Host Hotels & Resorts Inc (HST) 2012 Q4 法說會逐字稿

Good day everyone and welcome to the Host Hotels & Resorts Inc. fourth quarter and full year 2012 [earnings] (technical difficulty). This call is being recorded. At this time I would like to turn the conference over to Ms. Gee Lingberg, Vice President of Investor Relations. Please go ahead.

Thank you, Kim. Good morning everyone. Welcome to the Host Hotels & Resorts fourth quarter and full year 2012 earnings call.

Before we begin, I'd like to remind everyone that many of the comments made today are considered to be forward-looking statements under federal securities laws. 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.

In addition 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 and 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 Greg Larson, Executive Vice President, Corporate Strategy.

This morning, Ed Walter will provide a brief overview of our fourth-quarter and full-year results, and then will describe the current operating environment as well as the Company's outlook for 2013. Larry Harvey will then provide greater detail on our fourth-quarter and full-year results, including regional and market performance.

Following their remarks we will be available to respond to your questions. And now I'd like to turn the call over to Ed.

Thanks, Gee, good morning everyone. Despite a variety of external challenges in the financial and political world, and a historic storm in the Northeast Mid-Atlantic region, 2012 generated another year of positive growth for the lodging industry and especially for our Company. Driven by strong group and transient demand, combined with solid cost controls and cheaper utility prices, we were able to substantially exceed our top line and bottom line expectations issued at this time last year.

In addition, our fourth-quarter adjusted FFO per share exceeded both our most recent guidance and consensus estimates. Finally, we made progress on a variety of corporate initiatives designed to add or realize value, including international and domestic acquisitions, key dispositions, value enhancement projects and debt refinancing. But before we get into the details, let's review our results for the quarter and the year.

Comparable revenues increased 3.9% for the quarter and 5.5% for the full year. Fourth-quarter RevPAR for our comparable hotels increased 5.8%, and on a calendar quarter basis increased 6.8%. As we discussed during our last call, the fourth quarter was negatively impacted by unfavorable holiday timing, the election and fiscal cliff concerns, as well as Hurricane Sandy.

The storm, which meaningfully disrupted travel in the Washington/New York corridor and resulted in the closure of four of our hotels, with one hotel closed for over two weeks, reduced RevPAR for the quarter by at least 1%. Overall, our RevPAR growth accelerated in the second half of the year and we outperformed the industry over that period.

For the year, comparable hotel RevPAR growth was 6.4%, as our average rate was $191 per night and our average occupancy was 74.5%. It is worth noting that while our occupancy levels now exceed our 2007 performance, we've not yet reached our historic peak levels which exceeded 78%, and we believe that there's still upside potential, especially on the group side of our business.

F&B revenue growth for the year was up a solid 3.9% although, as expected, fourth quarter growth was low, increasing just 1%. Comparable hotel adjusted operating profit margins increased 80 basis points for the fourth quarter and 140 basis points for the year, resulting in a 22% increase in adjusted EBITDA to $426 million for the quarter and full year adjusted EBITDA of $1.19 billion, a 17% increase over the prior year.

Our adjusted FFO per diluted share was $0.40 for the fourth quarter and $1.10 for the full year which exceeded consensus estimates and reflects a nearly 20% increase over 2011. And finally, our dividend for 2012 more than doubled compared to 2011.

Overall, the key driver of our business this year was the more than 4% increase in our group room nights, which allowed hotels to be more aggressive in increasing room rates, especially in our transient segments. As a result, roughly 60% of our RevPAR increase in 2012 was driven by higher rates.

The strong recovery in our group business was led by our higher-priced association and corporate segments, which increased a combined 8% for the year and drove an overall increase in group revenues of roughly 6.5%. The calendar challenges inherent in Q4 and the impact of the storm, which was well-publicized in advance of its landing, led to a lower increase in group room nights for the quarter of just 1.6% with group revenues increasing by 4%.

As of year-end our group business has recovered more than half of the 19% in demand lost in the downturn. Our average rate is just 1% short of 2007 levels.

For the full year, our transient room nights increased more than 1.5% helping to drive strong rate increases across all segments. Average rate increased by more than 4% as transient revenues were up almost 6% for the year. Our business generally shifted toward higher rated segments through the first three quarters of the year. But the fourth-quarter transient mix was impacted by Hurricane Sandy, which caused some last-minute group cancellations.

While hotel managers were somewhat successful in replacing the lost business with transient travelers, it generally was priced in the discount rate segment. For the quarter, overall rate and demand were both up approximately 3%, leading to a revenue increase of nearly 6%. While our full-year transient demand is 5% better than 2007 levels, the average rate is still 9% below the prior peak, indicating a meaningful opportunity for additional rate growth in 2013.

As I mentioned earlier, our overall occupancy level is about 0.5 points higher than where we were in 2007, but we have not yet achieved the 78% plus occupancy we reached at the end of the '90s. Average rate is still 6% short of 2007 levels on an absolute basis, and closer to 17% below if you adjust for inflation.

As we look at lodging fundamentals over the next few years, we expect supply will continue to be constrained, especially in the upper upscale segments. We would expect demand growth will exceed supply growth as international visitation continues to grow and group demand continues to improve.

As group demand improves, we would expect that the hotels will benefit from continued mix shift and be able to increase rates across all segments. As a result we would expect that RevPAR would be driven more by increases in rates, but we would still expect to experience further increases in occupancy.

For 2013, the stage is set as I just described. Our group booking pace is up 4% in room nights for the full year 2013 and up 6.5% in revenues. Revenues for the last three quarters of the year are up more than 8%, and overall we expect a strong year from our group segments.

