then will describe the current operating environment, as well as the Company's outlook for 2012. Larry Harvey will then provide greater detail on our first-quarter results, including regional and market performance. Following their remarks, we will be available to respond to your questions. And now, here is Ed.

Thanks, Greg. Good morning, everyone. 2012 has gotten off to a great start as demand growth has been strong in the higher-rated segments of both our group and transient business, leading to better-than-expected top-line and bottom-line growth, which resulted in earnings that exceeded consensus estimates.

Our strong first-quarter performance combined with the robust group booking pace for the remainder of the year gives us confidence to raise our full-year guidance. We feel very good about the fundamentals of the business and our outlook for the remainder of the year, which I will discuss in more detail in a few minutes.

But first, let's review our results for the quarter. First quarter RevPAR for our comparable hotels increased 6.1%, driven by an increase in occupancy of 2.1 percentage points, combined with an increase in average room rate of 2.9%. The RevPAR growth, when combined with an impressive 5.9% increase in food and beverage revenues, plus the extra day on the calendar in February, generated a comparable revenue increase of 6.3% for the first quarter.

Continuing a trend we saw developing in the fourth quarter of last year, our banquet and audiovisual revenue grew faster than our outlet and lounge revenue as several of our larger hotels experienced meaningful increases in banquet activity.

The strong revenue performance in both rooms and F&B operations drove a 100 basis point improvement in our comparable hotel adjusted operating profit margins for the quarter.

Adjusted EBITDA was $176 million, an increase of more than 22% over last year. Our first-quarter adjusted FFO per diluted share was $0.14, which exceeded consensus estimates and reflected a nearly 17% increase over last year.

Overall, we are extremely pleased with our operating results and the progress we are seeing in lodging fundamentals.

The key driver of our first-quarter results was the solid increase in demand in the higher-priced segments of our group and transient business, which continued some favorable trends we had seen develop at the end of last year and should lay the foundation for improved results in the future.

Starting with our transient business, our special corporate and retail segments experienced demand in rate growth of more than 3.5%, leading to a combined revenue growth of better than 7%. Our discount segment saw demand growth of more than 2%, but the level of growth was restrained because of some weakness in government travel, which declined slightly. Overall, our first-quarter transient results reflected a 3.5% increase in rate and a 3% increase in demand, resulting in a 6.5% increase in revenue.

On the group front, 2012 is off to a strong start. While group bookings for the quarter started the quarter ahead of the prior year, we improved further, as bookings in the quarter for the quarter improved by more than 6%, leading to an overall increase in group room nights of nearly 4%. The improvement was generated by a double-digit increase in association business and an increase in corporate group of more than 6%, as our discount group segment declined by over 5%.

Combining the demand improvement with an average rate increase of 1.5% resulted in increased group revenues of almost 5.5%.

Looking at the rest of the year, our outlook is even brighter. Group bookings for the remainder of the year surged by more than 13% compared to the prior year, and are now approximately 7.5% ahead of last year's pace for the remaining three quarters and meaningfully positive in every quarter. The average rate for these bookings is up approximately 2%, and our recent bookings have exceeded last year's rates by more than 8%. Both trends bode well for the future.

While transient bookings trends are obviously a more near-term indicator, our transient bookings also continue to run well ahead of last year's levels and suggests strong rate growth. The combination of these trends suggests that we should continue to see improvements in occupancy in 2012, which will ultimately drive higher rates and additional mix shift.

We are also seeing positive group booking activity extend into 2013, indicating that our group hotels, which lagged during the early stages of this recovery, are now benefiting from increased business spending.

On the investment front during the quarter, our JV in Asia acquired the 278-room Citigate Perth for AUD61 million, and the JV will invest an incremental AUD17 million in the hotel to upgrade and rebrand the property as a Four Points by Sheraton. Even after completion of the capital investment plan, we would expect that we would have acquired this asset for at least a 15% discount to replacement cost.

The Perth lodging market directly benefits from the significant sums being invested in Australia's natural resource industry. The market has seen RevPAR increases of nearly 9% over the last five years, runs at occupancy levels above 80%, has little projected new supply and, as a result, we are very pleased to have acquired this asset.

Turning to dispositions, as we announced last month, in Q1 we sold the San Francisco Airport Marriott for $113 million. While certainly a fine property in a top market, this sale is consistent with our strategy of reducing our exposure to non-core assets located in airport markets at attractive pricing. The sale also permits us to avoid investing an incremental $15 million in capital improvements over the next couple of years.

Recognizing that there has been a dearth of acquisition opportunities in North America, we are moving quickly to bring selected assets to the market, as we continue to look to recycle assets and improve the quality of our already outstanding portfolio.

On the investment side, our pipeline is growing more active today, and we would expect we will see additional assets that satisfy our criteria come to market later in the year. Overall, we would expect to be a net buyer this year, but we intend to remain disciplined. If pricing levels move too high, we will look to take advantage by accelerating our sale activity. Given the unpredictability of the timing of these transactions, our guidance does not assume any additional acquisitions or dispositions this year beyond what we have already announced.

Turning to capital investments, for the first quarter, we invested $48 million in redevelopment and return on investment capital projects as we completed the redevelopment of the Atlanta Marriott Perimeter Center and Phase 3 of our redevelopment of the San Diego Marriott Marquis, which included the renovation of more than 95,000 square feet of meeting space. We continue to find construction pricing attractive and expect these investments will yield returns substantially in excess of our cost of capital. For the full year, we expect to spend approximately $150 million to $170 million.

