Host Hotels & Resorts Inc (HST) 2013 Q1 法說會逐字稿

Good day, and welcome to the Host Hotels & Resorts, Inc. first-quarter 2013 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Gee Lingberg, Vice President of Investor Relations. Please go ahead.

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

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 reconciliation with 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 Greg Larson, Executive Vice President, Corporate Strategy. This morning, Ed will provide a brief overview of our first-quarter results, and then will describe the current operating environment, as well as the Company's outlook for 2013. Larry will then provide greater detail on our first-quarter results, including regional and market performance. Following their remarks, we will be available to respond to your questions.

But before I turn the call over to Ed for his prepared remarks, I would like to remind everyone that, with the beginning of this year, we adopted calendar quarter reporting periods compared to 2012, where we reported based on the fiscal quarters that had been used by Marriott International. Accordingly, our revenues, net income, adjusted EBITDA, diluted earnings per share, and NAREIT and adjusted FFO per diluted share quarterly results for 2013, are not comparable to the historical quarterly results for 2012, due to the change in periods.

To enable investors to better evaluate our performance, we have presented 2012 RevPAR and certain historical results on a calendar quarter basis we call the 2012 as-adjusted results. The 2012 as-adjusted first-quarter results include an adjustment to add the operations for March 24, 2012 through March 31, 2012, for our Marriott-managed hotels, and an adjustment to add the March operations for our hotels managed by Ritz-Carlton, Hyatt, Starwood, and other managers who report on a calendar basis, as our historical first-quarter results only included January and February operations for these properties. The following discussion of operating performance will include a comparison between the three months of operations ended March 31, for both years.

And now I would like to turn the call over to Ed.

Thanks, Gee, and good morning, everyone. Before I get started, let me apologize in advance for the state of my voice. The allergy season in D.C. has been particularly bad for me this week. It probably wasn't the best idea I had to attend my son's lacrosse game last night, but was a good one to have seen. I assure you I feel much better than I sound, and more importantly, I feel much better about our business than I sound.

So with that, we are pleased to report that 2013 is off to a strong start, with another quarter of outstanding results for the Company. Although the timing of the Easter and Passover holidays presented difficult comparisons for the month of March, overall strong rate growth, coupled with margin growth that was better than expected, led to earnings results that exceeded consensus estimates. Consistent with our commentary on the year-end call in February, we continue to feel good about the fundamentals of our business and our outlook for the remainder of the year, which I will discuss in more detail in a few minutes.

First, let's review our results for the quarter. First-quarter RevPAR for our comparable hotels increased 5.1%, driven primarily by an increase in our average rate of 4%, coupled with an occupancy improvement of 0.7 percentage points to over 72%. The calendar challenges led to a slight reduction in comparable food and beverage revenues, while other revenues jumped 5.6%, which resulted in overall revenue growth of 2.6%. These year-over-year revenue growth percentages would be roughly 100 basis points higher if 2012 had not been a leap year.

Excellent cost containment measures, combined with strong rate growth, led to solid margin expansion, as comparable hotel adjusted operating profit margins increased 85 basis points. Adjusted EBITDA was $283 million, an increase of more than 10% over last year. Our first-quarter adjusted FFO per diluted share was $0.28, which exceeded consensus estimates, and reflects a nearly 17% increase over last year. Overall, we are extremely pleased with our results.

The key drivers of our first-quarter results were solid increases in transient average rate and demand. As I mentioned earlier, the shift in Easter and Passover from April in 2012 to March in 2013 created difficult comparisons to the prior year, and impacted our downtown hotels that are highly reliant on group and business travelers. However, our hotels in resort locations benefited from the holiday shift, as RevPAR increased 11.6%.

Starting with our transient business, we experienced rate increases across all of our business segments in all three months of the quarter, resulting in a more than 4.5% increase in rate. When adjusted for the leap year, demand was also positive in all three months of the quarter, and our highest rated premium segment increased over 13%. In addition, demand for our higher rated promotional segments also increased double digits, while our lower rated government segment declined 1.5%. Holiday and leisure travel positively impacted our March results, with transient demand up more than 7% and rate up 4%, leading to a revenue increase of 11.5% for the month. Overall, our first quarter transient results, when adjusted for the leap year, reflected an increase in demand of more than 5%, and combined with a rate increase, resulted in more than 10% increase in revenue.

On the group front, 2013 started strong in January, with an increase in room nights of nearly 3%, coupled with a rate increase for that month of nearly 3.5%. In February, adjusted for the leap year, demand was essentially flat, while average rate was up more than 1%. In March, demand was up more than 4.5% in the first three weeks of the month, but volume in the final holiday-impacted week declined nearly 45%, resulting in a 12.5% decline for March with rates up slightly. Overall, group demands adjusted for the leap year declined by nearly 4%; but from a segment perspective, we were pleased to see an increase in our high-priced corporate business. The bulk of the decline was driven by reductions in our discount business, which included a few cancellations from government and government-related groups.

In addition, a decrease in short-term government bookings contributed to the shortfall. Group rates improved by more than 1%, leading to a revenue decline in our group business of approximately 2.5% for the quarter. Looking at the rest of the year, while booking activity in the first quarter was weak, our booking pace remains solid for the remainder of the year, with pace up almost 3% and revenues up over 6%. At this point, we believe about 85% of our full-year group bookings are already under contract. The second and fourth quarters look quite strong, while the third quarter is essentially flat, in part due to the absence of the Republican Presidential Convention in Tampa, where our hotel served as the headquarters.