Transient bookings are also well ahead of last year's pace and we're seeing solid rate growth in virtually all segments. Our RevPAR growth for the first month and a half is averaging more than 9%. While March results are expected to slow, primarily because of the early Easter holiday, we are certainly encouraged by our initial results.

Transaction activity across our various markets generally matched the pace we experienced in 2011, although both the US and Europe saw more activity in the second half of the year. For the year, we invested or committed to invest in more than $1.2 billion in acquisitions or new developments, purchased either directly or with joint venture partners. The largest of these transactions, the EUR440 million purchase by our European JV of five Marriott branded hotels located in Paris and Amsterdam, closed late last quarter.

On the disposition front, we remain focused on reducing our exposure to non-core hotels located in suburban and airport locations. Consistent with that plan, we sold San Francisco Airport Marriott, the Rocky Hill Marriott and the Toronto Airport Marriott in 2012.

Additionally we're focused on reducing our portfolio allocation in secondary markets, as demonstrated by our recent sale of the Atlanta Marriott Marquis, which reduced our presence in Atlanta from over 5% to roughly 3% of our US portfolio. In total, our asset sales were $445 million including the early January sale of the Atlanta Marriott Marquis.

Preliminary indications suggest the transaction volumes in the industry will be similar to 2012. We expect to be active on both the acquisition and disposition fronts as we look to increase our investment in target markets and look to reduce our exposure in non-core locations.

On the margin, we would still intend to be a net acquirer in 2013. While we have active pipelines both in sales and acquisitions, given the difficulty in predicting the timing of completing these transactions, our guidance does not assume the benefit of any acquisitions, nor does it is assume the impact of any sales beyond the transactions we have already closed.

In addition to transaction activity, we will continue to look to invest in income-generating additions to our portfolio, which typically drive returns well in excess of our cost of capital. In 2013 we hope to commence final phase of the San Diego Marriott Marquis and Marina, which will provide a new ballroom and exhibit hall.

Another 2013 project we're working on is the repositioning of the Newark Airport Marriott, which will include a 10,000 sq. ft. ballroom which is scheduled to be completed before the 2014 Super Bowl, which will occur in the MetLife Stadium just outside of New York. In 2013 we expect to spend approximately $90 million to $100 million on ROI and redevelopment investments.

Now let me elaborate a bit on our outlook for 2013. As I discussed earlier, we anticipate that hotel demand will continue to grow as the US economy improves, leading to demand growth which will slightly exceed the less than 1% supply growth projected for 2013. The increase in net demand combined with solid group bookings suggest we should experience both occupancy and rate growth in our portfolio.

We should also benefit from a more than 20% reduction in maintenance capital expenditures as spending declined from $366 million in 2012 to a range of $270 million to $290 million in 2013, which should reduce ongoing business disruption. With all this in mind, we're expecting comparable hotel RevPAR to increase 5% to 7% for the year. While food and beverage and other activity is often volatile and difficult to predict, we're expecting those revenues to increase roughly 2% to 4%.

We expect margins to be up 50 to 110 basis points. This operating forecast will result in an adjusted EBITDA of $1.25 billion to $1.31 billion, and adjusted FFO per share of $1.19 to $1.27.

Looking at our dividend, we announced yesterday the first quarter common dividend would be $0.10 per share. Dividends for the rest of the year will depend both on operating results as well as gains on asset sales.

I'm pleased to say that the lodging recovery is progressing well due to continued demand increases combined with low supply growth. As a result of the strong industry outlook and underlying fundamentals, we believe this cycle will continue to gain momentum through 2013 and 2014.

The capital we have invested over the last several years in our hotels ensures that our portfolio is in excellent condition and able to benefit from this improving marketplace. As Larry will describe in more detail, our industry-leading balance sheet is only getting stronger and our cost of capital remains attractive.

Looking to our valuation, despite the fact that interest rates are at historic lows and supply is low, our stock is currently trading at approximately a 40% discount to replacement cost and near its average 10-year multiple. When we look at all these factors, it gives us confidence that Host is well-positioned to outperform in 2013.

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. Overall, we had an outstanding quarter in many markets, as 10 of our top 20 US markets had RevPAR growth in excess of 9%.

Our top-performing market for the fourth quarter was Los Angeles, with a RevPAR increase of 17.6%. Occupancy improved by over 7 percentage points to nearly 81% while ADR was up roughly 7%. The outperformance was driven by an increase in both transient and group demand. We expect the Los Angeles market to continue to perform well in 2013.

Our Seattle hotels had a great quarter with RevPAR up 17.3%. Occupancy improved nearly 9 percentage points as transient demand was very strong and ADR increased by 4%. We expect Seattle to be one of our top-performing markets in 2013 due to growth in both transient and group demand, which will help to drive rate and RevPAR growth.

Our Hawaii hotels significantly outperformed our expectations for the quarter with a RevPAR increase of 12.3%. Occupancy improved by nearly 4 percentage points, driven by strong group and transient demand which drove rate growth of roughly 7%. We expect Hawaii to be a solid market in 2013 due to good group bookings. Results for 2013 will be affected by the construction of the timeshare project adjacent to Hyatt Maui and a rooms renovation at the Fairmont Kea Lani in the second half of the year.

Our Houston hotels had a RevPAR increase of 11.6%. Strong group and transient demand led to an occupancy increase of nearly 6 percentage points. The ADR growth of over 3% was driven by increases in both group and transient rates. We expect our Houston hotels to have a good 2013 due to better demand which will allow us to shift the mix of business to higher-rated segments.

