Host Hotels & Resorts Inc (HST) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Host Hotels & Resorts, Inc., second-quarter 2012 earnings results conference call. Just a reminder, today's conference is being recorded.

Now for opening remarks and introductions I will turn the conference over to your Executive Vice President, Mr. Greg Larson. Please go ahead, sir.

Well, thank you. Welcome to the Host Hotels & Resorts second-quarter earnings call. Before we begin I would like to remind everyone that many of the comments made today are considered 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 Gee Lingberg, our Vice President of Investor Relations.

This morning Ed Walter will provide a brief overview of our second-quarter results and then will describe the current operating environment as well as the Company's outlook for the remainder of 2012.

Larry Harvey will then provide greater detail on our second-quarter results, including regional and market performance. Following their remarks we will be available to respond to your questions.

And now here is Ed.

Thanks, Greg. Good morning everyone. Well, we are pleased to report another solid quarter of operating results, which were driven by substantial improvements in group demand and average rate growth. Strong F&B and other revenue growth, combined with improved flow-through, lead to earnings results that exceeded consensus estimates.

In addition, we just completed the acquisition of a great hotel, and to take advantage of our largely unsecured asset base to arrange a very attractively priced term loan, which Larry will talk about during his commentary.

First let's review our results for the quarter. Our comparable hotel RevPAR for the second quarter increased 6.1% driven by an improvement in our average rate of 3.7% combined with an occupancy increase of 1.7 percentage points.

Our comparable average rate was $195 and our average occupancy was 77.6%, which exceeded our portfolio's prior peak occupancy in the second quarter of 2007. The first time we have seen this happen since the start of the 2008 downturn. For the calendar quarter our RevPAR growth was 6.8%.

Comparable hotel food and beverage revenue growth of 5.7% was driven by a strong banquet and AV revenue, and contributed to overall comparable revenue growth of 5.8% for the quarter. The increase in profitable banquet activity contributed to 120 basis point improvement in our comparable hotel adjusted operating profit margins for the quarter, resulting in adjusted EBITDA of $348 million, an 11% increase over prior year.

Our adjusted FFO per diluted share was $0.34 in the second quarter, an increase of nearly 10%. On a year-to-date basis comparable hotel RevPAR increased 6.1% driven by a 3.3% increase in average rate and a 1.9 percentage point improvement in occupancy.

Total year-to-date comparable revenue growth of 6%, combined with an adjusted operating profit margins that have increased 110 basis points resulted in year-to-date adjusted EBITDA of $523 million. This represented an increase of more than 14% over the prior year and generated adjusted FFO per diluted share of $0.49.

Overall we are extremely pleased with our operating results and the progress we are seeing in lodging fundamentals. The key driver of our second-quarter results was the strong increase in demand in our group business, especially in the higher-priced segments. The favorable trend that we noted in group demand since Q4 of 2011 continued to accelerate in the second quarter as our overall group occupancy increased more than 5%.

The demand improvement was evident in all of our group segments, led by a more than 9% increase in our higher-rated association business and a 5.5% increase in our corporate business. Overall combining the demand improvement with a rate increase that exceeded 1.5% resulted in improved group revenue of nearly 7%, which exceeded our transient revenue growth for the first time in over a year.

As we had anticipated, one major benefit of the significant increase in group demand was our managers were able to focus on driving rate in our transient segments, which became the primary factor behind our transient revenue growth in this quarter. Rate growth in each of our major segments exceeded 5% led by a 6% increase in our special corporate rate.

On the demand side, as might be expected, our government transient business, which represents about 3% of overall demand, declined by less than 3%. The strong increase in group business we experienced could result in a slight decline in transient room volume as midweek availability was constrained. As a result, overall transient revenue increased slightly less than 5%.

Looking at the rest of the year, we continued to be encouraged by the positive trends in group business. Group bookings in the quarter for the remainder of the year increased 9% compared to the prior year and the average rate on those bookings rose by more than 6%. Total bookings for the remainder of the year are now more than 7.5% ahead of last year's pace, and the overall rate for the third and fourth quarters has increased well over 2%, indicating revenue improvement of 10%.

We are also seeing the positive booking activity extend into 2013 in both demand and rate indicating that our group hotels are benefiting from increased business spending and should continue to perform well for the remainder of this year and next.

On the investment front, as we reported this morning, we acquired the 888 room Grand Hyatt Washington DC for $400 million. As you may recall, we signed an agreement last year to acquire this hotel at a higher price; however, volatility in global equity markets and economic uncertainty last fall prompted us to reevaluate our pricing. We have always believed that this hotel is a great asset with a superb location in a strong market with good, long-term growth potential.

While recent expressions of concerns about the DC market, combined with some near-term operating weakness, did permit us to negotiate a price reduction, we are confident that this asset remains a very attractive investment. In the longer term we expect the hotel will benefit greatly from the redevelopment of the old convention center site in downtown DC, as well as from synergies associated with our ownership of the Capitol Hill Hyatt Regency.

On the disposition front, we have one smaller asset under contract which is expected to close in late summer. And we are also actively marketing several additional properties, which we expect to close during the fourth quarter. While the sale market is difficult to predict, the guidance I will discuss in a few minutes assumes that we complete incremental sales into the $300 million to $400 million range by year-end.

Turning to capital investments, we invested $50 million in redevelopment and return on investment capital projects in the second quarter, as we substantially completed the rooms renovation phase of the redevelopment at the Sheraton New York Hotel & Towers. We also completed the conversion of one tower at the Sheraton Indianapolis into 129 apartments and have already begun leasing.