Looking further out, bookings for 2014 picked up very nicely during the first quarter, suggesting that we are seeing some lengthening of the booking cycle. As we mentioned last year, we are working on various value enhancement projects, where we evaluate and find alternate uses for existing hotel space or excess land to enhance or generate new revenue. Specifically, this month, we sold approximately 4 acres of land adjacent to the Newport Beach Marriott Hotel & Spa for $24 million. The land, which had previously been used for tennis courts, was sold to a luxury home builder, and has been approved for the development and sale of 79 luxury condominiums.

The Company recognized a gain of $21 million, which will be included in adjusted EBITDA and adjusted FFO next quarter. On the transaction front, we continue to expect to be active on both acquisitions and dispositions, as we look to increase our investment in target markets and look to reduce our exposure in non-core locations. We intend to be a net acquirer in 2013, and have active pipelines both in sales and acquisitions, and anticipate acquisition activity in the range of $135 million to $150 million in the second quarter. However, given the difficulty in predicting the timing of completing transactions, our guidance does not assume the effect of any acquisitions or dispositions.

Turning to capital investments for the first quarter, we invested $21 million in redevelopment and a return on investment capital projects. We completed the construction of a pavilion at the JW Marriott Desert Springs Resort & Spa, and also converted a restaurant into meeting space at the Westin New York Grand Central. For the full year, we expect to spend approximately $90 million to $100 million. We spent approximately $15 million on acquisition projects in the first quarter. We completed the renovation of all of the 888 guest rooms of the Grand Hyatt Washington, and continued work on the guest room renovations in the second tower of the Manchester Grand Hyatt in San Diego. For the full year, we expect to spend $40 million to $50 million in total on these projects.

In terms of maintenance capital expenditures, we spent $87 million in the first quarter, and expect to spend $270 million to $290 million for the full year. Projects in the quarter included room renovations at the Philadelphia Airport Marriott, the San Francisco Marriott Marquis, and the San Diego Marriott Mission Valley Hotels, as well as the renovation of almost 40,000 square feet of meeting space and public space at the Ritz-Carlton, Tysons Corner and over 36,000 square feet of meeting space at The Westin Denver Downtown.

Now let me spend some time on our outlook for the remainder of 2013. With fundamentals expected to remain strong for the balance of the year, we continue to expect our comparable hotel RevPAR growth for the year to be 5% to 7%. On the margin side, given the increasing importance of rate growth, we believe we can drive incremental profitability and strong flowthrough. Therefore, we expect margin increases of 60 to 120 basis points, which is 10 basis points higher than what we described in February. Based on these improved operating assumptions, as well as the gain on sale of the land at the Newport Beach Resort & Spa, we are increasing our adjusted EBITDA guidance to $1.275 million to $1.335 million, and our adjusted FFO per share for the year between $1.25 and $1.33.

Roughly half of the improvement in FFO was related to the expected higher EBITDA, and the other half reflects the benefits of less expensive debt. Confirming the benefits of the capital investment decisions we have made over the last few years, which are contributing to stronger operating results, the midpoint in our guidance suggests EBITDA growth of 10% over 2012. The combination of better operations, opportunistic debt refinancings, and the careful use of equity to fund growth have generated, at the midpoint, adjusted FFO per share growth of 17% over 2012.

Looking at our dividend, we increased our first-quarter common dividend to $0.10 per share. Dividends for the remainder of the year will depend on operating results and gains on asset sales.

In summary, we are very pleased with our results for the quarter and remain confident about our outlook for the remainder of 2013. Based on our expectations for fundamentals in the business, including a supply growth forecast that remains below historical averages, we continue to believe that the current growth cycle in lodging will be sustained. Our portfolio is well-positioned to benefit from these strong fundamentals, particularly given the significant investment we have made in our assets in the form of maintenance capital, ROI and repositioning investments.

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

Thank you, Ed. Let me start by giving you some detail on our comparable hotel RevPAR results. Our top-performing market for the quarter was San Antonio, with RevPAR growth of 16.6%. Occupancy improved 4 percentage points, and ADR improved over 10%, as the group mix shifted to higher-rated association and corporate business. We expect San Antonio to have a weaker second quarter, and then perform better in the second half of the year due to strong citywide bookings. RevPAR for our Boston hotels increased 14.2%, driven by a 7 percentage point increase in occupancy, and an improvement in ADR of over 2%.

The outperformance was driven by in-house group demand, which created compression to drive rate. We expect our Boston hotels to have a good second quarter due to solid in-house group bookings. The Marathon bombs and subsequent manhunt in Boston had a small negative impact on our hotels in the second quarter.

Our Miami/Fort Lauderdale hotels also performed well, with RevPAR up 12.8%, and ADR increased nearly 15%, and occupancy declined 1.5 percentage points. Strength in both group and transient bookings allowed our hotels to drive rate. We expect our Miami/Fort Lauderdale hotels to perform in line with the portfolio in the second quarter. RevPAR for our New York hotels increased 12.1%. ADR improved slightly, but occupancy increased more than 8 percentage points.

Demand in New York was very strong. One component of that demand is overseas arrival. At this point, approximately 1/3 of the overseas arrivals into the US go to New York City, which is 20 percentage points better than Los Angeles, the second highest market with 13%. With renovations last year at the Sheraton New York, the New York Marriott Marquis, and the W Union Square, our first-quarter results in 2013 benefited from the favorable comparison, although first-quarter results this year were negatively affected by the final phase of the Sheraton New York's meeting space renovations and mechanical work at the W New York. We expect our New York hotels to continue to perform well, due to an increase in both group and transient demand and less overall renovation disruption.