As we expected, our San Francisco hotels continued their excellent performance as RevPAR increased 10.9% due to an ADR improvement of nearly 6% and an occupancy increase of 4 percentage points. The improvement in ADR was driven by both rate increases and the shift in the mix of business to higher rated segments, as both group and transient demand performed well. We expect that the San Francisco market will have a decent year in 2013, although results will be affected by the rooms renovation of the San Francisco Marriott Marquis in the first half of the year.

RevPAR for our Boston hotels increased 10.2%, driven by an 8.5% increase in ADR and an improvement in occupancy of over 1%. The outperformance was driven by group business, which created compression to drive rate. We expect our Boston hotels to have another good year due to solid in-house group bookings.

Our Chicago hotels also performed well in the quarter, with RevPAR up 8.8%. ADR increased nearly 6% and occupancy improved more than 2 percentage points. Strength in both group and transient bookings allowed our hotels to drive rate. We expect our Chicago hotels to continue to perform well in 2013 due to strong group demand and ADR improvement through better business mix and overall rate increases.

RevPAR for our New York hotels increased just 1.7%. Renovation disruption and Hurricane Sandy negatively impacted our fourth-quarter results in New York, particularly at the New York Downtown Marriott, which was closed for 15 days and was well below capacity for the remainder of the quarter due to rooms out of service. In addition, the W Union Square was closed for eight days. Excluding the downtown Marriott and the W Union Square, our RevPAR growth in New York was 5.3% on a calendar quarter basis.

We expect New York to be one of our top-performing markets in 2013 due to an increase in both group and transient demand, less renovation disruption and no Hurricane Sandy.

RevPAR for our Washington, D.C. hotels decreased 4.3% as occupancy declined roughly 3 percentage points and ADR was flat. Results were affected by cancellations related to Hurricane Sandy and renovations at three hotels. For the year, RevPAR was down 2.4% in 2012. With the inauguration in January, RevPAR for the month for our four downtown hotels was up over 24%, and RevPAR for all 11 of our D.C. hotels was up 21%. While we expect 2013 to be better than last year, weakness in government travel will limit RevPAR growth.

For the full year, our best performing markets in the US were Philadelphia, with a 14.4% RevPAR increase, followed by Los Angeles with a 12.3% increase and Boston with 11.1% increase. Our worst-performing market was Orlando with a 3.9% decline in RevPAR due to extensive renovation work.

For the 11 hotels in the European joint venture that have comparable results, RevPAR increased 2% for the quarter in constant euros as ADR increased 3%, while occupancy fell 80 basis points. EBITDA margins increased 50 basis points.

The Hotel Arts Barcelona and the Crowne Plaza Amsterdam performed the best in the quarter, while the Renaissance Brussels and Sheraton Skyline underperformed.

For the full year, RevPAR for the 11 comparable hotels improved 2.9% in constant euros due to 3.3% rate growth, while margins were up 110 basis points. We expect the 18 European joint venture properties, excluding the Sheraton Roma which was under major renovation in 2012, and including the five hotels recently acquired, to have RevPAR growth in the 2% to 3% range for 2013.

For the full year, comparable hotel adjusted operating profit margins increased 140 basis points, 30 basis points of which can be attributed to the 5.5% decline in utilities for the year when compared to a normal inflationary increase.

For the quarter, comparable hotel margins increased 80 basis points. Margin growth is affected by the lower level of RevPAR growth which was driven by Hurricane Sandy and the unfavorable shift in holidays in the fourth quarter. More than half of the RevPAR growth was from occupancy growth, not rate.

For the fourth quarter of 2012, F&B revenues increased only 1% and F&B profit declined as the quarter was challenged by an unfavorable comparison to the fourth quarter of 2011 when F&B revenues increased 6.8%. In total, general and administrative, sales and marketing, utilities, and repairs and maintenance expenses were flat. Property taxes increased 5% in the fourth quarter primarily because we received property tax refunds in the fourth quarter of 2011.

Looking forward to 2013 we expect that RevPAR primarily will be driven by rate growth. The additional rate growth should lead to solid rooms flow-through, even with growth in wage and benefit costs. We expect unallocated costs to increase more than inflation, particularly for rewards in sales and marketing, where higher revenues will increase costs.

Margin expansion for 2013 will be negatively affected by projected above- inflationary increases in both property insurance, primarily due to Hurricane Sandy losses, and property taxes, which, when combined, result in a 17 basis point impact on margins. In addition, a couple of initiatives from the brands, including incremental costs for Marriott CI/TY initiative and Starwood's paid search revenue initiative, which when combined, results in an incremental 10 basis point decrease in margins as well.

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 110 basis points at the high end of the range for 2013. When looking at our comparable hotel margins for 2012, and assuming that we achieve the midpoint of our guidance for 2013, our comparable hotel adjusted operating profit margins will have increased 220 basis points, or 110 basis points a year since 2011.

There are two items in particular that impact the comparability of EBITDA and FFO between 2012 and 2013. The first is the sale of the land to the Hyatt Maui timeshare joint venture. We recognized an $8 million gain on the sale in 2012 which reflected the profit we received from Hyatt for their one-third portion of the land. In 2013 the JV expects to start the marketing process for the timeshare, and our portion of the expenses will total roughly $4 million with no offsetting income, resulting in a $12 million decline in EBITDA from 2012 to 2013.

The second item is the $9 million business interruption proceeds related to the New Zealand earthquake that we received in 2012. While the ibis Christchurch reopened in September of last year and we expect the Novotel Christchurch to reopen later this year, the EBITDA generated will be approximately $7 million less than the 2012 EBITDA. When combined, these items generated roughly $19 million of EBITDA and FFO that will not be repeated in 2013.