As we mentioned last quarter, we are in the process of converting the New York Helmsley Hotel to the Westin Grand Central, where we are renovating all the guest rooms, meeting space, restaurants, as well as mechanical and facade work. In the first quarter, we completed the first few floors of our newly-renovated guestrooms in the hotel. We also completed the renovation of all of the rooms at the W Union Square. We spent approximately $14 million on these and a few other acquisition-related projects this quarter, and expect to spend $100 million to $110 million in total on these projects for the full year.

In terms of maintenance capital expenditures, we spent $100 million in the first quarter and expect to spend $300 million to $330 million for the full year. Projects in the quarter included room renovations at the Ritz Carlton Amelia Island, the Pentagon City Residence Inn and a meeting space renovation at the W New York.

Now let me spend a few minutes on our outlook for 2012. As we have outlined today, we are seeing very strong demand trends. With new supply in our markets projected to be approximately 0.5% for 2012, we expect industry fundamentals will remain strong for the balance of the year.

Given our solid first-quarter results and better-than-expected group booking activity, we have increased our comparable hotel RevPAR guidance to 5% to 7% for the year.

On the margin side, even given that occupancy growth is still making a meaningful contribution to RevPAR growth, we believe we can drive incremental profitability and strong flow-through. Therefore we expect an adjusted margin increase of 50 to 100 basis points, resulting in adjusted EBITDA in the range of $1.120 billion to $1.165 billion. This operating forecast, combined with the balance sheet activity that Larry will discuss in a minute, will result in an adjusted FFO per share of $1.01 to $1.08.

Looking at our dividend, we increased our first-quarter common dividend to $0.06 per share. Dividends for the remainder of the year will depend on both operating results and gains on asset sales.

I am pleased to say that the lodging recovery is continuing to progress and that we are seeing significant improvements in group business, which have led to our increase in guidance for the year. We believe this positive cycle will gain momentum through the remainder of this year and into 2013, and increase in demand combined with projected low supply growth in our markets of roughly 0.5% in 2013 and 2014 should support a solid and sustained recovery.

So thank you, and let me turn the call over to Larry Harvey, our Chief Financial Officer, who will discuss our operating and financial performance in more 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 Philadelphia, with a RevPAR increase of 30.8%. Occupancy improved 15 percentage points, driven by strong group and transient demand, while rate increased more than (technical difficulty) percent. Results for the quarter benefited from the 2011 rooms and meeting space renovations at the Downtown Marriott. RevPAR for the hotel improved over 50% for the quarter when compared to the first quarter of 2011. We expect Philadelphia to be a top-performing market in the second quarter due to strong group demand, which should allow us to drive pricing.

RevPAR for our Chicago hotels increased by 20.3%, driven by an increase in occupancy of more than 8 percentage points and an improvement in average rate of over 3%, as both citywide and overall group demand were excellent. We expect our Chicago hotels to continue to perform very well in the second quarter due to strong group and transient demand.

Our Hawaiian hotels continued their outstanding performance, with a RevPAR improvement of 15.1%. Occupancy increased over 10 percentage points and average rate was up nearly 2%. The outperformance was driven by strong corporate group and transient business, which allowed us to shift this mix of business and benefit from rate compression. We expect our Hawaiian properties to underperform our portfolio in the second quarter, but have a good second half of the year.

Our Houston hotels had an excellent first quarter, with RevPAR up 12.8%. ADR increased nearly 6%, and occupancy improved 5 percentage points due to strength in group bookings. We expect our Houston hotels to underperform our portfolio in the second quarter due to an unfavorable comparison to the first quarter of 2011, when the city of Houston hosted the NCAA Men's Final Four.

As expected, our Miami and Fort Lauderdale hotels had another great quarter, with RevPAR up 11.3%. Average rate increased by over 5.5%, while occupancy improved 4.5 percentage points. Strength in higher-rated group and transient business helped to drive the ADR growth. We expect our Miami and Fort Lauderdale hotels to continue to perform well in the second quarter.

Our San Francisco hotels had another strong quarter as RevPAR increased 10.9% due to an ADR improvement of nearly 9% and an occupancy increase of nearly 2 percentage points. The improvement in ADR was driven by rate increases for both group and transient business. We expect our San Francisco hotels to continue to perform well in the second quarter as strong demand will allow us to continue to drive rate.

Our Los Angeles properties also had a good quarter, with a RevPAR improvement of 8.5%. Strong group demand led to an increase in occupancy of 5 percentage points, while ADR improved over 2%. We expect our Los Angeles hotels to continue to perform well in the second quarter due to strength in both group and transient demand.

RevPAR for our New York hotels increased 6.5% due to a rate improvement of 2.5% and an occupancy increase of nearly 3 percentage points. Results were negatively impacted by the second and final stage of the rooms renovations at the New York Marriott Marquis and the Sheraton New York Hotel and Towers, meeting space renovations at the W New York and a rooms renovations at the W Union Square. We expect our New York hotels to have a good second quarter.

RevPAR for our Washington, DC hotels was down 3.9%, as occupancy declined roughly 1.5 points and ADR declined 1.5%. Lower levels of citywide demand led to the poor performance, although our hotels did increase their market share in the quarter. As we previously discussed, 2012 will be a challenge in DC due to a weaker citywide calendar, government travel cutbacks and the lack of legislative activity, which reduces demand. We expect the second quarter will be better, but still underperform our portfolio.