Our Houston hotels had a great quarter with a RevPAR increase of 11.8%, substantially driven by improvements in ADR from both rate increases and the shift in the mix of business to higher rated segment, as both group and transient demand were strong. Our Houston hotels will continue to perform well in the second quarter, due to solid group and transient booking.

Our Hawaiian hotels continue to outperform our expectations with a RevPAR increase of 8.4%. Occupancy improved nearly 3 percentage points to 89.4%, due to strong group and transient demand, which drove rate growth of 5%. We expect our Hawaiian hotels to continue to perform well in the second quarter.

Our Seattle hotels had another great quarter with RevPAR up 7.6%. Occupancy improved nearly 4 percentage points, as transient demand was very strong, and ADR increased by 1.2%. We expect Seattle to have a great second quarter due to excellent group bookings, which will help to drive rate and RevPAR growth.

RevPAR for Washington, D.C. hotels increased 2.3%, as occupancy improved 40 basis points and ADR was up roughly 2%, due to the presidential inauguration. Our downtown hotels performed much better than the suburbs, with RevPAR up 5.3%. We expect D.C. to continue to struggle due to weakness in government and government-related travel somewhat stemming from the sequester.

With our San Francisco Marriott Marquis under renovation, RevPAR for the quarter in San Francisco was down 2.5%. Occupancy declined roughly 4 percentage points, while rate was up 3%. RevPAR for the Marquis was down 13%. Excluding the Marquis renovation, RevPAR in San Francisco would have been up 6.7%. We expect our San Francisco hotels to perform much better in the second quarter.

Our San Diego hotels struggled in the first quarter due to poor citywide demand, and were affected by rooms renovations at three of our hotels in the quarter. Occupancy was down 4.6 percentage points and ADR was down nearly 2%. We expect San Diego to perform better the rest of the year.

Excluding the Sheraton Roma, which was under renovation last year, the pro forma RevPAR for the 18 hotels in the European joint venture, which includes the five-hotel portfolio acquired by the venture in December of last year, decreased 1.5% for the quarter in constant euros, as ADR decreased roughly 1% and occupancy fell slightly. EBITDA margins decreased 220 basis points. The overall weak eurozone economies and unusually cold winter affected demand.

The Paris Marriott Rive Gauche and the Renaissance Amsterdam performed the best in the quarter, while the Pullman Paris Bercy and Sheraton Skyline underperformed. We expect the euro JV hotels to perform much better in the second quarter.

For the quarter, comparable hotel adjusted operating margins increased 85 basis points. Margin growth benefited, as 80% of the RevPAR growth was driven by improvements in ADR. F&B profit declined 3.6% as a result of leap year in 2012, less group business and the movement of the Easter holiday into the first quarter. Support costs, which include G&A, repair and maintenance, sales and marketing, and utilities, decreased roughly 1%, due to excellent cost controls at our hotels. Property taxes increased 5%.

Looking to the rest of the year, we expect that RevPAR will continue to be driven primarily by rate growth, which should lead to solid rooms flowthrough, even with growth in wage and benefit costs. We expect better food and beverage revenue and profits for the rest of the year due to better group demand. We expect support costs to increase more than inflation, particularly for rewards and sales and marketing, where higher revenues will increase costs, and for utilities, where we expect rates to increase, particularly in the second half of the year.

We are in the process of renewing our property insurance program on June 1. While property insurance was up only 1% in the first quarter, we expect above-inflationary increases in our insurance costs. As a result, we expect comparable hotel adjusted operating profit margins to increase 60 basis points at the low end of the range, and increase 120 basis points at the high end of the range. At this point, we are forecasting that roughly 30% to 32% of our full-year EBITDA will be earned in the second quarter.

During the quarter, we issued our first investment grade senior notes in a $400 million offering at an interest rate of 3.75%, which is 100 basis points cheaper than any non-convertible bond coupon in our history. The bonds have a 10.5 year term and mature in October of 2023. On May 15, the proceeds of the offering, along with available cash, will be used to redeem the $400 million in 9% Series T senior notes that mature in May of 2017 at 104.5%, which reflects an $18 million call premium. The interest savings are substantial at $21 million a year.

We also called the remaining 175 million in 2004 exchangeable debentures, $174 million of which were converted into 11.7 million shares of common stock and $1 million was repaid in cash. These shares have been in our diluted FFO share account for the last few years. All-in, the total cost of the 2004 exchangeable debentures was approximately 4%, well below the 6.8% interest rate that we would have issued a non-exchangeable senior notes bond in 2004. Subsequent to the end of the quarter, we repaid our only meaningful debt maturity in 2013, a 4.75%, $246 million mortgage loan on the Orlando World Center Marriott. In addition, on May 2, we called $200 million of our 6.75% Series Q senior notes. We intend to draw approximately $150 million on our credit facility and fund the remaining amount with available cash in order to redeem the debt on June 3.

After adjusting for these transactions, the Company will have approximately $380 million in cash and cash equivalents, $692 million of available capacity under our credit facility, and $4.8 billion in debt. At this point, our run rate cash interest expense is roughly $230 million a year, and we ended the quarter with leverage of 3.9x net debt to EBITDA. In the quarter, we issued approximately 6 million shares of common stock at an average price of $16.78 per share, for net proceeds of approximately $102 million, which will be utilized to fund a portion of our acquisitions for this year. Additional issuances will be based on the level of acquisition opportunities and the level of our stock price.