In the fourth quarter we redeemed $100 million of our 6.75% Series Q senior notes. For 2012 we reduced our weighted average interest rate by 90 basis points to 5.4%, and we increased our weighted average debt maturity by nearly one year to 5.1 years. We finished the year with a debt to EBITDA ratio of 4.2 times and a fixed charge coverage of 3.2 times.

We have two debt maturities in 2013; the 4.75%, $246 million loan on the Orlando World Center Marriott that is due in the second quarter, and an 8.5% $33 million on the Westin Denver Downtown that goes into hyper amortization in December, both of which we intend to repay with available cash. We finished the year with $470 million of cash. After adjusting for the asset sales proceeds from Atlanta Marriott Marquis, our January dividend payment, and a $100 million credit facility repayment, we currently have over $530 million of cash and $837 million of credit facility capacity.

As you are aware Marriott recently moved to a calendar quarter and year. We're thrilled to be moving to the calendar quarter. However, this year will be an interesting year of transition.

In order to provide as much transparency as possible, we plan to provide you with estimated comparable revenues and margins on a calendar quarter basis for each quarter in 2012 when we report our results, which will give you an apples-to-apples comparison to the 2013 calendar quarter results. In addition, we will provide estimated adjusted EBITDA and adjusted FFO for each calendar quarter 2012 in order to make the appropriate comparisons as we report our 2013 results for each quarter.

We realize that the transition to a calendar quarter creates challenges for us, and for you, with respect to spreading metrics such as EBITDA among the four quarters of the year, particularly in a year when Easter moves from the second quarter to the first quarter.

At this point we're forecasting roughly 20% of our full-year EBITDA will be earned in the first quarter. We will provide you with the spreads for each of the remaining quarters on the first quarter earnings call.

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

(Operator Instructions) Joe Greff, JPMorgan.

Good morning, everybody; thanks for taking my call. First quick question here, Ed you mentioned in the first month and a half of this year RevPAR is up 9%. You may have said it. Maybe I didn't catch it. If we exclude D.C. from that result, what was the RevPAR growth? And what was New York City within the first month a half as well?

I'm not certain what New York City was for the first month, because we were -- to be honest we were just getting some of these results as late as last night. Our sense is that D.C. affected the January RevPAR, which was about the same; was right at that same 9%. D.C. affected January's RevPAR by 1%. So we would have been 8% in January without the strong D.C. performance.

Great, and then my next final question on the group, you mentioned about the group pace in the last three quarters the year being up 8% versus a year ago. But with the 1Q being down, have you tried to estimate what the impact was from Sandy on 1Q bookings or to what extent it's a reason for that? And then at this point, what percentage of your anticipated total 2013 group room nights are on the books right now and how does that compare to last year?

Okay, we have not tried to figure out what the effect of Sandy was on the first quarter this year, so I don't think we can respond to that. We've got about 75% of our group room nights for the year on the books at this point.

Great, thanks guys.

Okay, thanks, Joe.

Joshua Attie, Citi.

Thanks, good morning. The 5% to 7% RevPAR guidance is for the same store pool, which is about 85% of the portfolio. Can you share with us what you expect the total portfolio to achieve in terms of RevPAR growth, including the hotels that were recently acquired and those that were coming off renovation?

I guess the short answer is I don't have that number at my fingertips, but that's something we can take a look at. I would probably say, broadly speaking, I would be surprised if it would be dramatically different from that, though. We have -- we're going to have a couple of hotels that are still under construction that aren't in because of that reason. But by and large I don't think there is going to be a big difference between the two metrics.

In fact, thinking a little bit quickly on my feet, we're going to be seeing a huge increase from the Helmsley year-over-year. So to be honest, when you average that all together, it could be a bit higher. But I honestly don't know if the top of my head the answer to that.

Okay, and on the margins, you explain some issues that are weighing on 2013 margin growth, which does seem low relative to the RevPAR growth you're going to generate. But part of that may also be slower growth of food and beverage revenue. As group business continues to get better, do you see any potential for an acceleration of food and beverage revenue growth in 2013?

That's a great question, Josh, because that's -- food and beverage revenue, this recovery has been more difficult to predict then anytime I've been with the Company. You know, and even if you look at what happened in the fourth quarter where it was up 11%, the reality is if you take New York City and D.C. out of the equation for the fourth quarter, and then you'd see if you looked across the whole rest of the country, food and beverage revenues were up 4.3% fourth quarter, so pretty much in line with what we had seen for the rest of the year.

When we look at December we were up 5%. You look at January we were up 7%. So at the end of the day, what we tried to do it is because we've seen some inconsistency, and because so many of the groups are really not determining their full food and beverage sort of offering until a relatively near-term period before their event actually occurs, we chose to go with what I think -- hoping is going to prove to be a conservative outlook of 2% to 4%. But you know, generally have been on the high end of that encompass what we did in 2012.

Certainly if we see some group business comes in the way we like and people feel optimistic about spending, doing better on that front is certainly possible.

Can you just remind us what the margin sensitivity is? I know the food and beverage outlets tend have low margins, but the food and beverage associated with meetings, can you remind us what the margins are on those? And to the extent that the spending is a little bit higher, what the potential flow-through could be?

You know, generally, if you look across our portfolio the absolute margins in food and beverage are kind of in that 26%, 27% range. We would typically expect to see flow-through well above that. But as you pointed out, it depends a bit on whether comes from outlets or whether comes from catering.

To be somewhere in the 30% to 40% range on food and beverage, given that we do expect strong group business in the year, is certainly reasonable.

Okay, thank you.

Felicia Hendrix, Barclays.

Hi, good morning. Ed, I think this is the most bullish I've ever heard you.

I think that may just be because of maybe what you've heard from some of the other calls. I sound the same, but it seems better (laughter).