It is worth noting that we are seeing great results at our three recently redeveloped hotels -- the Chicago O'Hare Marriott, the Atlanta Perimeter Marriott, and the Sheraton Indianapolis, where RevPAR is running better than 35% ahead of pre-renovation levels. For the full year we expect to spend approximately $165 million to $175 million on redevelopment and ROI projects.

During the quarter we completed the renovation of the rooms at the New York Helmsley Hotel as part of the conversion process of this hotel to the Westin Grand Central. And have also decided to renovate the lobby and create a new restaurant bar outlet in the front of the hotel, which should be complete by early fall.

We spent approximately $50 million on this and several other acquisition-related projects this quarter, and now expect to spend $115 million to $125 million in total on these projects for the full year.

In terms of maintenance capital expenditures, we spend $79 million in the second quarter and expect to spend $310 million to $330 million for the full year. Projects during the quarter include room renovations at the Boston Copley Place and the Westin Seattle, as well as meeting and public space renovations at the Swissotel Chicago.

Now let me spend a few minutes on our outlook for the remainder of the year. As we have outlined today, we are seeing very strong demand trends, especially in our group business, and with low supply in our markets, industry fundamentals are expected to remain solid for the balance of the year.

With that in mind we now expect that comparable hotel RevPAR for the full year will increase between 5.5% and 7%, which reflects an increase on the low end of the range.

Our year-to-date margin performance, combined with an expectation that we can continue to drive strong flow-through for the remainder of the year, gives us confidence to raise our margin guidance to an increase of 90 to 130 basis points for the full year.

The combination of the margin increase and acquisition of the Grand Hyatt Washington, offset by EBITDA reductions associated with our planned asset sales and the scope expansion of some capital projects at the Helmsley and Orlando World Center Hotel, results in an increase in our adjusted EBITDA guidance to a range of $1.135 billion to $1.170 billion. This operating forecast will result in adjusted FFO per share of $1.04 to $1.09.

Looking at our dividend, we increased our second-quarter common dividend to $0.07 per share. Dividends for the remainder of the year will depend on operating results and gains on asset sales.

In summary, we are pleased with our results for the quarter and remain confident about the outlook for the remainder of this year and into 2013. Based on our booking pace and expectations for fundamentals in the business, including continued low supply growth, we believe that the growth cycle on lodging will be sustained.

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 was Philadelphia with a RevPAR increase of 23.7%. Occupancy improved over 13 percentage points driven by strong group and transient demand, while rate increased more than 4%. Results for the quarter benefited from the 2011 rooms and meeting space renovations at the Downtown Marriott.

Both the Marriott and the Four Seasons Philadelphia had an exceptional quarter with excellent growth in rooms and food and beverage revenues. We expect Philadelphia to be a top-performing market in the third quarter due to strong group and transient demand, which should allow us to drive pricing.

RevPAR for our Chicago hotels increased by 11.1%, driven by an increase in rate of more than 7% and an improvement in occupancy of nearly 3 percentage points, as both citywide and overall group demand were excellent. The increase in group business helped drive a nearly 15% increase in food and beverage revenues. We expect our Chicago hotels to underperform our portfolio in the third quarter due to lower levels of citywide and group demand when compared to the third quarter of 2011.

Even with the Boston Copley Marriott under renovation, our Boston hotels had a great quarter with RevPAR growth of 10%, as ADR increased nearly 8% and occupancy increased 1.5 percentage points. The outperformance was driven by strong corporate group and transient business, which allowed us to shift the mix of business and benefit from rate compression. We expect our Boston hotels to have a strong third quarter.

Our Atlanta hotels had a very good quarter with RevPAR up 8.3%. Occupancy improved more than 4 percentage points due to strength in citywide association and transient demand, while ADR increased over 1%. We expect our Atlanta hotels to underperform our portfolio in the third quarter due to renovations at the Ritz-Carlton Buckhead and the Four Seasons.

Our San Francisco hotels had another strong quarter as RevPAR increased 8.2% due to an ADR improvement of over 7%. The improvement in ADR was driven by rate increases for both group and transient business. With the strong group business F&B revenues increased over 11%. We expect our San Francisco hotels to continue to perform very well in the third quarter as strong demand will allow us to continue to drive rate.

RevPAR for New York hotels increased 4.8% due to growth in ADR. 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, and a rooms renovation at the W Union Square.

The renovations at the Marquis included the addition of eight new rooms at a cost of under $300,000 per key. Unfortunately we had to shut down the whole floor in order to finish the construction, which affected occupancy at the hotel. We expect our New York hotels to perform better in the third quarter.

Our Miami and Fort Lauderdale hotels struggled in the quarter as RevPAR declined 20 basis points. Average rate increased over 3%, while occupancy declined nearly 3 percentage points. The weakness was due to less transient and group demand. We expect our Miami and Fort Lauderdale hotels to perform better in the third quarter due to better group bookings.

Year-to-date, Philadelphia has been our best performing market with a RevPAR increase of 26.5%, followed by Chicago with a RevPAR increase of 13.5%, and Los Angeles with a 10.6% increase. Our worse performing market has been San Antonio with a RevPAR decrease of 4.6%.

Our European joint venture operating results continue to exceed our expectations. Excluding the Sheraton Roma, which is under major renovation, RevPAR calculated in constant euros increased 2.8% for the quarter. EBITDA margins improved 110 basis points, and EBITDA was up 6%. The JV has high-quality assets. The average rate for the portfolio was EUR194 in the quarter.

