Host Hotels & Resorts Inc (HST) 2013 Q2 法說會逐字稿

Good day, everyone, and welcome to the Host Hotels & Resorts, Incorporated second-quarter 2013 earnings conference call. Today's call is being recorded.

At this time, I would like to turn the conference over to Gee Lingberg, Vice President. Please go ahead.

Thanks, April. Good morning, everyone. Welcome to the Host Hotels & Resorts second-quarter earnings call. Before we begin, I'd like to remind everyone that many of the comments made today are considered to be forward-looking statements under federal securities law. 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 information such as FFO, adjusted EBITDA, and comparable hotel results. You can find this information, together with reconciliations to the most directly comparable GAAP information, in today's earnings press release, in our 8-K filed with the SEC, and on our website at hosthotels.com.

With me on the call today is Ed Walter, our President and Chief Executive Officer; and Greg Larson, our Chief Financial Officer. This morning, Ed will provide a brief overview of our second-quarter results and then will describe the current operating environment, as well as the Company's outlook for 2013. Greg will then provide greater detail on our second-quarter results, including regional and market performance. Following the remarks, we will be available to respond your questions.

Before I turn the call over to Ed, I'd like to remind everyone that at the beginning of this year we adopted calendar quarter reporting period. And to enable investors to better evaluate our performance, we have presented 2012 RevPAR and certain historical results on a calendar quarter basis we called the 2012 as adjusted results.

The following discussion of quarterly and year-to-date operating performance will include a comparison between the three months and six months of operations ended June 30.

And now I'd like to turn the call over to Ed.

Thanks, Gee. Good morning, everyone. We are pleased to report another solid quarter of operating results, which were driven by strong rate growth and improvement in both transient and group demand. Strong F&B and other revenue growth, combined with improved flow-through, led to earnings results that exceeded consensus estimates. We continue to feel good about the fundamentals in the business and our outlook for the remainder of the year, which I will discuss in more detail in a few minutes.

Let's review our results for the quarter. Our comparable hotel RevPAR for the second quarter increased 6.1% to $163, driven by an average rate improvement of 4.5%, combined with an occupancy increase of 1.2 percentage points. This increase exceeded STAR's total US industry RevPAR by 110 basis points. Our comparable average rate was $204 and our average occupancy was nearly 80%, our highest occupancy level since the third quarter of 2000.

Comparable hotel food and beverage revenue grew 6.6%, as banquet and AV rental increase by nearly 8%, and outlet revenue improved by more than 4.5%. Total comparable revenue growth for the quarter was 6.3%. Excellent flow-through across all departments led to a 180 basis point improvement in our comparable hotel adjusted operating profit margin for the quarter, resulting in adjusted EBITDA of $431 million, a 23% increase over the prior year.

Our adjusted FFO per diluted share was $0.45 in the second quarter, an increase of more than 36%. On a year-to-date basis, comparable revenues grew 4.5%, as hotel RevPAR increased 5.7% and F&B revenues increased by 3%. Operating profit margins increased 140 basis points, resulting in a year-to-date adjusted EBITDA of $714 million. This represented an increase of more than 17.5% and generated adjusted FFO per diluted share of $0.73, which exceeds last year's total by 28%.

Overall, we are extremely pleased with our bottom-line adjusted EBITDA and FFO growth. While our room revenue growth was slightly impacted by weaker short-term bookings as well as some unique circumstances in a couple of markets, this was more than offset by our F&B and ancillary income growth, which was above expectations. This overall strength in revenue growth, combined with very strong margins, resulted in a very good quarter.

The key driver of our second-quarter results was solid increases in demand, combined with strong increases in our average rates across all segments of our business. Both our group and transient segments saw demand increases of roughly 2.5% and rate increases of more than 3.5%. Overall for the quarter, transient revenues were up 6.4% and group revenues increased 6.2%. As a result, our portfolio easily surpassed the industrywide performance for the quarter.

As we discussed in May, the timing of the Easter holiday significantly affected both Q1 and Q2 comparisons and segment trends. As a result, examining the segment performance for the first half of the year may yield better insights from several perspectives. All segments benefited from mix shift, as our highest-price transient demand increased by nearly 9% and our high-priced corporate demand increased by over 7%. Conversely, our lowest-priced business, discount group and contract, decreased by more than 10%.

While government business represents just 6% of our overall room nights, we experienced meaningful declines during the first half. Government group was off roughly 35%, and transient declined 4%. Excluding the government group business, our overall group demand was roughly flat to last year, but up more than 2.5% in rate. And 2013 rates now exceed 2007 levels. As in the first quarter, our near-term group bookings continued to fall slightly short of last year's levels.

Transient demand for the year exceeds 2012 pace by approximately 3.5%, and ADR is also up 4%. Our transient segment has also outpaced the industrywide growth for the second quarter.

Overall, while we could have expected a stronger contribution from our group segment, we have been pleased with the strength and price of our transient demand.