You don't sound the same, you sound good. No, but that actually gets to the crux of my question. So you had one competitor who is more cautious regarding the economy and some things that might happen with the government. And then you had another competitor who was more cautious regarding the group business. And just wondering -- are you leaving enough room for error?

It's a great question, and we certainly did some thinking about that on our side. We've been -- the short answer is we think we have. But I'll be honest with everybody, is we have not -- in coming up with our outlook for this year, we have not assumed that the sequester issues snowball into a bigger problem, say a problem similar to what we saw in the economy in the summer of 2011.

We have assumed that there would be impact in D.C., which is certainly a market that is going to feel some pain as a result of sequester and we've seen some evidence of that already. We do think that some of the impact of that to will be felt perhaps more in the upscale segment than necessarily in the upper upscale segment, but I wouldn't say that we will be immune to that.

But on the other hand, we've had good group on the books for the second half of last -- as when you look at 2013, our group bookings have been solid. We feel good about the group bookings we have on the books for this year.

What we're hearing from our operators is that the group booking pace -- that the bookings they're looking at, that they've seen so far this year continue to be strong. Transient has been quite good. The year got off to a great start.

And while D.C. was part of that, as I just commented earlier, D.C. was 1% of that growth in January. But after that, even during that period and after that, we've had very good RevPAR growth.

Granted there are a lot of risks out there, are frankly, as an industry we've been dealing with those risks now for probably two or three years. But when we separate ourselves from being worried about that and look at the evidence we can evaluate, we just feel like are going to have a good solid year. Obviously things could happen that could be worse, but the bottom line is if we look at the facts in front of us, it feels pretty good right now.

Great. If we could just switch gears to Europe for a second. The hotels in your European JV also they reported better RevPAR results than some of your peers who also operate in Europe. So I'm just -- would you attribute that to location, type of property or something else?

I'm sure it's a little bit of both. But the way I would look at Europe right now is there are sort of two big factors that affect what happens in European hotels, is the way we look at it. The first is that there's no doubt the weak economy in Europe has caused business travel to be lower, and so we have seen that in our special corporate business and we've seen that some of our corporate group business.

And so what we find is those months of the year that are driven primarily by local sort of domestic travel, you tend to see weaker results. But we're in -- converse of that are those markets that attract international leisure. So that's London, that's Paris, that's Barcelona, that's some of the Italian markets.

Those markets, because Europe is still a primary place for the entire world to visit for leisure purposes, those markets are outperforming over the cycle and they've outperformed over the last 12 months. So I think to ultimately to get to the answer to question, it's because we are in a lot of those leisure destinations. And as we've mentioned before fully 40% of our business at those hotels comes from outside the EU and the UK. The bottom line is we've had better performance because of that.

Okay helpful. And then just finally you might have said this and if you did I apologize. But for your 2013 disposition program, have you given us -- have you quantified what that could be?

No, we didn't do -- in our outlook we didn't try to quantify either acquisitions or dispositions. What I would say, though, is we did comment that we had sold over $400 million of hotels this year including the Marquis, rather last year, including the Marquis as a 2012 sale.

As we think about sales going forward in 2013, we would certainly love to do sales [in a leap] that same level. As always, since it's not liquidity driven or event driven, it's really going to see around what price we can get and we go to be a seller.

Okay great. Thanks so much.

Andrew Didora, Bank of America Merrill Lynch.

Hi, good morning. Ed, you just mentioned in response to one of Felicia's questions that you're seeing some evidence of the sequester already in your business. I guess could you be a little bit more specific just in terms of what you are seeing? Have there been any cancellations and just really a hesitancy to book? And then as a follow-up, can you just remind us what percentage of your business comes from government?

Sure. I guess I don't know that we're necessarily seeing it. Let me clarify. I said that we were we had a conservative outlook about Washington.

The reality is, so far, I wouldn't say that we have really seen anything significant that's happened in the last 45 days that we would relate to the sequester. Now, what we would say more broadly, so some of this is why our perspective on this is different from others, we've been seeing for probably the last 8 to 10 months, we've been seeing some reduced bookings from some of the government-related industries. And we certainly have not seen the same level of government business in the second half of 2012 that we have seen in prior years.

But I don't think we've seen anything that's happened in the last six or seven weeks that we would necessarily tie to the sequester. The net of it, though, is recognizing that the sequester is coming, or at least appears to be at this point time. We have assumed that our D.C. hotels would probably be a bit softer than we would like because of the impact to that.

Now as it relates to the question of around what government represents for us, I would tell you that all -- excluding group and transient, and looking at government and government-related, so the contractors that are directly working with the government, we would generally put that somewhere in the 6% to 8% of our overall business. It would obviously be a bit higher in D.C.

Now I'd also note though that this tends to be our lowest price business, and so as we get to these higher levels of occupancy and we start to talk about mix shift, this is exactly what we're trying to shift away from is government business, so the hotels have been focused on that in general. And as a result, I hope that it will be less impactful than it may have seemed at first glance.

That's helpful. And just one other question, just when I look at your leverage levels you have certainly come down a little over a turn over the past two years, but a lot of that coming from EBITDA growth. Where would you like to see your leverage be as we get into later parts of the cycle? And do you see the opportunity to lower your absolute debt levels from here?

Overall, I think what we've been pretty consistent about saying is that would like to get to about 3 times leverage. We are sort of comparing to where we were in the prior cycle, which was in the mid-3 range. And I'd say now, thinking about the appropriate debt to EBITDA levels we would like to get down to around 3 times.

I think the bulk of that will come from improvements in EBITDA. But it's conceivable that some of our asset sales may be applied over time to pay down debt.

David Loeb, Robert W. Baird.