As we previously discussed, 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 Hotel Arts Barcelona, the Sheraton Warsaw and the Crowne Plaza Amsterdam all had strong RevPAR increases for the quarter, while our Brussels and Madrid hotels struggled.

Year-to-date, excluding the Sheraton Roma, pro forma RevPAR in constant euros is up 3.3%, and EBITDA margins increased 160 basis points, while EBITDA was up 10.4%.

For the quarter adjusted operating profit margins for our comparable hotels increased 120 basis points. Margins for the quarter benefited from better productivity as wages and benefits on a per occupied room basis were up only 1.1%. Food and beverage revenues were up 5.7%, and F&B profits were up over 9%, leading to F&B flow-through of more than 47%.

We continue to see improvements in catering, meeting room rental and audio/visual revenues, as well as reductions in Food and beverage costs as a percentage of revenue.

General and administrative, sales and marketing, and repairs and maintenance increased 3.5%, primarily driven by expenses that are variable with revenues, including credit card commissions, guest reward programs and cluster and shared service allocations. Utility costs were down 3.5%. And property taxes increased 6.6%, while property insurance increased roughly 14%.

Looking to the rest of 2012, we expect that comparable hotel RevPAR will be driven more by both occupancy and rate growth, but rate growth should 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, which should help drive growth in banquet and audio/visual revenues and good F&B flow-through. We expect unallocated cost to increase more than inflation, particularly for sales and marketing where higher revenues will increase costs. We also expect utilities to decline slightly for the full year.

We had some good news in both property insurance and property taxes. Substantially all of our property insurance renewed on June 1. We were expecting an increase in excess of 15% for our insurance, particularly given our wind and earthquake exposure and the rate increases we were seeing earlier this year in the market. We took advantage of some new capacity added to the market and were able to achieve an increase of approximately 7%.

We expected a property tax increase of roughly 8% to 9% this year. At this point we expect an increase in the 6% area as we have been successful in reducing some of the assessment. The majority of these items -- benefit from these items will be realized in the second-half of the year and has been reflected in our margin guidance. As a result, we expect comparable hotel adjusted operating profit margins to increase 90 basis points at the low-end of the RevPAR range and increase 130 basis points at the high-end of the range.

During the quarter we utilized proceeds from our debt offerings with a weighted average interest rate of 5.3% to repay $1 billion of debt with a weighted average interest rate of 6.8%.

In the third quarter we received commitments from a number of banks and expect to raise $400 million through a credit facility term loan. Based on our current leverage level the term loan will bear interest at LIBOR plus 180 basis points for an approximate 2.1% all-in interest rate today. We are evaluating whether to enter into a swap that will fix LIBOR for the five-year term of the loan. We expect the term loan to close by the end of July and we will use the proceeds to repay debt.

Taking into consideration the acquisition of the Hyatt DC, and the expected term loan, and the related use of proceeds from the term loan to repay approximately $400 million of debt, our outstanding debt will increase approximately $100 million to roughly $5.3 billion. We will have approximately $760 million of capacity in our credit facility and approximately $150 million of cash and cash equivalents.

During the second quarter we issued approximately 3.1 million shares of common stock at an average price of $15.75 per share for net proceeds of approximately $48 million through our ATM program. Consistent with our philosophy, our willingness to issue equity depends on our stock price and the visibility around acquisition opportunities.

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

(Operator Instructions). Eli Hackel, Goldman Sachs.

Just two questions. First, can you just talk about to what extent rate growth or RevPAR growth was held back by lower-priced groups and pre-negotiated corporate that had last room availability?

I don't know if there is a way to quantify this, but any color there, and maybe what you're doing with your managers to help maybe expedite the process of getting rid of some of those groups where maybe you could get higher price on a rack rate.

And then, second, just on the guidance, can you just help us with the gives and takes how much is coming in, and maybe some of the cap rate or multiple paid on the DC asset, and how much EBITDA you expect to go out the door due to the sold assets that you talked about? That is it. Thank you very much.

Okay, so let's start with the issue about lower-priced group and the special corporate. It is -- as you guessed, it is fairly difficult to get a precise handle on either of those, but especially the impact of the special corporate pricing.

But here is what I would probably say. If we look at our group business in 2012, I think we have previously estimated that maybe a quarter or so of that was booked during a period of time when pricing was weaker and when the business was softer.

So as we keep working our way through 2012 and into 2013, we will continue to find, because of the nature of how we book group in our hotels and because a number of them are larger hotels, that book business significantly in advance, we will continue to find that we have booked business during slightly slower times simply because we are now in the third year of a recovery.

But I would imagine that as we work our way through this year and into next there will be very little of the business that we booked to say back in the 2009 time period that is left on our books. And I don't -- it is to some degree inhibiting rate growth, but I guess I would probably flip it around and go back to some comments that I made in my prepared remarks, which was that while overall rate growth in the group area was, I think, roughly around 1.5% to 2%, the reality is that the bookings that we are getting -- that we got in the last quarter for the third and fourth quarter of this year were closer to up 7%, which I think sends a good signal for where group bookings are going on a going forward basis.

Now on the special corporate side, what I think you're referring to is the fact that a number of the -- well, on the transient side -- a number of our special corporate accounts have what is called last room availability, which means that if there is a room available in a hotel of the type that they're entitled to, that even though we may be able to sell that to another customer at a higher price, they are entitled to get that room for the contract that they have agreed to -- that we have agreed with them on if the room is available.

And since special corporate pricing tends to be somewhat below our rack rate pricing, the reality is if that did -- I think our sense is in the second quarter, because of the high occupancy we ran at some many hotels, especially during the midweek, that did hold pricing back a little bit.