Lastly, our worst-performing market for the quarter was San Antonio. RevPAR declined 8% due to a slight drop in occupancy and a decrease in ADR of over 7%. Citywide and group demand were weak. We do expect our San Antonio hotels to perform better in the second quarter, but to continue to underperform our portfolio.

Despite concerns in the European lodging market due to weak economic results and sovereign debt issues, we were pleasantly surprised by our European joint venture operating results. Excluding the Sheraton Roma, which is under major renovation, RevPAR calculated in constant euros increased 4.8% for the quarter. Inbound travel to the Eurozone from the US, UK, Asia and the Middle East continues to be strong and is a major source of Euro lodging demand. The Westin Europa & Regina in Venice, the Sheraton Warsaw, the Sheraton Skyline in London and the Pullman Paris Bercy all had double-digit RevPAR increases for the quarter. F&B revenues were also strong, with an increase of 4.5%.

Lastly, our first-quarter JV results only reflect January and February. RevPAR for March for the JV, excluding the Sheraton Roma, was up 6.2%.

For the quarter, adjusted operating profit margins for our comparable hotels increased 100 basis points. Margins for the quarter benefited from better productivity as wages and benefits on a per-occupied room basis were up only 60 basis points. Food and beverage revenues were up 5.9%, and F&B profits were up 8.3%, leading to an F&B flow-through of roughly 35%.

We continue to see improvements in catering, media room rental and audiovisual revenues. General and administrative, sales and marketing and repairs and maintenance expense increased 4.4%, primarily driven by expenses that are variable with revenues, including credit card commissions, reward programs and clustered and shared service allocations.

Utility costs benefited from mild winter weather throughout most of the country and declined over 3%. Property taxes increased 3.6%, while property insurance increased nearly 15%.

Looking to the rest of 2012, we expect that RevPAR will be driven by both occupancy and rate growth, but rate growth will be increasingly more important throughout the year. The additional rate growth should lead to solid rooms flow-through, even with growth in wage and benefit costs. We expect the positive trends in group demand to continue, particularly in the second and fourth quarters, which should help drive growth in banquet and audiovisual revenues and good F&B flow-through.

We expect unallocated costs to increase more than inflation, particularly for rewards and sales and marketing, where higher revenues will increase costs. We also expect property taxes to increase roughly 8% and utilities to increase between 1% and 2% for the year. As a result, we expect comparable hotel adjusted operating profit margins to increase 50 basis points at the low end of the RevPAR range and increase 100 basis points at the high end of the range.

During the quarter, we issued $350 million of 10-year senior notes at a 5.25% rate, which is more than 60 basis points lower than any bond coupon in the history of the Company. Subsequent to the end of the quarter, proceeds from the bond deal, along with available cash, were used to repay the $113 million, 7.5% mortgage secured by the JW Marriott Washington, DC, to redeem $250 million of the 6 7/8% Series S senior notes due in 2014, and to repurchase $386 million of the 2 5/8 exchangeable senior debentures.

In conjunction with our refinancing activities, we intend to repay the remaining Series S senior notes and reduce our overall debt by an additional $150 million. As a result of these transactions, we will have lowered our debt balance from approximately $6.1 billion at the end of the first quarter to approximately $5.2 billion, which leads to cash and cash equivalents of approximately $400 million on a pro forma basis.

After these transactions, we have no 2012 debt maturities and less than $250 million of 2013 maturities. Our weighted-average debt maturity will have increased from 4.5 years to 5.1 years.

During the first quarter, we issued approximately 11.1 million shares of common stock at an average price of $15.67 per share, for net proceeds of approximately $172 million through our ATM program. The first-quarter issuance has completed the sales program under the 2011 agreement. As detailed in the earnings press release, we recently entered into a new $400 million ATM program with BNY Mellon Capital Markets LLC and Scotiabank. Any proceeds will generally be used to invest in our portfolio and for new acquisitions, including joint venture investments.

Consistent with our philosophy, our willingness to issue equity depends on our stock price and the level of acquisition opportunities.

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

(Operator Instructions) Robin Farley, UBS.

-- was up 13% versus 7% last year, I think, if I got that right. Can you give us some sense of how of much is rate versus volume? And then also --

Hey, Robin. Robin, if I could interrupt you for a second, for some reason, the first part of your question didn't come through. If you could just start over again, that would at least be helpful for us and probably for everyone.

Sure, okay. I wanted to get a little more color on -- if I got your opening remarks correctly, you said group bookings up 13% versus 7% at the same time last year. And I was just looking for some color on how much of that is rate versus volume, of that 13% increase.

And then the other question I was going to ask is on your acquisitions spend. It looks like your budget -- your planned spend on acquisitions is up for the year, and I wonder if you could talk about kind of what is driving that. Is it just better capital availability, or are more compelling assets available? In other words, is that being driven by a specific transaction that you have not firmed up yet? That kind of thing. Thanks.

Let's start with the group booking activity. What we were trying to communicate relative to the booking pace activity is that we were up significantly in the quarter for the quarter. Then if you looked at the rest of the year, our room nights for the rest of the year, the number of rooms that we booked for the remainder of the year, that was up 13%. So that was a room night number and not a revenue number.

As we look overall for the full year, what we are seeing at this point now is that our overall booking pace for the full year is up actually about 8.5% on a revenue basis for the full year, but that is much stronger for the last three quarters of the year than it was for the first part. So actually, if you look at the last three quarters of the year, we are running -- on the revenue basis, we are running in the 9.5% to 10% area. That gets comprised of a high 7% increase in room nights combined with a couple of percent in rate. So hopefully that clarifies that.