Lastly, there is one additional item I wanted to highlight for you. In the first quarter, we recognized a gain of approximately $11 million because the state of Georgia condemned approximately 3 acres of land at the Atlanta Perimeter Center Marriott for highway expansion. We received the cash in 2007, but could not recognize the gain until we completed certain requirements. While this gain is considered NAREIT FFO and has been included therein, we excluded the gain from both adjusted FFO and adjusted EBITDA.

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

(Operator Instructions). Joshua Attie, Citi.

Same-store growth was up 5.1, but the total portfolio is up 6.6. Can you talk about some of the properties in the noncomp pool that drove that upside? And do you expect a gap of that magnitude between comp and noncomp RevPAR to persist through the remainder of the year?

Certainly, Josh. Let me try to clarify a couple of things here, though. The 6.6% change in RevPAR that Josh is referencing is a comparison of what was our RevPAR for all of our properties in the first quarter of last year, compared to what is our RevPAR in the first quarter of 2013 for everything that we own today.

So part of what is captured in that difference -- and the RevPAR in 2013 is 6.6% higher than what it was before -- a big part of what is captured in there compared to our 5.1% RevPAR growth in the first quarter is the strong performance of a number of the hotels that we have invested capital in, and as a consequence, we have significantly improved their operation, as well as some of the hotels that we purchased, which are not part of our comp set, which are performing well. So all of those hotels -- that subgroup that I just described -- had RevPAR growth above 27% in the first quarter.

The other piece, though, of that calculation that we need to remember is that the comp set in 2012 is slightly different -- the overall number of hotels we owned in 2012 is different from what we owned in 2013. So, for instance, what is in the 2012 number is the Atlanta Marquis. What is in the 2013 number is the Grand Hyatt in D.C. So there's two factors that are applying there. But the bottom line point, Josh, that you have identified, which is that the broader portfolio is growing a bit faster than what our comparable portfolio is growing, it's true.

Do you expect that gap of 100, 150 basis points to persist for the rest of the year?

I can't sit here and say that I have exactly looked at it, but the reality is that other than to the extent that those numbers are affected by sales or acquisitions, which would change that relationship a little bit, the reality is it should generally continue at that level.

Okay, thanks. And if I could follow up, Ed, with one more question on equity. You issued $100 million through the ATM in the quarter and that is on top of $270 million that you issued last year. And I understand you are working toward a leverage target of 3 times and that those aren't very big numbers in the context of your market cap, but they do add up over time. And at the same time, asset sales seem like they may accelerate and could be a source of capital for you.

Can you just explain the rationale for the equity issuance? And also is there an acquisition pipeline where you might be able to put some of that money to work in the near-term?

As I highlighted in my comments, we do -- we are looking at a couple of things where we feel relatively confident we may -- we will have a closing in the second quarter on the transaction. And so I guess I would describe the equity raise in March as pre-funding the capital required to complete that acquisition. I would also agree with you that we are intending on seeing sales accelerate over the course of this year, and in general, would like to fund most of our acquisitions out of the proceeds of asset sales.

Okay, thank you.

Andrew Didora, Bank of America.

Just wanted to follow-up on Josh's question with regards to the equity issuance and as it relates to the acquisition environment. I mean, I guess from what we have been seeing out there in terms of transactions, there hasn't been a whole lot of quality out there to this point in time that would probably be very accretive to your portfolio. It seems like you are probably seeing something else in terms of your pipeline. But with -- I guess, with your stock implying you guys trading around [$290] per key, does it ever make sense to maybe be buying back stock at these levels rather than issuing?

You know, as we have described in the past that there's a process that we go through as we sell assets, and then determine what to do with those proceeds, one of the things that we would always look at is whether it made sense to buy back our stock. I guess what I would say is that, so far, as we have gone through that process, we have concluded that it either made sense to reinvest in our portfolio in the form of some of these redevelopments and ROI investments we've made, or it has -- we felt comfortable in redeploying that capital into acquisitions.

Certainly, as we progress through the cycle, and we inevitably reach the point where we are a bigger seller than we are a buyer, then at that point in time, we will again continue to look at whether it makes sense to be buying back our stock (technical difficulty) -- time leverage targets that we have described to you all that we'd like to attain.

Understood. Do you plan, when you close on some of these acquisitions, do you plan on putting additional debt on to help fund those acquisitions? Or is this going to be purely equity?

I would say we are at the point now where we feel pretty good about where we -- we feel good about the length of the cycle. And so, generally -- and we feel good about the progress that we have already made in terms of improving our balance sheet. So the reality is, is as we look at incremental acquisitions, we are thinking of finding those sort of on a pro rata basis in terms of debt and equity, consistent with where the Company is currently capitalized.

Now you are not going to likely see that in the context of, oh, well, we put a secured loan on an asset right after we bought it. Because that's just not how we do things. When we think more broadly about our financing plan for the year, we would be envisioning, if our acquisition activity heated up, and to the extent that it exceeded our asset sale activity, that we would fund that through a combination of debt and equity.

Okay, that's helpful. Thank you, guys.

Thomas Allen, Morgan Stanley.

Just on the operating environment, you talked last quarter about how good you felt around group bookings for later this year. This quarter, you and others seem to maybe be a little bit more cautious. What do you think has changed in the market that is blowing into your bookings? Maybe I am just coming from a Wall Street view, but the equity markets keep on going up. Job numbers keep on beating expectations. Why are groups holding off bookings? Thanks.

I think you have accurately summarized what a number of us have seen over the past quarter, and I don't know that there is a perfect explanation for it. I mean, I would say we still feel pretty good about group. We feel -- as we talked about in our comments, especially the second and fourth quarters of this year look very, very strong from a group perspective. And, just as importantly, when I look out to 2014, we had a very nice jump in terms of room nights in revenues that were booked for 2014.