At the end of the day we were very pleased to see the growth in occupancy. That ultimately does allow us to push rate, and we were doing that. You could see that at the overall rate growth that we saw on the transient side.

There is not a lot that we can do in the near term relative to the contracts that we have negotiated for 2012. But on the other hand, I think as you look to what that means for 2013, I suspect that our strategy, certainly at those hotels running high occupancies, will begin to change. We will certainly be pushing for higher pricing next year to reflect the more competitive market conditions.

I also think that it is reasonable to assume that if trends hold the way they are now, we would probably do a little bit less in special corporates than we -- have fewer special corporate accounts next year, or at least fewer special corporate accounts with last room availability, because we will be recognizing the fact that, number one, we have got more group business on the books. We have higher occupancy. And we really ultimately would like to be able to push even more of our business into those more highly rated corporate and premium categories.

With respect to the guidance, I don't think that I really want to break it down into the different segments. I guess, I would just say at the end of the day we made the decision to move forward with a comprehensive pool renovation, including adding a small waterpark as part of our Orlando hotel, and that combined with some other activity regarding facade improvements and other things -- once we decided to step into the pool renovation area we decided to accelerate a lot of other activity at the hotel, including the renovation of two of our food and beverage outlets.

And the net effect of that, plus the decision to add what I think is going to turn into a great bar restaurant at the Helmsley, which was not part of our original game plan, but represents an opportunity to not only add a very profitable outlet, but also gives us the ability to take the existing restaurant and turn that into meeting space.

Those changes, I think, are going to be really positive for both of those hotels, but they did result in some reduction in EBITDA in the current year. We obviously hope that it results in much stronger EBITDA going forward.

And I am sorry. Will you relate just on the cap rate for the Hyatt? I think you said probably less than 14 times when you were going to buy it late last year. I don't know if there is an updated number.

Yes, I would say that based on the last 12-month EBITDA we are right in the mid-13 range on our acquisition price.

Okay, thank you very much.

Joe Greff, JPMorgan.

Ed, I think you touched about it -- touched on it in your answer to the last question, but can you just talk about how tight are the terms of these new group contracts relative to a few years ago with respect to either cancellation provisions or attrition or commitments? And then I have a follow-up, thanks.

Joe, I think from a trend perspective, what I would tell you is whereas a couple of years ago we were finding it almost impossible to get really good attrition clauses, what I am hearing in general is that while, of course, it varies by hotel, we are starting to see an ability to negotiate better cancellation penalties, better attrition clauses and overall better contracts.

But as you can guess it depends a lot on the hotel. So markets where occupancies have fully recovered and it is becoming -- really I would say the balance of power shifted a bit back towards the hotel, you see better contracts. And in other markets that might still be struggling to recover a little bit or have weak periods, you don't see quite as much.

But I think what we are seeing this year is ultimately a slight increase in attrition and cancellation fees on a year-to-date basis compared to what we had last year. And I think that is a sign of the fact that we have been able to negotiate slightly better clauses on a going -- recently compared to where we were a year or two ago.

I also think here part of that too is the fact that the business that was being booked in the end of 2010 and in the beginning of 2011 was -- tended to be very short-term in nature. Although I would still -- meaning that people didn't book unless they were absolutely certain they're going to have the event.

Now I think what you're seeing is while there certainly is business being booked on a short-term basis, my sense is just looking at how the bookings are playing out, we are seeing more people, more companies, booking a little bit further in advance, and that is one of the reasons why you are seeing our booking pace show the positive year-over-year comparisons that we have been describing.

So how much of your anticipated full-year 2012 group is on the books right now?

You know, I think if you -- my guess is it slightly north of 90% -- maybe 90%, 91%, something like that. And that obviously depends a little bit on what happens in fourth-quarter bookings.

But I think one thing that people should expect is that given the strength that we have at this point for the rest of the year, we would expect to see incremental business booked. That is obvious, or implicit in my comments that 90% of it is on the books. But I suspect that on a relative year-over-year basis we may not book quite as many rooms as we did last year, only because we are so far ahead of where we were last year.

And my final --

Just to be clear -- let me just be clear there because sometimes these areas get confusing. We certainly expect that by the end of the year our group business will be up significantly compared to last year.

Got it. And then would you expect the RevPAR growth rate in the fourth quarter to exceed the year-over-year growth rate in RevPAR in the third quarter? I know you don't provide quarterly guidance, but just directionally.

I don't know that we necessarily see a big difference in trends between the quarters right now.

Excellent. Thank you.

David Loeb, Baird.

Usually that one comes out right. So, hello. A little bit of refining on the guidance. I hear you, Ed, about the trade-offs in the guidance, particularly from the renovation projects in New York and Orlando. But is there -- absent that is there any change in the guidance for the same-store portfolio or is the rest of the change in the guidance related to acquisitions and dispositions?

David, I think it really is all caught up in the notion that there was -- well, there is a benefit in the same-store portfolio from the standpoint that the margin improvement is higher than what we previously talked about, so we're definitely anticipating a pick-up there.

It is just that when you look at what, I guess, I might describe as the non-comp assets there is some reduction in there because of some of the capital projects we spoke about. And then we also have some changes happening because of the EBITDA associated with that, that we expect to sell.

Now that obviously could play a little bit differently than what we have anticipated in the numbers that we have. You never know exactly how quickly an asset is going to sell. Once we put it out on the market we would obviously like to see that happen sooner than later, but there is some variability in the way that it would play out. But I don't think at the end of the day that either that has a material effect on the answer here.