Now, on the acquisitions (multiple speakers).

Actually, can I -- if your number of room nights is up 13%, but on a revenue basis up 9.5% to 10%, it seems like there may be a rate --

They are slightly different numbers. In other words, what we are saying -- another way to look at this is that our booking pace starting the year, on a room night basis, was probably below -- was around 5% or so. And so now at this point, our booking pace for the full year is significantly higher.

The reason why the overall booking pace on a room night and a revenue basis is higher than where it was at the beginning of the year is because we've booked more rooms in the quarter for the quarter, and we've booked more rooms for the remainder of the year than we did last year. The net result of that is the increases that we are seeing in Q2 through Q4 in terms of both room nights and then an improvement in rate, which ultimately leads to the improvement in revenue.

Okay, thanks. And then on the acquisition spend.

On the acquisition side, I don't know that I would necessarily view what we expressed in my comments as a change. We still feel that we are early in the lodging cycle. We don't see supply increasing for a number of years back to the average level of supply, frankly, and therefore, we don't see supply getting back to the point where it exceeds demand for several more years.

So looking at where we sit in the lodging cycle, our sense is that this is still a good time to be a buyer of assets. Now, we've also expressed that we also intend over time to continue to recycle assets from our portfolio. A lot of those proceeds would be reinvested in the assets that we would acquire.

But at this stage where we stand, we would like to be a net buyer of assets, and that would be our goal for this year. We haven't actually put a dollar amount on that externally, in part because it is somewhat contingent on availability and things like that.

Okay. Thank you.

Bill Crow, Raymond James.

A couple of questions for you. Ed, are you surprised at all at the speed at which staffing levels have returned at the hotel level?

Yes and no. I guess the first thing I would say, Bill, is I'm probably a little surprised at how quickly occupancy has recovered in the industry, and certainly in our portfolio. So when I look at what has happened -- we've gone back and we keep comparing in our portfolio where are our staffing levels relative to '07 and '09, both at an associate level and at the manager level. And I think what I would say is, based on the numbers that we've looked at, staffing levels have come back. They've come back slower at the manager level than at the associate level, but they are still lower than where they would be kind of in relationship to the occupancy levels that we saw in '07. On the managers side, I would say if we cut about 20% of our managers in the downturn, I don't think we've even recovered half of that decrease. So maybe we are up 10% from where we were in '09, taking into account a pretty significant occupancy increase from where we were in '09 to where we are right now.

But I think our sense is -- generally throughout the portfolio is that the operators have been thoughtful about how they've been adding staff back. And part of that is as we look more broadly at productivity levels in our portfolio, our productivity levels are certainly better now than they were during the prior recovery.

Discussion that maybe the second half of the year is going to be better for DC on a group basis, but now we've got that whole GSA scandal in there. What are you seeing for DC in the second half of the year?

Larry, do you have any thoughts on the second half there? I know we expect it to be stronger.

We expect the second quarter to be better across the board. And roughly for the full year -- we were down 3.9% in the quarter. We expect it to be I would say flattish, so we do see some pickup.

All right. That's helpful. And then finally for me, on the acquisition front, I know you are barraged all the time by the brokers. Are you looking at potential portfolios becoming available, CMBS-related assets that may come out the second half of the year? What are you anticipating from an acquisition landscape?

That's a great question, Bill. Obviously, if somebody has a larger portfolio, whether it is here or outside the US, we will tend to get a call on that. We don't tend to necessarily focus on those types of deals, because it is more about owning the right assets than necessarily getting bigger. But there are a few portfolios that are in play right now, and it will be interesting to see whether pricing gets to a point where it makes sense for us to play in those.

I think if you look beyond that, there seems to be still a little bit of a pricing expectation gap between sellers who would generally be of a mind to sell and where the market is right now. I think some of that is maybe expectations that were developed over the course of first and second quarter of '11, where pricing was starting to accelerate a little bit, and folks are still sort of looking for cap rates and thinking that they apply to this year's NOI, when they think about the value of their assets. And that is the explanation I get from the brokerage community for why the recovery in assets being brought to market has been a little bit slower than what might have expected, given that the stock market and cost of capital recovered by the beginning of the year.

I think that a lot of what -- part of the reason there seems to be a sense of confidence that the second half of the year will see more transaction activity is driven by the belief that there is debt maturing in or around the second half of the year. And so that would likely drive more transaction activity, because in general -- there is always specific exceptions to this -- but in general, lenders are not necessarily willing to pretend and extend at this point. Values have recovered enough that lenders want activity, and lenders want to be paid off. So I think there is an expectation that there will be some acceleration of activity that flows out of that.

Terrific. Thanks for the help.

(Operator Instructions) Jim Sullivan, Cowen and Company.

Good morning. Ed, a question for you on the group business. You talked extensively in your prepared comments about how strong group bookings are. And I'm just curious, outside of the comments about the San Antonio asset and market, in the remainder of your large convention center hotels, have you seen a significant difference in strength between the larger group business and the smaller group business, number one, in the first quarter?

And number two, as you think about those two businesses as kind of sub-segments of overall group, do you expect that relative differential to continue over the balance of the year or not?

Jim, that's an interesting question. And I know that -- I think this came up on one of the other calls, maybe from a slightly different slant.

If you look at how our larger hotels are doing compared to our smaller hotels, if you compare the two based on first-quarter operations, broadly speaking, relative to just overall revenue performance, I think what you find is that the larger -- they are both, in comparison to the prior peak, in roughly the same position. But the way they get there is a little bit different.