If I could start with a couple for Larry; Larry, on the pro forma quarterly information, if you could put that out sooner rather than just when you release the quarters, that would really help us a lot. Is that possible?

Yes, David, one of the issues obviously is we're the process of selling assets and other things. So the comp set could change, so we're really focused on only really putting out one number, one time, and not updating that for asset sales.

Okay. And given the pretty low interest rates in the debt market, would you consider doing a bond deal now even though it looks like use of proceeds would be some debt reduction now or later in the year. But given these rates, is that something that's enticing?

The rates are very good, we don't comment on individual bond deals in advance. Obviously it's something that we look at on an opportunistic basis. We also balance asset sale process, available cash, other things as we look at our debt needs. So it's something we continue to evaluate.

Okay and Ed, what do you think about the share buyback with the price in this range? And how do you evaluate accretion from that versus the opportunity -- the returns you could get on acquisitions?

Here's what I would say that, David, is that before -- as we thought about share buybacks in the past, and I remember we had some fairly extensive conversations about this topic on a call maybe a year or so ago, we generally would look to do that either from cash flow that we would generate from operations or from asset sales. So, certainly, whenever we start to -- when we generate the cash flow or when we have asset sales, we tend to look at what our options are in terms of what we think is going to provide the best return.

Should we add the ballroom in San Diego? Should we buy a hotel somewhere or should we buy back stock? So I would say in general that is something that were always considering.

I would add, though, that at this stage I would say that we still -- going back to the prior question about leverage levels, we've been pretty consistent about the fact that we want to continue to reduce our leverage and make that balance sheet, which is already I think the strongest in our sector. We want to make it even stronger because we just think that will help our overall cost of capital and make us that much more competitive, as well as at a margin of safety in a sometimes cyclical business.

So I would say we are probably a little bit more focused on the balance sheet goal than we would necessarily be on buying back stock. But a lot of that will kind of all tie in with exactly how many assets are we able to sell. And then in the context of that, what is the opportunity -- where is the opportunity to reinvest those proceeds?

Okay, and one more if I can; what is your view on the acquisition market in Europe these days? Do you still have a significant advantage in terms of access to debt capital?

I think we do, I think we do. What we found on the portfolio that we acquired at the end of last year is that the combination of Host with the Government Investment Corporation out of Singapore, combined with a large Dutch pension fund, APG, who is the third partner in that venture, that lenders seem to be far more interested in lending to three well-capitalized partners such as ourselves versus some of the other folks that might be active in the market.

So, while I know it has been difficult in general to attractive debt capital in New York, we've been fortunate that we've been able to do it. And I think that continues to be an advantage as we look to acquire hotels in Europe.

And are there significant acquisition opportunities out there today?

You know, there are -- I wouldn't say that the pipeline in Europe or the opportunities in Europe are quite as many as what we would expect to see in the US. And of course it's a smaller market in general in some ways, so that's not abnormal. But even adjusting for that, I would say there are fewer opportunities there. But there are a few.

You know, our focus in Europe is really at this point primarily in Germany, because the portfolio is not well-invested in Germany and that represents a market we have wanted to get some exposure to. And then I also think that if we could find something that was priced appropriately we'd be interested in buying into London, although we would probably prefer to be buying more off of 2013 numbers than 2012, given that the Olympics was there last year.

Great, thank you.

Ryan Meliker, MLV & Co.

Good morning guys, nice quarter. Congratulations. Just a couple of quick questions and, Larry, I guess not to piggyback on what David said, but I don't know if there's any way to get, you know, instead of the breakdown of EBITDA by quarter, maybe the calendar quarter total RevPAR levels through 2012 might help us in terms of modeling. I don't know if that's something we could get from you guys at some point.

But then the other question I had was just if you have any way to quantify the impact that you think your maintenance CapEx had on your portfolio in 2012. That obviously will be a little bit more of a tailwind in 2013. That would be helpful too. Thank you.

You know, I guess on the first question let me just say is that we will do our best to provide you guys with the best information we can on some of those issues. I mean, to some degree this is a very challenging exercise for Marriott, and consequently it becomes a challenging exercise for us. So we'll do the best we can to provide as much clarity as we can.

As it relates to be impact of the capital improvements we did last year on the kind of operations, I don't know that we really can give you kind of a hard number to say that last year it reduced RevPAR by a percent, because it's just so -- it varies so much by assets. Some assets it was usually impactful and others it wasn't. I do think it does provide more than just 25 or 30 basis points worth of wind as it relates to this year, but exactly what it will be is frankly hard to predict.

Okay, but more than 25 or 30, so at least it's material which was helpful. And then I guess the other question, you talked about this a little bit with response to your last question in Europe. But where are you guys focused in terms of acquisitions in 2013? Where do you think the best opportunities are? Is it in the US? Is it in Europe? Is it resort, urban, full-service, select service? Where do you think Host will be spending its money?

I would say if you did a quick tour of opportunities for us right now, you know our primary market that we're going to focus on is the US. And I'd say I think we've been pretty clear of late really focused on a series of gateway markets. I think the markets would be most interested in acquiring would be in Miami, and then some of the California markets where we're underrepresented. I'd probably add Seattle at the mix, too, as another market that we would be interested in acquiring in.

I think if you look outside of Europe -- or outside of the US, I already commented on where we would be interested in Europe. We continue to be very bullish on the Brazil market. The initial investment we have made in that market has performed extremely well, and so we would like to invest some more capital there.

I think in that area on the full service side it would be in the form of acquiring existing assets because we would feel comfortable. You could acquire those at discounts to replacement costs. We would also entertain one or two incremental investments and to-be-built properties that would probably be in select service area, because there is certainly a need for that in Brazil.