Okay. And related to that I wanted to ask about dispositions and acquisitions, how it looked. Dispositions, you put a very specific number, including one hotel, but are there other specific ones, including perhaps some of the ones that you have listed, that you expect will close by the end of the year?

We certainly do expect that some of the -- a number of the hotels that we are marketing today will close at the end of the year -- by the end of the year. Only one of the hotels that we have been marketing in 2012 met the standard to be excluded from our comp set and be treated as a held for sale asset. So that was -- none of the others are anywhere near as far along as that.

A lot of our marketing of hotels that were counting on selling in the fourth quarter began in the beginning of the second quarter. So we are well into the sale process and I think have some reasonable level of confidence that we will transact, but we're certainly not in a position to make any announcements relative to which of those hotels will sell.

I would say we have tried to -- in the estimate that we provided about incremental sales, we have not assume that everything that we have on the market will sell it, certainly. We have tried to make a guess at some reasonable number of the ones that are marketing that those with close by year-end. .

Okay, that makes sense. And how about on the acquisition side, are you seeing more deal flow these days, and how interesting is the stuff you are seeing?

I would say that -- as a number of folks have talked about over maybe the last 60 days, earlier in the year there was an anticipation that the second-half of 2012 would be somewhat like the first-half of 2011, meaning a very high level of activity. I would say expectations have moderated a bit, but clearly we are seeing more activity -- more opportunity right now than we did in the beginning of the year. And I think that doesn't surprise me in some ways that that would happen. I think conditions are better.

So we didn't try to predict the number of acquisitions that we would get done, but we certainly still are looking to be active. And I would still say that at the end of the day, for the full year it is our intent to be a net acquirer as opposed to a net seller in 2012.

Now, obviously, the deal we just completed and announced this morning we have got a good head start on that. So I am not saying we are necessarily going to buy as much as we're going to sell in the rest of the year, but we do for the full year intend to be a net acquirer if at all possible.

Okay, great. Thank you.

Ryan Meliker, MLV & Company.

Just a quick question on margins and expectations for margins. You guys obviously have exceeded your initial expectation on the year. I think you initially guided us 25 to 75 BPs of margin -- of comp property margin expansion back in February, and you are up 110 BPs year-to-date. You have now raised guidance up where the low-end is now above what was the high-end just four months ago, or five months ago.

I am wondering if you can give us some color on what is leading that margin expansion ahead of your expectations, and if we can continue to see more of that, or if you think your current guidance is where things will likely end up?

Well, we wouldn't modify our guidance -- you already have what we gave you, so it is included therein. So really strong F&B revenues. They were up 5.7%. In the quarter flow-through was very strong, as I talked about, up over 47%. We also saw really nice ADR growth, so we had really good rooms posted as well.

Then you fill in the property insurance and taxes, there alone is another 15 basis points. So I think it is a combination of all of those things. Not to mention, I should also add utilities were down. We were expecting utilities to be up about 2.5% in the quarter and they were up -- they were down 3.5%. And so at this point on a full-year basis we were looking at utilities when we gave guidance before up about 1% to 2%. Now we think they're going to be down slightly.

Okay. So it sounds like it is really F&B, ADR growth, property taxes, insurance and utilities. And does your current guidance assume that we are going to see similar trends to what we have seen over the first-half of the year or any moderation in those trends?

No, I would say that we are generally expecting that what we saw in the first-half will carry through into the second-half.

Helpful, thanks a lot.

Josh Attie, Citi.

On the Hyatt acquisition, it seems like the EBITDA stream is probably close to where it was in 2007, and you have new supply coming into the market in 2014. Where do you see the upside in the value of that asset coming from, and what level of return to expect to achieve?

We -- I think you're right in saying that the Washington market in general is closer to its prior peak than some of the other markets -- a number of the other markets across the US. This asset is not quite at its prior peak. It is probably -- I don't know -- my guess is it is about 8% to 9% -- 8% to 10% below its prior peak EBITDA.

So as we look at this hotel though I think that the real opportunity that comes from owning this hotel comes from its location within DC, and honestly what we see as the long-term prospects for the DC market. Washington has been talked a lot about the last couple of years as a weaker market. And I think a number of us that are invested in the market have highlighted the fact that part of the problem has been issues, that Washington didn't fall as far as some other markets, consequently it didn't necessarily have as much easy ground to recover.

And then there have been some issues that I think are somewhat unique to the current period, dealing with a weaker convention calendar and an absence of activity on Capitol Hill that have resulted in less transient demand in Washington than we would normally expect to see.

As we look further out in Washington thinking more broadly about the market, we think Washington is going to continue to be a very attractive market for convention business. And as the -- with the new hotel coming online in 2014 will only help facilitate the strength of Washington in the convention market.

And if you look at the bookings out more to say the 2015, 2016 level, we are seeing certainly a definite increase in bookings in those years, especially in 2016, that confirm the fact that Washington should be on a long-term basis a very active convention market.

I don't think that the current gridlock on Capitol Hill can continue forever, and so it would seem to me that -- and it wouldn't surprise me if it didn't start to happen in 2013 -- if we didn't start to see an accelerated level of legislative activity which will certainly lead to an accelerated level of lodging -- of demand for lodging from lobbyists that will be helpful and add some strength into the Washington market.

So then I think adding -- besides the fact that we generally feel very good about the long-term for the Washington market, the last thing I would add is the location of the Grand Hyatt in Washington is right in what is really becoming the heart of the city. It is immediately opposite what was the old convention center site, which the old convention center was demolished once the new convention center was built earlier this past decade. And now is being redeveloped into 1 million square feet of office and over 300,000 square feet of retail, as well as a couple of different condo projects.