The larger hotels are actually doing better on rate, but are a few points behind in terms of occupancy. And I think the reason for that is the one that you were suggesting, which is that overall, the larger hotels are probably seeing -- are seeing a little bit less of their business coming from group right now than they have in the past. I think they are getting the rate because they are well-located in markets that are recovering quickly, which in part accounts for the differential in rate. But because we still don't -- we have not recovered close yet to our prior levels of group activity, you are just not -- you haven't quite seen the same level of group business at those larger hotels.

I do -- as we look at the beginning of this year, we would see a similar result that Marriott described, which is that we are seeing some heavier levels -- some bigger increases in the smaller hotels than we are seeing in the larger hotels. We are seeing significantly good, strong increases in both. But I think part of that comparison, you need to understand that the smaller hotels tend to book a lot of their business fairly short-term. So the fact that group is coming back and coming back well in the initial stages of this is going to disproportionately benefit smaller hotels -- look better -- not so much benefit, but look better on a year-over-year basis for the smaller hotels, because they don't do as much group business.

That same quantitative benefit, when it hits the bigger hotel that already does 60% of its business on a group basis, is still very meaningful, but on a comparison basis, it doesn't look quite as strong.

I think as we -- part of what we are encouraged by when we look at the larger hotels is the fact association business was better, corporate group is better. We are hearing signs from our operators that the associations are thinking in terms of bigger events both in days and attendance as they look out into '13 and '14 and beyond. So I think there is a confidence in the larger groups that they are going to hold bigger events as opposed to smaller events looking outward. That will clearly benefit the larger hotels.

And coming back to my first point, when we look at the levels of -- when we look at those overall levels of occupancy, we really see a strong opportunity for those larger hotels to benefit in a material way over the next couple of years from the improving group trends.

Conclude on this point, to make sure I understand it, that would suggest that your larger assets -- and you have, of course, a significant chunk of those in your portfolio -- it is really a lead lag time kind of issue, that you should be looking at relatively -- good relative strength as we go forward through this recovery.

That is certainly what we would believe.

And second question from me regards your appetite for international acquisitions. Obviously, there has been a significant amount of uncertainty regarding currency and interest rates in the European market, notwithstanding your assets have done fairly well there. And I'm just curious how you assess your appetite to do more European acquisitions as opposed to perhaps more acquisitions in the Asian market going forward. Are we likely to see more buying in Asia than Europe?

A lot of that will be driven by the opportunities that present themselves. I think that there are attractive -- we would be interested in investing in both markets. In Europe, I don't expect, though, that we will see that many assets come to market, unless they are driven by debt maturities. In talking with our office there and with the folks that run that office, the amount of product that is on the market in Europe right now is relatively low. And what is there is there because debt is maturing.

I think we need to be cautious investing in Europe for all the obvious reasons, but I also think that we need to remember a couple points we've talked about before. One is that Europe is a very varied place, and so we would generally feel better about the economies in northern Europe than the ones in southern Europe.

The major cities of Europe are incredible tourist destinations. I think one of the reasons why Europe has done far better than most folks would have expected is not because of some surprising pockets of economic strength in Europe itself, but rather because the rest of the world is interested in going to Europe. I think we mentioned on a prior call that looking at our portfolio of assets, which is a reasonably diversified portfolio of hotels, over 40% of the business that we do at our hotels comes from outside of Europe in the UK. And I think that is one of the reasons why we've done as well as we've done in the first quarter, because so much of the business is coming to us from outside of Europe.

So net of it is that we would be cautious about Europe. But if we felt like -- if we liked the market, we liked the price, sometimes investing in periods of risk is when you get your best returns. And then part of our analysis would be to look for slightly higher returns in Europe right now than we have in the past.

As you look more broadly through Asia, it is really just -- it's a very different situation country by country. As we announced today, we had purchased a property in Perth. We would certainly be interested in acquiring more in Australia. We think that is a market that even with some of the signs of slowing growth in China -- I mean, that little bit of a reduction in China's growth outlook does not change the outlook for Australia, in our minds, in a meaningful way. There is a tremendous natural resource boom that is going to continue to happen there, and the acquisition in Perth is a great way to play on that.

Good. Thank you.

Josh Attie, Citi.

How much of the improvement in your group bookings would you attribute to stronger market demand versus the positive changes in Marriott salesforce program over the last 12 months?

Josh, I don't know that I can give a realistic answer to that. I think that they have been working through some of the bugs in the structure of salesforce, one. And I know that in talking with them -- and we have regular meetings with them on this topic -- they have certainly been encouraged by some of the trends that they've seen.

I think it is true that if we look at our Marriott hotels, they have certainly had a strong surge in booking activity over the course of the last six months. So I think it is probably fair to attribute some of the improvement to them figuring that out at a better level. I also think that at the end of the day, a stronger market makes a big difference for all of us, and that is the other -- that clearly is the major driver behind the improvement.

Maybe even when you look at the first quarter, how did the Marriott portion of the portfolio perform relative to the rest of it? Did you see outperformance?

Off the top of my head, I don't know the answer to that. And I think we tend not to try to give operator data on this call, so I probably would stay away from that answer.

Okay. One more question. Can you update us on the European debt investment that you made? I think it is scheduled to mature in October, and do you have any sense for how that will play out?

What I would tell you is that you are right that it matures in October. And I would also tell you that the portfolio is on the market at this point in time, as the owners look to either refinance the debt or to sell it. And we are paying close attention to what is happening with that portfolio.