When we look at Asia, the market that's most intriguing to us right now is Australia. The performance of the assets we have acquired Australia to date has been very strong. And as we look at how we expect Australia to perform going forward, I think we have a good understanding that demand will continue to grow. And fortunately in those markets, somewhat similar to the US, supply is very low, and so that creates in our minds and opportunity for a successful investment.

Okay, that's helpful. And then since you mentioned development in Brazil, obviously you guys have the national property with White Lodging here in the US. Any plan to do more development in the US?

The short answer is probably. You know, I think we're looking at some opportunities right now. I think that if those opportunities would probably show up, they would be similar to the White Lodging example, meaning that it would be urban limited service is what we'd be looking to invest in.

But I don't want to signal that we're about to engage in a big move towards development. I would view these as more isolated opportunities in target markets that I just identified, but not a schematic move on our part.

That makes sense. All right, thanks a lot for answering my questions.

Harry Curtis, Nomura.

Good morning, how do you balance your appetite for growth versus shareholders' appetite for dividends? And as an adjunct, is there a target optimal size or locational mix that you're trying to achieve? And how much investment might it take to get there?

You know, Harry, I guess what I'd say is on the first point is that the dividends usually, for us, is driven by what our taxable income is. So we have typically not tried to distribute more than what we have -- what we are required to do. I imagine, though, and thinking down the road, there's clearly going to be a point in the cycle where we are going to conclude it does not make sense to invest because the pricing is going to be too rich. And so the -- and if we're at that point where, hopefully, when the pricing is rich, that means that Greg and his team are actively selling a bunch of assets.

So what will naturally happen as a result of that is that if we're selling assets, generating gains, and not reinvesting the proceeds in new hotels, our dividend will increase because we will be dividending out the profits from asset sales.

Now, on the other hand, I think as we have tried to be thoughtful about how our portfolio is positioned, and of course we've described a couple of times the fact that we're really in the US looking at a series of target markets. Just to make it clear to everybody where we're most interested in owning at this point, it's really Boston, New York, D.C., South Florida, Chicago, Seattle, San Francisco, L.A., and San Diego. Those gateway markets are the markets that we think in the long run are going to outperform.

We would like the bulk, but I don't think I'd say 100%, but certainly the bulk of our EBITDA in the US to be coming out of those markets. I think we're at the point right now where we're probably at about 70% to 75% of our EBITDA coming from those markets. I'd like to see that percentage be higher.

But at the same time there are -- there are going to be -- there are some great hotels that we have that I think are more are more valuable in our hands than the sale prices we might get. So we wouldn't be necessarily looking to exit those hotels until pricing improves in a material way.

And I would also say looking down the road that despite the fact that we generally want to be in those target markets, I am sure there will be some opportunities that will turn up that we'll realize are compelling, and so we'll decide to invest outside that. But I think overall 80%-plus in the target markets and something less than that outside of that would make sense to me today.

And do you have any sense, any rough estimate of how much investment it's going to take to get you there, maybe net of divesting some of your less prioritized hotels?

You know, Harry, I think we could probably do it with just -- by reduction and reinvestment. I don't know that we have to grow. I generally have thought, though, over time that we are -- as long as we think the growth is accretive, as long as we are generating NAV improvement, generating earnings improvement, which I would then hope would translate into share price improvement, we would generally be predisposed towards growth. But I do I think you could certainly get there via subtraction, too.

Okay, thank you.

James Sullivan, Cowen and Company.

Good morning, thank you. Ed, I just want to make sure I'm clear on the adjusted EBITDA guide. I think your comments said that it included the impact of completed dispositions, but did not include any assumption for acquisitions. Although at the same time you do expect to be a net acquirer this year. Is that right?

Yes. That's correct, Jim.

Okay, and on the sale of the Atlanta Marriott, there was a $21 million gain in the first quarter. And does the adjusted EBITDA number include that or exclude that?

It does not include that.

Okay, and then finally for me, you mentioned in your prepared comments in terms of what gives you comfort on the demand side, continued good demand on internationally-ward bound travel. And I'm just curious if there are any leading indicators that you have that give you comfort fare in terms of say 2013, 2014 with demand continuing to grow from that segment?

You know I think the only -- there's probably not an official public stated metric, that unfortunately a lot of the information around international travel tends to be very much delayed. But in talking with our asset management team and their conversations with the hotels, the feedback we're getting is that we're still seeing a very strong influx of travelers from international markets, consistent with the sort of what we've been seeing over the past 24 months.

So they're still seeing -- whether it's visa reform, whether it's greater wealth in those markets or in some cases better airlifts, the bottom line is that the growth in international travel that we've been seeing since the Great Recession has at least stopped going downwards, has been continuing.

Okay, and then final question for me concerning your credit rating. I believe you still have a split rating. And I'm curious, as you think about approaching the bond market, your bonds have traded as if they're investment grade rated. And I'm just curious if you -- if I'm right on that split rating, if you do become an investment grade rated issuer, to what extent if any do you see some room for improvement in your spreads?

Being split rated, Jim, we only picked up a little less than half of the improvement in our spreads than we'd get if we were purely investment grade. (multiple speakers)

You would you estimate the improvement that you get if you were investment grade rated at how many basis points?

I'd say at least 25.

Okay great, thank you.

Susan Berliner, JPMorgan.

Good morning. I just wanted to follow up, I guess, on that question. I guess, can you just comment on where you stand on the rating agencies, and if you think that you should already -- according to our math, you should already be fully investment grade rated, and I guess how important that rating grade is to you? And then another question, just when you look at the secured markets versus the unsecured markets, what's kind of the differential in spreads there?