And I think that there is a real expectation that that is going to provide a focal point for that part of downtown. We should benefit from that. I think the location of this hotel is only getting better. And it has had a good track record over the last decade or two, from our perspective that can only improve over the next decade or two.

Thanks, that is helpful. When you look broadly at the acquisition market, this asset and other things that you see, where do you think we are in the asset appreciation cycle? And related to that, going forward to you think you will be a net buyer or a net seller?

A lot of that -- I guess in answer to the first question, I think that the cycle is ultimately driven by how quickly does new supply start to overtake demand in the various markets in which we and others invest. And certainly as you look at the projections for supply in -- well, this year is pretty obvious -- but as you look at the projection for supply in 2013 and 2014 they are relatively low. So I think as long as we continue to see low levels of new supply, with then -- and we have a growing economy, then we should continue to see demand exceed supply, which I think creates an opportunity for appreciation in the value of hotels.

What was the second part of your question there?

Do you think you will be a net buyer or a net seller over the next 12 months?

Yes, certainly in the near term we're very confident we would like to be a net acquirer. I think the answer around that question depends upon where pricing goes. And so we will continue to evaluate assets the same way we always have, which is to look at our long-term cash flow for the asset and look to see if we believe under what we think are conservative assumptions we can generate a return on that asset that would exceed our cost of capital.

Now, I don't know exactly how this cycle will play out, but I do know that in the last cycle what ended up happening in 2006 and 2007 is we started to see pricing that just was so strong that under the assumptions under which we were comfortable underwriting assets we started to find that we just weren't competitive as a buyer, not because we didn't have a low cost of capital, but I think others were just being very aggressive.

And consequently we made the decision at that point that we were better off being a seller than a buyer. I clearly anticipate that we will find the same sort of dynamic happen at some point in this cycle. I don't see any real signs of it yet, so I suspect that even as we look at 2013 we would still be active on the acquisition front, but it is hard to predict beyond that right now.

Okay, thank you very much.

Jim Sullivan, Cowen and Company.

Just a couple of other small points on the expenses. And thank you for the detail in terms of what is in the guidance. But I didn't hear -- maybe I missed it -- but what was -- what is the outlook in terms of wages and benefits for the balance of this year?

And, second point, in this respect, to what extent is food price inflation something that you're thinking about or should be concerned about for the balance of the year or into 2013?

Jim, I am going to have you come back to that second question, because I missed part of that. But I think what we are finding on wages and benefits right now is that we are probably looking at our overall raises and benefits increasing somewhere a little bit north of 3% over the last quarter.

The interesting thing is that on a -- what we tend to look at even more carefully is how we are doing on a per occupied room basis. And at that level the increase is much smaller, really closer to around 1%, which is reflecting, I think, both the fact that we've had some increase in occupancy, as well as the fact that we have been doing a good job about trying to look at ways to be more efficient in the way the hotels are run.

If I were to think about where wages and benefits are going to go for the rest of the year, I suspect that the increases in the second-half of the year would be slightly north of 3%. That seems to be the trend rate. And my guess is that we would see, again, looking at a per occupied room basis, it would be roughly similar to what we have recently experienced. There is really no reason that I can see right now why there would be a major swing in those numbers in the near term.

Now your second question dealt with longer-term inflation process?

Food price inflation. Obviously, conditions there are getting difficult. We are seeing some significant increases in corn prices and others, and people are talking about food price inflation becoming a factor maybe toward the end of this year.

I just wonder to what extent that is something that you think about, the operators' forecast, and how you cope with that? And is that an issue that could present some margin pressure in 2013?

First I would say, Jim, so far on food costs we have done very well. We actually had a benefit of 20 basis points as a percentage of revenue in the quarter. A lot of the things over time since 2008 we have focused a lot on working with the operators on menu management, making sure good profits, making sure they are focused and using the vendor and some of the services to get the cheapest pricing.

Right now we have had banquet and AV revenues were up 6.8% in the quarter. So we have been pushing through price -- some price increase. And overall the menu management has been good. Clearly when you see the cornfields out in the Midwest, there is some concern around that, but we haven't seen that inflation at the properties.

Okay. Ed, this is really a question for you. If you could touch on how you're thinking about capital allocation internationally. You made some announcements regarding Latin America, obviously, recently. You have made some positive comments about the resiliency in Europe, particularly Northern Europe. But I am just curious how you are thinking about allocating your capital internationally given everything that is happening, and your appetite for more newbuild in markets like South America as well as India?

I guess what I would say is that consistent with what you have seen so far this cycle we still expect that the bulk of the investment that we do will end up in the US. Having said that, though, I think you did touch on a couple of different places around the world where we are interested in investing more.

Europe is -- Larry talked about our results in Europe during his comments. And we have been pleasantly surprised by how well Europe has held up despite the turmoil in the debt markets over there, especially the sovereign debt market.

And we continue to be interested in investing over there. I think most people know we invest through a joint venture with two fairly sophisticated investors. One is the government of Singapore's Government Investment Corp. of Singapore, and the other is APG, the big Dutch pension plan. And as we discuss with them about how to pursue opportunities in Europe, the conclusion that we have collectively reached at this point is that we would be interested in pursuing opportunities in what I would loosely describe as Northern Europe.

And I would probably focus that more directly on say London, Paris, and certain of the markets in Germany. Both because those are markets that we think will do better from an economic perspective and certainly from a lodging perspective, but also they are markets that attract a fair amount of leisure customers, which I think helps provide a base for those markets if the economic situation in Europe were too weaken even further.