So the longer-term seems to be fairly positive. But having said that, there was a little bit of weakness during the first quarter relative to overall bookings. I think some of that is probably tied in with weakness in government bookings. I think we did -- I think all of our operators and most of our larger properties saw some reduction in government bookings over the course -- or more than some; something in the 40% range in terms of government bookings during the quarter. So I think that contributed to part of it.

I also think that while you're right about unemployment is -- or employment is improving, unemployment is declining, and certainly today's report seems to be a positive one -- the reality is, is compared to where we have been in other cycles, we are way behind in terms of reducing the unemployment rate. So I -- and just looked the other day and realized that back in '04 and '05, which was when we were starting to approach the really rebuild our whole group pipeline and our group business, we were looking at an unemployment rate that was more in the 5% to 5.5% range, not in the 7.5% and above that we are facing right now.

So while the data that connects employment and group business is not as tight a correlation as some of the others we have seen in the industry, I have still generally found that group, especially corporate group, accelerates when you start to see more employment growth. And today's report in some ways gave me some -- even more of a sense of optimism about what we might see over the latter half of the year.

Very helpful. Thank you.

Joe Greff, JPMorgan.

Ed, you sound horrible, so I feel bad asking a question and making you speak. But I have a question for you on your updated EBITDA guidance. It's up $25 million from where you were a quarter ago. And then, obviously, what you accurately described 1Q adjusted EBITDA nicely beat consensus. And now you're including a $21 million gain here in April. Can you reconcile all those pieces and whether or not 1Q was more in line and then 2Q really is unchanged, adjusted for this gain? Or are you saying to us maybe 2Q through 4Q from an EBITDA perspective is slightly below where you were a few months ago? Thank you.

No, I would say that -- I mean, first off, if you look at the guidance change that we've made, I'd say that the bulk of the lift in the EBITDA guidance is related to the recognition of the gain associated with the sale of the property in Newport Beach. But, however, there is some improvement there that's tied to the fact that we feel more confident about where margins are going to come out for the year.

I would not read our -- read anything more into that guidance other than the fact that we continue to feel fairly good about the whole year. We probably -- trying to get a handle on the first quarter was maybe a little bit more challenging, given the changes in the calendar that we have faced. We did do better than we had expected. And so, as a result, I continue to feel very good about how the year is going to play out. I don't have any less of a sense of optimism regarding the last three quarters of the year than I did in February.

Thank you.

David Loeb, Baird.

Let's try Baird. Can you talk a little bit more about acquisition? It sounds like you have specific transactions that are near closing. Can you give us a little color, if not specifically on those, on what regions you think you'll be most active in? What cap rates are like? What's the state of competition for acquisitions these days?

Sure, David. I guess what I would say is we have been pretty clear about what the markets are that we've been most interested in investing. It is generally in the coastal market, Chicago and Hawaii. And as we are -- I would say right now that the focus for us has -- for this year, is representing -- recognizing the strength that we already have in the Northeast and the mid-Atlantic, has been to focus more on the West Coast markets, with the exception of San Diego. We are certainly looking at some of the markets in Waikiki -- not more in Hawaii, so probably more Waikiki, not Maui, given our presence in Maui already.

And then on the East Coast, I think the one market that we are very interested in adding more exposure is Miami, because we are certainly underrepresented there. And that is a market that has done quite well and we think will continue to do quite well.

If you -- in terms of thinking about where the market is in terms of pricing and competition, I mean, I think we are -- there continues to be a slow flow of assets to the market. I wouldn't say it's a flood. I would say that that's probably reflective of the fact that people are fairly comfortable that the cycle is going to be extended, and so there is no rush to revalue before the theoretical end of the cycle. So I think that's why we haven't seen maybe as many assets on the market as folks had hoped. But having said that, that the brokerage community is probably closer to the overall degree of the flow than we are. And I think they still seem to feel that the transaction activity this year will be pretty comparable to what existed last year.

So in terms of -- let me go back to one follow-up and then I will ask you to come back to cap rates. In terms of global regions, it sounds like your focus is much more US at this point rather than Europe, Australia, other markets?

Yes, I would, I guess, in part, I should correct my answer a bit. I would say we are still looking to invest globally. We have about EUR130 million in equity commitment remaining in the European JV. And our activity there is generally focused in Northern Europe with a primary focus in Germany. We are interested in adding more exposure to Brazil as we continue to like the fundamentals there, and generally feel good about where Brazil is headed. And then in Asia, the market that is getting the most focus, it would be Australia. So you had correctly identified that. Yes, it's always hard to predict what the mix of activity is going to be, but as I've said in the past, we'd like to grow some of these international businesses, but we still expect that the bulk of our activity will happen in the US.

And any insight into cap rate trends?

It is still affected by the markets, because it depends a little bit on how much the market has recovered vis-a-vis prior peaks, and then what the near-term outlook is. But the sense that we have right now is that, if you're in a leading market, high tier, either luxury or upper upscale asset, you're probably still in that 5 to 6 range for a cap rate. And then I think if you moved to select service, you might drop -- that might increase by about 1 point.

Okay, great. Thank you.

Ryan Meliker, MLV & Co.

Most of my questions have been answered, but I was hoping you could give a little more color. Ed, in your prepared remarks, you talked about the lengthening of the booking window. I know Marriott talked a little bit yesterday with regards to 2014 group booking pace accelerating. Can you give us some more color on what you're seeing in terms of who is booking further out? Is it association business that is expanding? And what your pace looks like for 2014 right now?