The most important thing with investment grade is having access to capital. In very dire times, the high yield market will shut down. It shut down for nine months in 2008. So, access to capital, but it's also obviously cost of capital.

At this point, where we could do a bond deal, call it in 10-year 4.25%, that is equivalent to basically where the light companies are as well as CMBS. So they're all about at the same spot.

Okay.

So another way to look at that, of course, is to the extent we do end up with a dual investment rating, we would be borrowing at less than where we can if we were borrowing from the life companies.

And I guess just with regards to the rating agencies, do you think you have all the metrics now that would get the rating agencies to move with the final upgrades?

You know, I think it's probably hard for us to comment on that. Certainly both of the agencies took some sort of action last year. I think one was to literally upgrade us. The other was to change our -- (multiple speakers)

Positive outlook.

Positive outlook, so as you can well imagine, there's ongoing conversations with the agencies to throughout the year. And I think with the fact that you're seeing some of these changes suggest that we've made good progress from their perspective.

You know I think we would like to get the -- ultimately would like to benefit the cheaper debt with being fully investment grade. I think the bigger focus sometimes internally for us, though, is on making certain -- it's really on the broader balance sheet objective, because we think the market has a tendency to pick up the benefit of the balance sheet in our pricing anyway. But at the end of the day it will ultimately be beneficial to be investment grade rated by both S&P and Moody's.

Great, thanks very much.

Carlo Santarelli, Deutsche Bank.

Thank you, guys, most of my questions have been answered. But just really quickly, if you could talk about any specific markets where, as you out there looking to source deals, where things feel a little bit crowded either on the buy or the sell side?

You know, what you've seen this cycle, and it seems to me that it has been -- maybe you've seen this disparity to a greater degree, is that there has really been a focus on -- everybody on the debt side and on the acquisition side on the larger -- on the gateway markets, the markets that come to mind first, in part because I think the general perception out there that those markets -- the New Yorks, the D.C.'s, the San Franciscos, are maybe a bit safer from a long-term perspective. So that has clearly driven a lot of the acquisition activity, and therefore the disposition activity, over the course of the last three years.

We are hearing, but I don't know that there's any evidence of this yet, that folks are starting to -- both on the lending side and then on the investment side -- are beginning to look at some of the next tier down markets. In some ways I would look at our sale of the Atlanta Marquis as may be a leading indicator of that. I think that was a great asset, but at the end of the day that was a major sale both for us and for the buyer.

And I think it's an indication of the fact that people are now starting to look outside of those markets. So it will be interesting to see as you look at this year how much more activity starts to happen in what previously were viewed as secondary markets.

Great, thank you.

Bill Crow, Raymond James and Associates.

Good morning guys; Ed, just a quick question. It seems to me, as we talk to investors, there is more of a focus on M&A potential today than there was six months ago. And I think it's just the pool of capital that's out there chasing deals and sovereign wealth, et cetera.

I guess my question is two-part. To what extent, as you look at the landscape, are you interested in participating should we get another round of M&A activity? And if so, are you doing any homework at this point to be ready for it?

You know, I guess what I would say broadly is that we obviously have the scale to do larger transactions. So we always are at least trying to be thoughtful about what potential transactions might be out there.

We also know, though, that history has suggested that while we've done a couple of larger deals over the years, the reality is that we generally built the Company one acquisition at a time. So in terms of how we are deploying resources and things like this, at this point in time, it is emphatically far more focused on looking at the individual transactions that are out there, that are in our pipeline as opposed to necessarily looking at larger transactions that might fit into the M&A framework.

But you wouldn't be averse to looking. Is that a fair statement?

You know, I -- of course not.

That's it; everything else was asked and answered.

Great, thanks, Bill.

Robin Farley, UBS.

Great, thanks most of my questions have been answered. I just -- I don't think that you gave a comment on your expectations for RevPAR in Europe in particular in 2013. And I know you have the Companywide, but I wondered if you could give a little color. I imagine that's similar to what your North American range is, but if you have commentary in Europe?

And also in North America, do you have any comments on corporate negotiated rates and where they've ended up for 2013, and just whether that was better or worse than what you were thinking two or three months ago?

Yes, for the 18 properties, including the five we just bought, in constant euros it's 2% to 3% RevPAR growth.

That was in Q4 was 2%. That's also your expectation for 2013?

2% to 3%.

Okay, and the corporate --

And as it relates to the special corporate discussions, I think we're -- I think what we've generally seen is plus or minus 5% to 6% terms of special corporate rate increases. I mean part of -- what I will say in this area is that we bulked up in this area through 2009 and through 2010, and probably a little bit even in 2011.

Last year we didn't necessarily try to grow those relationships a lot because we were looking for really trying to substitute in higher price business. And I think we've seen a little bit of continuation on that theme. So the actual rate negotiations are probably in that mid-single digit sort of area. But we might see better performance in that overall because some of the cheaper business is now not necessarily getting access to the hotels the same way it did a couple of years ago.

Is that 5% to 6% a little bit lower than kind of high single-digit range you might have expected for the year two or three months ago?

I'm sure that we started -- our operators started off with a more aggressive position. But I think from our perspective that's in line with what we thought would likely happen.

Okay great, thank you.

That's all the time we have for questions today. Mr. Walter, I'll turn the conference back to you for additional or closing remarks.

Well, thank you all for joining us on this call today. I can tell from all the reports I've seen lately that this has got to be an incredibly busy week for all of you.

We appreciate the opportunity to discuss our results and our outlook, and we look forward to providing more insight to how 2013 is playing out when we do our first-quarter call in the very beginning of May. Thanks everybody.

And that does conclude our conference call today. Thank you all for your participation.