Okay, thank you.

Eli Hackel, Goldman Sachs.

Good morning. Just two questions. Your commentary was very positive about group and transient. And it would suggest, at least in your commentary, that maybe RevPAR would be up more than 5%. I am just trying to get at what does the 5% take into account and how much of that maybe would be attributable just to DC being weak throughout the year?

And then just a second question on group. I think at one point, Ed, you talked about you used to make sure groups guaranteed a certain out-of-room spend, whether it be F&B or maybe audiovisual. Are you starting to make or are your managers starting to make them guarantee sort of out-of-room spend as you continue to get more occupancy on the group side? Thank you.

I guess when you are talking about the 5%, you are sort of trying to look at the range that we've given, and have some sense as to how likely is it to be 5 versus some other number. Is that the point you're trying to get at there?

Yes, I'm just trying to (multiple speakers). I mean, the numbers you gave in terms of group booking pace were high single digits, and in terms of transient, seemed to be very, very strong. And clearly, the first quarter was strong and it seems like things are looking to get better. Obviously, you benefited from big Philly comparisons in the first quarter.

I am just trying to get at what would cause the deceleration. Is it DC or is it something else? Or is it just to take into consideration it's still a cautious time with Europe and things like that?

I got it now. The answer would be the second half of what you just spoke about. I think we feel good about the first -- very good about the first quarter. There is nothing that we are looking at right now that would suggest that we should see a deceleration.

But we all know that there are -- that just watching what has happened over the course of the last couple of years, and recognizing that we are not through the sovereign debt crisis in southern Europe at this point in time, I think our sense is that it is important to just remain balanced in our perspective over what is going to happen for the rest of the year.

But as Larry highlighted, DC is not going to be a great market this year, but it should start to improve. We don't expect it to be negative certainly for the rest of the year. And we are not -- I'd say generally, you probably should take comfort from the fact that if we weren't fairly comfortable with the improving overall outlook, we would not have raised our guidance in the way that we did.

And your second question was relative to -- on the group side?

Yes, on the group side, in terms of making groups guarantee (multiple speakers).

Yes, yes, okay. I don't know. We've talked about that internally, and I actually asked that question when we were speaking with our asset managers last week to just get a better feel for what was happening on that side.

I think in certain markets, we are starting to get the benefit of being able to push pricing a bit around banquets and things like that. But it seems to me that we are still a little ways away from where we can really drive that improved result. Folks are showing up with a budget. The good news is they want to do the event. The bad news, if it's bad news, is that they still are showing up with a pretty defined budget that they need to stick to in order to have the event. And I think we are not quite at the point in a lot of markets where we can start to say that budget has to go up before we can give you the meeting space.

What is interesting, though, is -- which we were not seeing last year -- is a number of groups are -- while they might not have committed to higher spend before they get to the hotel, when the meeting planners and the senior executives or the senior folks responsible for the event get to the hotel, we are seeing some pops in activity on the food and beverage side that get determined at the very last minute. And so that has been a positive in terms of our food and beverage revenues. And more often than not, we've found that whatever our month-out forecast is for food and beverage, we've been beating that more than missing it. And I think it is in part driven by the fact that when groups are showing up, they are comfortable that they can increase their spending.

Great. That's very helpful. Thank you.

Bank of America, Andrew Didora.

Hi. Good morning, everyone. Two questions here. I guess the first one is sort of a follow-up on your last commentary. It seems like your total same-store revenue guidance implies F&B and other revenues will more significantly lag room revenues than they have the past couple quarters. Is there anything specific you are seeing here in terms of the groups you have on the books for the rest of the year?

And then my second question, with regards to Europe. And on the last call, you mentioned your European properties were forecasting a 3% to 5% RevPAR increase, but your guidance implied closer to flat European RevPAR. Has anything changed in your view since the last call here?

Let me deal with Europe first; then I'll come back to the food -- the issue about revenue. As we had indicated in our February call, we were being fairly cautious in our approach to Europe for all the obvious reasons. We have been very happy with the results that Larry explained in terms of just how the first quarter has played out, especially when you look at the calendar quarter, where you get the benefit -- a little bit more insight into what is really going on there by including March.

And when you look at those numbers, the reality is that we really are seeing -- we think our overall RevPAR was above 5, and you've seen strong food and beverage spending there. And so profit is up in a material way.

Our revised forecast takes the first quarter, essentially, the first quarter success into account. But recognizing that the situation there is still somewhat volatile and uncertain, we've been conservative for the rest of the year, and are roughly at a level where we are assuming flat performance year-over-year for Europe.

I think there clearly is upside there, but we have not tried to pick that up as of yet, just for -- again, because it is hard not to have concerns about Europe when you read the paper every day.

Going back to the other point, I think at the end of the day what you should probably take out of our overall revenue numbers, we still feel pretty good about food and beverage revenue. Some of the trends relative to other revenue, we're probably being a bit more cautious on the other revenue side, which is why when you look at the overall mix, you are seeing that revenues are down a bit from the -- overall revenues are slightly less than where we are on room revenue.

But I would tell you that more of that is happening in an area that is less of a profit driver, which is the other revenue side. The food and beverage spending, we would probably estimate right now will be slightly less than where room revenues are, but not a lot less.

That's helpful. I appreciate it.

Baird, David Loeb.

Good morning. I had some housekeeping questions. First up, Larry, maybe this one is for you. In the release --

David, can you speak up a little bit? We are having a hard time hearing you.