We are also pleased with the strength of our higher-priced group segments, as the weakness in demand has been largely focused in the lower (technical difficulty) discount segment. As we look at the remainder of 2013, we expect that group will be weak in the third quarter, as the middle of the quarter tends to be more influenced by discount business; and a few events, such as the Presidential Nominating Convention, will not repeat this year.

However, our advanced transient bookings continue to look quite solid. Fourth-quarter group bookings continue to be quite strong, both in demand and in rate. Looking out further into 2014, both group room nights and rate continue to trend ahead of last year.

On the investment front, as we reported in June, we acquired a fee-simple interest in the 426-room Hyatt Place Waikiki Beach in Honolulu for $138.5 million. The hotel underwent a $45 million renovation in 2012 and was converted to a Hyatt Place. It is located approximately a block from Waikiki Beach and from the destination shopping and entertainment districts. Overall, the Waikiki market is a high-demand leisure market that is experiencing occupancy rates that run north of 85%.

Most of the competitive inventory resides on leased land and there are high barriers to entry for future development, so we are excited to add this hotel in Hawaii to our portfolio. We have an active pipeline at this juncture and hope to complete additional investments before year end. But given that the timing in certain of these transactions is hard to predict, we have not included any additional acquisitions in our forecast.

On the disposition front, as we announced last month, we sold The Ritz-Carlton San Francisco for $161 million, or approximately $479,000 per key, which represents the highest price paid for a hotel in San Francisco in the last five years. We are actively marketing several assets, and anticipate completing between $100 million to $150 million in sales before year end, which is reflected our guidance.

Turning to capital investments, we invested $26 million in redevelopment and return on investment projects in the second quarter, as we completed the lobby/great room renovation at the Philadelphia Airport Marriott, as well as the restaurant and bar renovation at the Hyatt Regency Reston. For the full year we expect to spend approximately $90 million to $100 million on redevelopment and ROI projects.

We spent approximately $7 million on acquisition projects this quarter. We completed the renovation of all 1625 guest rooms at the Manchester Grand Hyatt in San Diego. And later this year we will begin renovation on approximately 100,000 square feet of ballroom and meeting space at this hotel. For the full year, we expect to spend $35 million to $45 million in total on these projects.

In terms of maintenance capital expenditures, we spent $76 million in the second quarter and expect to spend $280 million to $300 million for the full year. Projects during the quarter included room renovations at the San Francisco Marriott Marquis, and a lobby renovation at the San Diego Marriott Mission Valley.

Now let me spend some time on our outlook for the remainder of the year. As we have outlined today, we had a great quarter with solid rate growth and increases in food and beverage revenue, which generated exceptional margin performance. Looking at the second half of the year, we expect industry fundamentals to remain favorable, and supply growth will remain low.

We expect that transient demand will remain robust, but that short-term group will continue to be slightly weaker than last year. With these trends in mind, we are tightening the range of our guidance, forecasting adjusted EBITDA of $1.290 billion to $1.315 billion, and adjusted FFO of $1.28 to $1.32 per share. We now project that comparable hotel RevPAR for the full year will increase between 5.5% and 6.25%. Our year-to-date margin performance gives us confidence to raise our margin guidance to an increase of 100 to 120 basis points for the year.

Looking at our dividend, we increased our second-quarter common dividend to $0.11 per share. Dividends for the remainder of the year will depend on operating results and gains generated by asset sales.

In summary, I'm pleased with our second-quarter results, and remain confident about our outlook for the remainder of this year and into 2014. We expect the fundamentals in our business will remain strong. And with low supply [growth], we will continue to deliver meaningful growth.

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

Thank you, Ed. Let me start by giving some detail on our comparable hotel RevPAR results. Houston continued its strong growth and was our top-performing market for the quarter, with RevPAR gains of 16.1%. Occupancy improved 70 basis points, and ADR improved 15%, due to the strategies implemented at the end of last year to shift out lower-rated contracting group business, while pressing for aggressive special corporate rate increases. We expect Houston to continue its robust first-half growth trends, as solid group and transient demand will continue to facilitate a shift in the mix of business to higher-rated segments.

Likewise, our Seattle hotels had another great quarter, with a RevPAR increase of 14.5%, driven by a 3.8 percentage point increase in occupancy and an improvement in ADR of 9%. Strength in both group and transient bookings allowed our hotels to drive rate. As in Houston, we expect our Seattle hotels to have a good third quarter due to a solid group base on the books and strong transient demand, creating compression that will drive group and transient ADR.

Our Atlanta hotels also performed well in the quarter, with RevPAR up 11.4%, as ADR increased 7.8%, and occupancy increased 2.3 percentage points. The increase in rate was primarily driven by the NCAA Final Four in early April. We expect our hotels to continue to outperform in the third quarter due to a strong city-wide calendar.