What we're seeing as it relates to who's booking is it seems to be a combination of both associations who are looking at slightly bigger events; I don't know that they're booking more events, but I think they're booking bigger events, is what we hear. And then I think the other element of it is improved corporate bookings, which is good to see. And so I think that's been what -- that has been what's been driving the improvement. Overall, if you just sort of combined both room night improvements as well as rate improvements, our group bookings for 2014 are up over 6%.

Great, that's helpful. And then another question I was hoping you guys could answer for me was, can you give us any update on how the developments in Rio are progressing? And if you are looking to do anything more along those lines? Certainly, I would think you guys might be at a little bit of an advantage relative to some private developers out there, given limited construction financing and your access to the capital markets seem to be a little stronger than I would say the average private developer. Any color on how those developments are progressing and expansion of that development process?

The project that's under construction that's down in the Barra da Tijuca part of Rio de Janeiro, which is not far from where the Olympics will be held, is progressing right on schedule. And so we've been very happy with our -- the developer and construction team on that project. And everything seems to be headed in the right direction.

I would tell you that the activity that we're looking at in Brazil right now seems to be more on the existing side than on the new construction side, but we would be open to an additional new development project. It just seems that the current flow right now has been more attractive on the existing side because of a couple of opportunities we're looking at there.

All right, fair enough. Thanks for the color.

Ian Weissman, ISI Group.

Can you remind us what percentage of your hotels are currently paying out incentive management fees and how that compares to the peak? (multiple speakers) To the prior peak?

Yes, for this year, based on our forecast, it's roughly, call it, 43% of our hotels pay incentive fees. And it's, call it, low to mid-60s at the peak.

You anticipating -- I mean, I understand it's a different environment -- I mean, what's your expectations about those numbers getting back to peak?

We haven't (multiple speakers) --

I don't know any reason why we wouldn't get back to those levels. I mean, you know, we're -- as we look at where this is headed, I mean, we feel good about where the industry is going. And consequently, I would expect that we would get right up to those levels. And depending upon which assets are missing, I don't know why we wouldn't go buy it.

So -- well, so, ultimately then, you're saying then you believe that the pace of rate growth, which has been somewhat muted just because of -- obviously, weak job growth; group business has been sluggish -- you anticipate that the rate growth environment is significantly going to accelerate from here. Is that fair to say?

I mean, we had pretty good rate growth this last quarter, so I would say that we still expect to see some occupancy growth. But as we look at our full-year, I think you're right that we would expect, over the course of this year, there is certainly a reasonable prospect for higher rate growth than what we had in the first quarter.

Trying to predict where that goes beyond 2013 is a little tricky at this point in time. But I think the main point we are trying to make is that we would expect to see -- to continue to see RevPAR growth above inflation in the future. That will allow us to have margin growth above -- margin grow. All of those factors will ultimately lead to higher NOI, higher EBITDA, and that means our partners, the operators, have higher IMF.

Okay. And just finally -- thank you for that -- and just finally, on the deals, I mean, there is a lot of focus on which markets you guys might potentially be interested in. Is there a potential shift or at least growing interest in acquiring limited service or select service brands at this point? Or hotels?

Yes. I don't know that it's a shift in attitude on our part in terms of acquiring and wanting to acquire them, but I would say that there is more than a handful of transactions that we've been in the discussions about, that would involve what I would describe as urban select service; in city, not in suburbs, but in city select service.

We think it's a natural complement to the hotels we already own. And I think it's a business we felt comfortable we understand. And so, again, I don't think it's going to -- we're not thinking in any way that we're transforming our portfolio in a different direction. But in our target markets, as a complement to the assets we own in those markets, owning some select service would make sense from our perspective.

Okay. Thank you very much for that color.

Jeff Donnelly, Wells Fargo.

Actually, I will start with Larry. Ed, so I will give your voice a rest. (laughter)

I appreciate that.

Larry, just -- I was just curious, in the release you mentioned you had $90 million to $100 million of ROI opportunities. What sort of on leverage returns, can you remind us, do you expect on that capital? And maybe you can talk about the depth of that reinvestment pipeline beyond 2013?

So looking at those assets, Jeff, I mean, we're getting, call it, mid to high-teens on some of those projects. So including our ROIs, energy ROIs, we have got a couple we are working on particularly in New York City. Got a $9 million one there; very good returns. So we -- as from a pipeline, we are constantly looking for those. And as Ed mentioned, we, at the meeting space -- the restaurant that was converted to meeting space at the Westin Grand Central.

So we have been doing them for a long time. And we are trying to do a better job of getting it out there of all the stuff we have been doing. With that, it's adding meeting space when appropriate, getting rid of unprofitable restaurants and converting them into meeting space or other uses. But there is plenty of projects that we are looking out for.

All right, I guess put differently, do you think it's going to -- that's a good run rate maybe for periods beyond 2013?

You know, that's a tricky question. I think that if you just look at what we would typically expect to see in the portfolio, exclusive of the larger projects, it probably doesn't run quite that high. I think it's probably -- you know, I think my guess is it's two-thirds of that. Now having said that, there is a project that we've been working on for a fair amount of time that we've talked about in the past, which is a new ballroom out at the San Diego Marriott & Marina hotel, which would sit between our Hyatt and our Marriott.

And so that project in and of itself is probably in the $90 million to $100 million range. So when one of those comes along, it's going to change that equation pretty radically. But I would totally agree with Larry -- it's just between the opportunity for energy ROIs, and then just looking for opportunities to improve the portfolio in different ways, we never seem to have a shortage of these types of projects.