I'm on a cell phone, and I'm not sure how much better I can do, but is that better?

That is better.

Okay. In the acquisition expenditure, the CapEx related to acquisitions, that range went up a bit; the midpoint about $15 million. What is behind that? Are the costs looking higher for the Helmsley conversion to the Westin, for example?

We've had a -- our budget for the Helmsley has snuck up a couple million dollars. But the real driver behind that -- and this might arguably be a classification issue internally -- is we've identified an opportunity at the Helmsley to change how the first floor works from a standpoint of the lobby, the bar and the restaurant. And what we are looking to do and what that budget anticipates, pending getting some final numbers in and actually approving it internally, is that we are going to move the whole food and beverage and bar operation into what I would call the front right part of the hotel. Potentially -- part of the idea will be to extend the hotel out into the sidewalk on 42nd Street, which we think will make that a far more visible food and beverage operation.

That will allow us to take what's a really nice space at what I would describe as the back of the hotel that is currently our restaurant -- that would allow us to turn that into meeting space, which is one thing that hotel would benefit from having more of. So most of that increase really relates to the fact that that project, which in a lot of way is only happening if it hits an ROI threshold, that we are going to add -- we look to add that project into the mix, and that is the reason for the change that you see.

That's on the order of magnitude of $10 million or $12 million.

I think it is not -- it is probably not up at that level. I think the other element is -- the other part of it is just we are a little bit more confident we are going to get some of these projects done this year, like some of the activity at the Hyatt -- the Hyatt in San Diego is part of that broader number. And some of the work that we were planning on doing there is probably going to be accelerated in terms of a spending perspective. The nature of the work isn't really changing, but we think some of that work is going to get done a little bit faster.

I am pushing our guys to get as much of that hotel done as possible before the NAREIT event in November this year. So they are reacting to that pressure.

Okay, much appreciated. Just on the group side, you've talked about this from a number of different perspectives, but I think there has been one perspective that I don't think I heard. Is their lower rated group that is burning off, and how much of a drag is that and when do you think you will start seeing better group rate increases because the mix is shifting towards more recent bookings?

I think we are already seeing that now, just by virtue of the fact that -- some of the statistics I threw out, the fact that our recent bookings are clearly up by -- are up by more than 8% compared to where we were last year is a good sign that sort of on the current basis we are doing better.

If I try to think back about it, right now, about 80% of our room nights for '12 are on the books. We probably started the year, I think we said around 70%. We probably -- at the beginning of '11, we probably had about maybe 35% to 40% of the room nights for '12 on the books.

And if you go a year further back, to the year that would be relevant, at the beginning of '10, which is when the world started to get a little bit better, we probably had 20% of our room nights for '12 on the books.

So I would guess that most of that business that was booked before the beginning of '10 was probably cheaper business. So maybe that means 20% of this year's room nights. And some portion of the business booked in '10 would also be at lower room rate.

But as you sort of think forward to '13, we'll have very little from '08 and '09 that will be on the books for '13. We will have some obviously from '10. But that hopefully gives you some feel that as we get to the end of this year and get into the beginning of next year, we should be less than -- call it 20% of our business would actually be still tied to a period of time where the industry was struggling.

Okay. That's very helpful. And finally, for Larry, you ran through a number of markets, but you didn't mention Atlanta. Can you just give a little bit of a view of how Atlanta performed and what the outlook is there?

Yes, sure. Atlanta was actually up 4.9%, David. Very good group and citywide demand. We actually expect an even better second quarter. We've got a really good group and transient pace on the books.

And then for the rest of the year, it will basically end up about where it was in first quarter. So second quarter should be very good. We are hopeful that the second half of the year improves, or what our current forecast has. But very nice first quarter and an even better second quarter.

So this sounds like it is group rotation into Atlanta, second quarter, you are going to lap that big [upper mid] drop from last year, right? That should help?

Yes.

But this is not really that business in Atlanta, the business climate in Atlanta or the transient business is picking up particularly; it is much more group driven this year?

No, the second-quarter strength is also on the transient side, both group and transient in the second quarter.

That's great. That's all I had. Thank you.

Jeffrey Donnelly, Wells Fargo.

Good morning, guys. Ed, if I could just build off maybe an earlier question on the call, we've seen just more consolidation activity happening at some of your I guess I will call them peers, Great Wolf, Red Lion and maybe even Gaylord. I'm just curious, what is your personal sense? Do you think those could be the canary in the coal mine for more consolidation as the year progresses?

That's an interesting question. You know, if you look at the merger market right now, I guess what I would say is capital is more available, certainly if you can access some of the markets that we can access, and that is a critical ingredient for those types of transactions to occur.

I don't know whether the capital is available necessarily for the go-private alternative, similar to what we saw happen in '05 and '06 and '07. I don't know that debt capital is necessarily available for those types of transactions. The capital I'm saying might more likely be available might be more company to company.

And I think the company-to-company deal is driven so much by factors that are hard to predict. It is both a function of whether one company is not realizing the benefits of their portfolio or their structure. It gets tied into sort of the motivations of management and what their longer-term game plan is.

So you could be right. Every -- I guess what I would say is every cycle, as we work our way past the halfway point, I think you do start to see that for a variety of reasons transaction activity begins to increase.

And as we get -- I don't know that we are at the halfway point yet in this recovery. I think we probably are not. So my guess is most of the industry would look at their portfolio and their companies and be pretty optimistic about the RevPAR and the NOI growth prospects for the next several years. It is just hard to really look out and say to yourself, wow, supply is going to start to pick up and things are going to -- we are going to start to be at a risky point in the cycle.