But generally I don't think we would -- so those of the markets we would look at there. As we look at Brazil, you're right that we recently announced a joint venture to develop -- rather an acquisition to buy a completion -- a Novatel and an Ibis that are being built in Rio de Janeiro.

As we look at Brazil, which is really our only focused market in Latin America, we would like to buy existing full-service there, because we still very good about the overall opportunity in Brazil.

And on the select service side we think that matches up well with the emerging wealth that is happening within the country of Brazil. We think that as the country -- as the middle class in Brazil grows larger, they probably aren't going to be staying at the higher-end hotels, but select service hotels are appropriately positioned to capture that traveler. And so I think we could see some incremental investment in some other select service hotels in a couple of the major markets within Brazil, nothing necessarily imminent, but we are looking at some opportunities there.

And the other market that I haven't touched on is Asia. And there we are really focusing our efforts right now primarily in Australia, which I think would generally be existing hotels, although there is always the possibility in a market that as tight as Australia is for a newbuild opportunity. And then we are looking at Singapore and Hong Kong.

But I think all of those -- we have tried to -- I would say in some degree as we have looked at Asia, we are refining the markets that we are focusing on there a bit, recognizing that some of the emerging markets, certainly with China at the top of this list, have seen an incredible amount of new supply. And while certainly there is a lot of growth in the lodging industry in a market like China, we are not necessarily certain there is an opportunity for a lodging owner to make a lot of money there.

And, Ed, any interest in India?

We have a JV that is building seven hotels in India. And I would say that at this point in time we are watching how that process proceeds and continuing to get more and more familiar with the India market.

New supply in India is picking up a bit. It is certainly nowhere near at the level of what we have seen in China, but I would say right now we have a cautious outlook on India and are trying to really get a better handle on that as we watch what happens with the hotels that we are completing there.

Okay, then final comment from me, as you think about dividend and capital spending, could you just remind us what your objectives are regarding your balance sheet metrics? Where would you like to be one to two years out in terms of those metrics?

We have concluded that ultimately we would like to see -- become a lower leveraged Company than where we were at the peak of the last cycle. In part because we think that will just drive a lower cost of capital. And also in part because we think that is probably just a overall safer structure for our Company.

If we were to try to put that into a debt to EBITDA metric, that would suggest to us that we should target to be at or below a 3 times debt to EBITDA multiple.

Harry Curtis, Nomura.

Just a couple of quick questions. Keeping in mind that your exposure to Europe is fairly limited, I am interested in your point of view on whether or not RevPAR in the second-half of 2012 is going to be better or worse or about the same as the first-half?

Harry, that is a great question, but I think the short answer to that is that we generally would expect it to be in line with what we have seen in the first-half of the year. The group bookings in Europe this year have been quite strong, and some of that, admittedly, in London is driven by the Olympics. But the Olympics don't drive -- our portfolio is pretty well diversified across all of Europe, and the reality is we are seeing relatively good group activity throughout Europe.

One of the -- and I think in some markets -- and I am thinking of Barcelona when I say this -- I think Barcelona is actually benefiting from some increased travel from the US over to Barcelona. I suspect that the favorable trend from the US perspective on the euro, meaning that the euro has gone down, which makes having a meeting or an event in Europe is a little bit cheaper, are probably helping us a little bit on that front.

But I think that we keep looking for themes there and trends in trying to track -- just to try to anticipate which direction Europe is going. And as I think we have talked about on the power calls, we took a fairly conservative approach to Europe when we thought about how it should fit within our numbers and how -- what we would anticipate there at the beginning of the year.

And the reality is, is if you look at year-to-date in London and Paris have been in the -- have seen RevPAR growth in the upper single-digit, and Barcelona has been right there next to them. The one market that has underperformed year-to-date has really been Brussels. But we have a sense that will do a little bit better in the second-half of the year.

So when you work all the way through it, I suspect we will see some ups and downs through these different markets because that has been the track record for the first-half of the year. But at the end of the day we would continue to expect to see this sort of 3% to 4% RevPAR growth for the full year that we have experienced for the first-half.

Okay, so, yes, Barcelona is probably up because of executives from Las Vegas traveling there. Let's see, second question is with respect to your renovations, when you look into 2013, are there any major renovations that you have on the docket right now? What I'm trying to get a sense of is when are most of the major renovations behind you, and when might they be a tailwind to helping your RevPAR?

We are about to in the next couple of weeks to start to review our capital plan for 2013. So I guess the way -- the short answer is I don't think we have any major renovations of the scale of say the Chicago O'Hare Marriott or the Atlanta Perimeter Hotel that are on the books today. But I wouldn't be surprised if there weren't one or two hotels that didn't ultimately creep into our capital plan as we see some opportunities to make some material changes in some hotels in an effort to improve their performance.

But they -- I think in that category they would tend to be smaller hotels and probably wouldn't have the impact that you are imagining.

In terms of the broader driver behind your question, we feel like we're generally fairly caught up in capital projects. And so we certainly don't feel like we're looking at a deficit in the portfolio. I don't envision that we have any amount -- I am not aware right now of any Philadelphia Marriott projects where we are spending $60 million on a hotel. And it really has a disruptive effect on your operations. Or the same thing that we thought about this larger project that we have been in the midst of up in the Sheraton in New York.

So I suspect at the end of the day there should be a little less drag, but to be perfectly honest, you are probably about a month early for me to intelligently answer that question because that is what we are about to figure out coming up here soon.