And maybe switching gears, Larry, can you talk about the market for financing, particularly large hotel assets? There has been a few instances in the last year where either there have been assets in the market or even just competitors, I know, who own hotels that might be $500 million to $1 billion in value. And I think there is always a question mark out there as to whether -- is Host the logical buyer? Who is the buyer for those? Because the question is how do you find the financing, once you talk about mortgages north of, say, $300 million -- do have any sort of experience or color there, and maybe how underwriting terms differ from a, I guess, I'll call it a more typical single asset financing?

Well, Jeff, I mean, you have to -- just go back a little bit. The CMBS market has improved significantly this year. But if you go back to where it was in the '05 to '07 peak, it was -- the CMBS market was $200 million -- $200 billion a year in new issuance. This year, the run rate is much higher. I think the predictions for this year is, call it, $80 billion to $100 billion. And last year, it was, call it, low 50s.

So there has been an improvement in that market. CMBS would be a perfect market for someone to go out and finance on the hotel side. There have been a couple of one-off larger hotels CMBS deals done. But if you had a $200 million -- $150 million to $200 million hotel, what they would do is typically just drop it into one of those securitizations. So that market has improved significantly and we would expect that to continue.

And then -- and maybe just a question or two for Ed. Can you just talk about where you see hotel values today relative to replacement cost? There just seems to be more anecdotes of either billings getting converted into hotel uses or hotels being billed, and I'm curious if you think there is some instances out there where cities -- pricing in certain cities is maybe converging with where replacement cost is?

Yes. I would say as I think across the transactions that we've been looking at, in most instances, you're finding -- certainly on the full-service side, I think you're still seeing that assets are trading at a discount to replacement cost. That discount is smaller in certain markets where the recovery has been quicker. I think some of the West Coast markets like San Francisco might fall into that area. But I think you're still -- you're not seeing a lot of full-service upper upscale construction even being discussed, and I think that's sort of confirmation of the fact that values have not yet risen to a point where they exceed the cost to construct.

I think as we typically see in our business, the select service side is a bit more efficient, runs higher margins and probably, ultimately, is always -- you always find the numbers make sense there more quickly. And so I do think in some of these hotter markets, you're starting to see a point where new construction numbers can make some sense. Doesn't mean assets aren't necessarily still trading at below replacement cost today, but it would also mean that the newer projects that are being built are -- they're new; they're current; they're taking advantage of the trends in the industry. And so they may be able to convince themselves that there is a little bit better yield on costs there than what you might see on an acquisition.

So, markets, yes, I think -- we're not seeing a lot of supply anywhere other than in New York. New York would, obviously, be a prime example of what I just described, with all the construction that's going on there. But I think as you would expect as the cycle matures, you're seeing -- you're slowly seeing that begin to build a bit.

I'll depart with maybe an easy one for Larry. Any estimates of what the financial impact of the Affordable Care Act might be?

Jeff, that's a great question. I'm not sure anybody in the government knows. We are working with the brands and Arne came out with something yesterday, saying 50 basis points on margins. It's -- we're working with the brands. We're waiting on them to come back to us with better answers. But frankly, I think they're having -- somewhat challenged by the fact there isn't a lot of great information out there. And there's a lot of concerns over it actually getting implemented next year.

(multiple speakers)

Jeff, the one thing to recognize in our case is that as we have talked with our operators, there is a huge majority of their folks are already taking advantage of their insurance offering -- their benefit offerings. So while we would expect to see that the requirement to provide insurance will lead to some increase there, it's -- we're not in a situation where we've had very low levels of participation by the associates of the hotels. And then would therefore expect to see a dramatic change in expenses as a result of the Act.

Great, thank you.

Robin Farley, UBS.

Two questions. First is your D.C. market RevPAR increase was kind of a bit below what the market overall increase was, so I just wonder if you have some color around that? And then on the second question was, since there seems to be this dichotomy between short-term and long-term group booking trends, just to think about what percent of your group typically is booked in the year for the year versus the year before? I think a lot of times it may be like 70% or 75% of your group bookings are booked before the year starts. So just trying to think about, is it only sort of 25% of bookings -- or not only 25%; it's obviously sizable -- but what amount of in-the-year/for-the-year business should we think of as being maybe at risk of this sort of short-term slowing?

I'm going to let Larry answer the question about D.C., and then I'll come back and address your question about bookings.

Yes, if you look at, for D.C., if you look at the market for up or up, it was up 4.5%. RDC's presence, if you look at our downtown hotels, as I mentioned on the call, were up 5.3%. So it's really the outside the downtown area for some of our suburban hotels, such as the case for Washingtonian and a couple other hotels out toward the Dulles Airport that have really impacted that. So as you get closer into the city, we're a little bit ahead of where the market upper-up is.

And then as it relates to the group business, as I said in my prepared remarks, we're at the point of the year where we've booked or we have under contract 85% of the room nights that we expect to do for the year. So, the way I would look at that is that you really wouldn't expect more than 15% of that business for the full year to really be at risk.

Now, obviously, there is always a risk of cancellations, which would be included in that 85% number. And as I mentioned earlier, we have seen some calculations that we thought were sequester-related. But the properties have generally gone back out to the group business on the government side over the course of the last month. And I think still relatively confident that we are not going to see more cancellations. So that risk is always there. But the reality is, for our portfolio, the good news is, is that 85% of the business was on the books and should show up or we should get paid for it.