So since that is not visible, I suspect that most folks would look at it the same way that I do in some ways, which is I really feel pretty good about where we are headed and the opportunity that we have to create value. And while we at Host would always entertain sale of the Company at an appropriate price for our shareholders, the reality is that I think there is a lot of value to create and I am pretty focused on trying to create that. And I suspect that if you polled all the other folks in our space, they would probably say something similar to that.

I guess it is a form of company-to-company transactions, not necessarily outright. Have you seen in a change in the attitude of the brands disposing of their non-core assets, particularly as REIT stocks have come back?

And I guess if I can put you on the spot, is it fair to say that like the large group assets, like a Gaylord owns, are not of interest to someone like you guys?

Speaking more broadly about the brands, we are in constant conversation with the brands about assets that they may own. I think that there -- right now, I would describe them as they are all thematically on the same path, which is that they generally would like to be more asset-light than they are today. But most of them are in pretty good shape from a capital perspective, and are looking for usage for that capital more than they are looking for reasons to generate more capital.

So I think you haven't seen as much activity as you might have anticipated for that reason. I think in terms of larger group assets, without talking specifically about any particular company, our focus, if we were to buy larger assets like that, would be to acquire assets that show the characteristics of something like the Hyatt in San Diego. It is not just because that is a large-group hotel that that is attractive to us. It is because it is a great hotel in a great location that can both benefit from group business, but can benefit from transient business and general business transient business -- or I meant leisure business and business transient.

So if you look at the hotels that I think of that are core in our portfolio, it would be the two big ones in San Diego, it would be the Marquis in New York and the Marquis in San Francisco. Those are assets that are big hotels, they do a lot of group; but they are just in great locations that benefit from everything the city has to offer.

So as we look at other hotels around the country, we are -- if it is a large hotel, we are particularly competitive for those because of our scale. So we would -- and I also think from an asset management perspective, we have unique insights because of what we own into how to improve the operations of those hotels. So if the hotel meets the parameters I just described, we would be interested in taking a look at it.

That's helpful. Just a last question; it might have two parts to it. But more broadly, are you may be disappointed with the pace of improvement in rate and margins in the business overall? Not necessarily just Host, but maybe more the industry.

Because I guess where I'm going is many of the urban centers are running at or above prior peak occupancy. Group and negotiated rate business volumes seem to be up nicely. But we don't seem to see the rate-driven growth that typically accompanies that compression. And I guess I'm curious why you think that is. And maybe do you just feel revenue managers in the hotels need maybe sort of a booster shot of confidence to push rate?

I think part of the -- certainly, in some markets we've seen very significant rate growth, Jeff. But I think if you look more broadly across the industry, part of the issue is it is the level of the decline in terms of occupancy that was -- it created a low floor on which to grow.

And I also think that the reduction in group during the last downturn really plays a significant role in the ability to ultimately drive rate. Now, when you look at the last downturn, as we've described before, at least in our portfolio, the decline in group and transient was the same. Both of them were down about 9% in room nights.

And in this cycle, we were off about -- compared to '07 -- about 4% in transient room nights and closer to 18% in group. And not only is that just significant in the absolute level of the recovery, but when it comes to driving pricing, having that group business on the books, as you know, gives the GM and the revenue manager a sense of confidence about an ability to drive rate. And that is probably one of the reasons why these last few quarters we've been maybe more focused and more excited about what we've been seeing on the group side. Because when we play this out over the next couple of years in our hotels, when you combine almost back to the prior peak occupancy levels -- we started the year a couple points short of that -- it will be interesting to see if we don't surpass that by the end of the year. As we start to get back to those levels and more of those rooms are booked in advance, which then leads to a better revenue strategy for the individual hotel on the transient side, I think you will see that pricing that you were expecting but you are disappointed not to have seen.

I think because this was a transient-led recovery until just lately, you unfortunately are finding that because some of those rooms are booked so close to the actual date of use, that it has just been difficult for the properties to push rate as aggressively as you would like.

Just last question and I'll yield the floor. I'm curious now, with group, though, seemingly continue to build in the right direction, and transient, like you said, has been very strong, just I'm curious -- when you take an early look at 2013, as long as the economy holds in there, would you hope or expect that it might look a little bit like it does right now, sort of that 4% to 6%, 5% to 7% growth could be sustained?

I want to hesitate to predict '13 at this point. But I would say that at the end of the day, economic growth is forecasted to be better in '13, I think, than it is in '12. And I don't -- what we see when we look across our markets is that supply should not be increasing in '13.

So if this year plays out the way we expect, we continue to see the growth in trends that we are seeing, and you have a good, solid economic year next year, combined with low supply growth, I suspect that what we will find is -- I think RevPAR growth next year could be good. And I would be guessing that we would start to see a lot more of RevPAR being driven by rate and by mix shift as opposed to necessarily by continued improvements in occupancy. But we will still see those, because there really is still room for more recovery on the occupancy side.

It looks like that is all the time we have for questions. I will turn things back over to Mr. Ed Walter for any concluding or closing comments he may have.

Thank you, everybody, for joining us on this call today. We appreciated the opportunity to discuss our first-quarter results and our outlook with you. We look forward to providing you with more insights into how 2012 is playing out on our second-quarter call in mid-July. Have a great day, and thanks.

Once again, everyone, this will conclude this Host Hotels & Resorts, Incorporated first-quarter 2012 earnings conference call. Thank you for joining us. You may now disconnect.