And as a practical matter do you expect just the renovation piece of it -- and it is hard to distinguish between renovation and maintenance CapEx, but strictly on the renovation side, would we expect a spend of under $100 million next year?

You know, I would -- at the risk of -- rather than trying to answer that and turn out to be wrong, I think it would just -- well, more to come on that as we get it. Probably at our third-quarter call we might have a little bit more insight in that.

Okay, very good. Thanks very much.

Carlo Santarelli, Deutsche Bank.

Most of my questions have been answered, but just in terms of some of your spend and as it relates to your asset sales, the strategy right now are you getting any push back on stuff that maybe hasn't been updated that you may be looking to sell? Is the strategy now maybe to address some of those prior to selling or how are you thinking about that? Thanks.

That is a great question. And we think about that very specifically as it relates to each asset that we sell. And so we have tried to be thoughtful as we look out and think about what hotels are coming on the market to try -- our capital plan tends to take into account either those sorts of investments that we think would add value to the hotel, so that we can get the value when we sell.

We also tend to look at those sorts of -- this doesn't come up as often -- but if there is a more complicated capital project that we think while it may not add value, it is one of these sorts of projects where the buyer might ding us more because it wasn't done. Think of a facade or a roof when you're thinking of an example of that, where there may be a variety of ways to approach it.

We have typically been addressing those sorts of projects to make certain that we don't end up creating a reason why a buyer might be able to offset the price for a capital improvement. So what it comes down to is each individual asset gets a capital plan that takes into account the fact that we have a general idea about when we would like to sell that asset, and then we will complete that in advance.

I think part of the -- and the way you approach these things can vary a bit, but in certain areas like with a rooms renovation it may be that you ultimately realize the buyer really is going to -- especially in a hotel where the management may change -- in a lot of the hotels we sell there is an opportunity for a new operator to come into the hotel -- we may not want to necessarily do a rooms renovation because it may be clear that the buyer will want to control that and will want to reach their own conclusions about how much of a renovation to do and how to approach it.

So there is a lot of different factors that go into it, but ultimately we try to tailor the program to the asset and the opportunity.

Great, that is helpful. Thank you very much.

Jeff Donnelly, Wells Fargo.

On the dispositions front you touched on this a little bit, I guess, in the near term, Ed. But when you look at your portfolio I think you guys have about 15,000 rooms in airport and suburban locations, and RevPAR there is about -- I think about $100 a night, which I think is about 35% lower than your urban and resort hotels.

How do you think about those less productive assets over the long-term? Because it strikes me that relieving yourselves of those hotels or ongoing capital investment is arguably a larger percentage of your profits could be a catalyst to Host's cash flow growth longer-term.

Well, Jeff, I think you're right that ultimately we -- maybe speaking more broadly to the question -- we do intend to be an active seller over the next two or three years. And as we -- consistent with what we have described in the past, a number of these suburban assets, both in core and non-core markets and the airport locations, leaving out the ones that are directly attached to the airport, those are the sort -- those are hotels that would be high on our priority list in terms of hotels that should be sold.

And I think it is a combination of what you described relative to lower RevPAR. It is also the probability in those situations is that CapEx may be a bit higher for those hotels as a percentage of revenues. It deals with our outlook in some cases about the growth prospects for those hotels, not in general, but relative to the strong prospects that we might see for a number of our urban hotels.

So if you go back to the last cycle -- I don't remember the exact number right now, but we sold somewhere plus or minus around 35, 36 hotels. I don't know that we necessarily end up being quite that big of a seller this cycle, but we will be a very active seller if the market permits us to do that.

And we do, as we have described before, intend to focus the portfolio in a smaller number of markets. That will mean that we will be reducing our presence in those markets that we don't view as core going forward. And even in some of the core markets that we have identified, as the market conditions permit us to, we will look to sell assets that are located in suburban locations. .

And then just, Ed, as another question, what do you think about more broadly than just Host, about the opportunity for folks to convert hotels, or convert buildings away from a hotel use and maybe into something like residential or office, because I know you have one in Indianapolis?

But when you look at where we are this cycle most hotels aren't at peak profits and they trade at multiples that are in line with historical averages, whereas most say residential assets are at peak profits and peak multiples and financing is cheap. It sort of begs the question of whether or not we could see more of that conversion activity in the industry in the next two to three years?

Well, as an owner of hotels, I would love it if a few more of the other ones got converted into residential. I can assure you of that. I think it is hard to say how often that will happen. I mean, part of it is -- well, we still feel that in a lot of markets the outlook -- the fundamental outlook between demand and supply for hotels is very attractive.

So in some ways it probably requires some special situations like the one that we saw in Indianapolis, where we just felt that the hotel as originally designed and built was a little bit too big for the market, which is why it made sense to take one tower from the hotel and convert it to apartment.

I am sure you're right that there will be other situations like that around the country; there always are. And a lot of times those come about because there is a changing nature in the local market where the building exists. And so whatever the original reason was for building a hotel or a hotel of a certain size, there is a reason to make it change. I don't know how much of a theme we will see of that, in part, because in general across the country we are seeing improving lodging dynamics, not deteriorating.

Thanks, guys, I will turn it back to you.

This will conclude our question-and-answer session. Mr. Harvey, I will turn it back to you for closing remarks.

Well, actually, this will be Ed Walter thanking you. But I would like to thank everybody for joining us on this call today. We appreciate the opportunity to discuss our second-quarter results, our new acquisition and our outlook with you.

We look forward to providing you with more insights into the rest of the year on our third-quarter call in October. Have a great day, everyone.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. Have a great rest of your day.