Is there -- could you quantify when we think about the sort of 15% in-the-year/for-the-year that may be a risk, what level of slowing we are seeing there? Kind of where that 15% may end up?

I mean, I would, at this stage, we would generally expect that for the remainder of the year, we should book about the same -- we should fill in that 15%. In other words, I feel pretty good about, based on the forecast that we've been looking at and the conversations we've had with our operators, we're relatively confident that we're going to finish the year with the amount of group rooms that we expect at this point.

Just at maybe slightly lower rates, potentially?

No, I don't think we're seeing any real softness on the rate side. I mean, clearly, group business is important to us, but it still only represents about 38%, 39% of our overall business. And so one of the things that's happening out there right now is that our transient business is so strong that we may end up with less -- I suspect we will finish this year with a little bit less group than what we had expected, probably back in January or February. But one of the reasons for that is that transient demand is solid enough that we will not be taking lower-priced group, discount group, when we feel good about the ability to fill in those rooms with better-priced transient.

And so while I don't know that that was much of a factor in the first quarter, as we look out to the rest of the year, and we are in periods of the year where our occupancy is a lot stronger, I think that's one other factor that will be affecting our outlook.

Okay, great. Thank you.

Hey, Robin, it's Larry. Just one last thing. We did also have the Hyatt Capitol Hill under renovation in the quarter. So that also impacted that difference.

Okay, great. Right, thank you.

Jim Sullivan, Cowen Group.

Ed, just to follow on with this -- the issue on the group business -- you talked about 38% to 39% of the total business being group, and where group has been particularly weak, I think, in your prepared comments, I think you talked about the government, government-related, some cancellations. And I'm assuming, also, because of the flat per diem that there was probably an attempt on your part that perhaps reduced the government business anyway this year. And I just wonder if you can help us -- what percentage of your group would you characterize as government, government-related?

Let's see, government business for us overall represents about 6% of our room nights. And that would be about split pretty evenly between transient and group. So it would be -- the government group would be less than 10% of our group business. Seems to me if I do the math quickly in my head, they're probably in the 7% to 8% range.

Okay, very good. And when -- but was there also, coming into this year, because of the attempt to improve the mix shift perhaps to reduce the government business or not?

Definitely. You know, at government, we've talked in the past that government in general, whether it's on the group side or on the transient side, tends to be a lower-priced business; it tends to be a business that we -- as things get -- as times get better and pricing gets higher, we naturally find that its share of our overall activity declines. The fact that government group and individual travel would be weaker this year is something that we have all -- everybody in the industry has known for quite some time. So, we certainly have been working as we could to transition away from that. Some properties are, obviously, better situated to do that than others. But we expected that business to decline as the recovery progresses, and that's what's happening.

Okay. Then secondly, there has been a lot of discussion about capital allocation in markets, but -- and really just to follow on you. I noted a few weeks ago that you and your partners increased your capital commitment to the European JV. And in your prepared comments, you've talked about weather being a negative in the first quarter. Could you just tell us when you think about the opportunities in Europe -- and I know you have identified them as Northern Europe primarily -- but when you think about the business outlook for the balance of this year, on the one hand, and then secondly, whether there is likely to be more products coming to market in Europe, because of pressure on capital ratios for some of the owners? I am just curious as you think about that, and the cap rates in Europe versus North America, how you would frame that opportunity vis-a-vis the coastal markets in the US?

I would say that, first of all, you've correctly diagnosed what's driving transaction activity in Europe, which is generally outside of a few transactions -- and I'd probably put the InterCon in London in this exclusion area -- with other than a few transactions that might have been driven by strategic reasons, the bulk of the activity that's happening there seems to be in some way related to debt, maturing debt, or too much debt. So that also means that I would expect the volume of activities that we would review and look at in Europe will be lighter than what we see in the US, because I think we're in a better position right now in the US in terms of overall values.

In terms of yields in Europe, they vary considerably by the city and the country. I would say that yields, cap rates, and what we would view as a 10-year unlevered IRR in some of the -- in the major markets -- so we're talking really London and Paris -- are comparable to what you would expect to see in the top cities in the US. As you move into Germany, where there is no one dominant market, I would say that those cap rates are higher, and the target IRRs or the achievable 10-year IRR in those markets would be higher than what you would see in the US.

Okay, and then, finally for me, there was some discussion about the improving CMBS market here. And as you, again, think about that in connection with your US acquisition and disposition thinking, have you seen cap rate compression between what you would call the primary coastal gateway markets that have been your focus on the one hand, cap rate compression between that, and say secondary markets, but still important markets -- and I'd facilitate the Marriott Marquis in Atlanta this quarter -- is it more attractive now on a relative spread basis because financing is strengthening?

Jim, I think that's a good insight, is that as the CMBS market recovers, there should be more financing available to the non-gateway markets. I don't know that there has been enough transaction activity yet and enough price discovery to really establish that that gap has closed in a material way. But I think that that's a likely outcome over the course of the next 12 to 24 months. Because as the financing is available, as the interest rates are attractive, capital will start to flow in that direction. Our goal is going to be to try to take advantage of that by being a seller of assets in those markets.

Okay, very good. Thanks, Ed.

And at this time, that will conclude our question-and-answer session. I would like to turn it over to Mr. Walter for any closing or additional remarks.

All right, well, thank you for joining us for this call today. I, again, apologize for my voice, but I'm pleased to see that it hung in there all the way through the call. I assure you I'll sound better in July. We look forward to talking to you later in the summer. Have a good weekend, everybody.

That will conclude today's conference. We thank you for your participation.