Moving out West, as a result of driving rate, RevPAR at our San Francisco hotels increased 11.2%. Although occupancy decreased 1.2 percentage points, ADR increased at a very healthy 12.8%. This rate increase was mainly driven by business mix shift from contract to higher-rated transient; and group business, as well, at the San Francisco Marriott Marquis taking advantage of a successful rooms renovation by increasing its rates. With continued high transient demand, we expect our San Francisco hotels will see strong results in the third quarter.

Looking to Chicago, our hotels there increased RevPAR by 10.9%, with occupancy improving 1.7 percentage points, and ADR increasing 8.6%. The strong performance was boosted by healthy city-wide demand in May and June. Substantial group business provided the downtown hotels with the opportunity to yield much higher transient ADR, while reducing low-rated discount channels. Further, F&B revenues were up 17.6%, for the downtown Chicago hotels have increased group demand translated into excellent catering business. As we look forward into the third quarter, we expect our Chicago hotels to continue to outperform.

In Los Angeles, our hotels saw RevPAR increase 8.8% on occupancy growth of 60 basis points, and ADR growth of 8%. All hotels in this market had significant rate growth, with transient business standing out in particular. We believe that Los Angeles should also experience a solid third quarter as transient demand strength persists.

Although there has been well-documented supply growth in New York, our hotels' RevPAR increased 5.7%, with a mix of occupancy growth of 3.8 percentage points, and an ADR improvement of 1.4%. New York's inability to compress rates has been due to the substantial amount of new supply. However, our hotels have performed better than the New York market in the face of this temporary adversity, as we continue to work with our operators to ensure we are maximizing operations. We believe the third quarter should continue to hold up relatively well when compared to the New York market.

As a result of city-wide weakness and cancellations related to the Boston Marathon bombing, RevPAR for our Boston hotels underperformed our portfolio in the second quarter. Occupancy increased 1.3 percentage points, and ADR 70 basis points, resulting in a 2.2% increase in RevPAR. In-house groups failed to materialize at the pace we had anticipated, but we expect our Boston properties to improve in the third quarter. Having said that, these hotels will likely continue to underperform the rest of our portfolio.

It is not a secret to anyone listening on this call that our Washington, DC hotels continued to struggle in the second quarter due to weakness in government and government-related travel spending from the sequester. However, we did see a slight increase in RevPAR of 30 basis points resulting from growth in ADR of 40 basis points, offset by an occupancy decrease of 10 basis points. Our hotels in the central business district outperformed the hotels in the suburbs. RevPAR for our Hyatt Capitol Hill and our non-comp Grand Hyatt Washington increased nearly 6% on a combined basis.

Given the continued weakness in government travel, we expect our hotels in DC to underperform the portfolio in the third quarter.

Although our hotels in Latin America have significantly outperformed in the past two years, these hotels have struggled in the second quarter. The extensive renovations at our JW Marriott Mexico City, and the political unrest in Brazil contributed to a RevPAR decline of 10% in the second quarter. Despite the civil unrest during the Confederations Cup soccer tournament and uncertainty surrounding government policies negatively affecting Brazil, the JW Marriott Rio's RevPAR only decreased 4.4% on local currency. However, our two properties in Chile declined 13% in local currency due to the unrest in Brazil, coupled with the reduction in trade with China and the slowing demand for copper.

In addition to the political and economic issues surrounding our Latin America hotels, JW Marriott Mexico City has been under extensive renovations in nearly all public areas and guestrooms. The renovations are expected to be completed in the third quarter.

The devastating flood in Alberta, Canada, in late June forced the Calgary Marriott to evacuate its guests, and it was closed for nine days. Even with the closure in June, our Calgary Marriott posted positive RevPAR results of 3.6% in local currency in the second quarter. But the hotel underperformed our forecast by almost 17 percentage points.

The timing of the flood could not have been worse for that area, as it impacted both the second and third quarters, including Calgary's largest event, the Calgary Stampede. It's an annual event that begins in early July and runs for 10 days. Hotels during this time are usually sold out at very high rates. But due to the flood, out-of-town demand significantly decreased. Therefore, we expect the Calgary Marriott will underperform in the third quarter.

Despite the continued overall weakness in the eurozone economies, less city-wide events, and weaker trade fair demand, the pro forma RevPAR for the 19 hotels in our European joint venture, which includes the five hotel portfolio required in 2012, increased 3.9% for the quarter in constant euros. ADR improved 1.9%, and occupancy was up 1.6 percentage points. The ADR improvement was mainly due to an increase in higher-rated corporate group bookings, which allowed the hotels to yield higher transient rates. The best performing hotels in the quarter were the Courtyard La Defense, Marriott Rive Gauche, and Pullman Bercy, as all three benefited from the air show in Paris in the second quarter.

In addition, the Westin Europa & Regina also outperformed, primarily as a result of high-rated incentives and corporate group business. Sheraton Warsaw, Sheraton Skyline, and Le Meridien Nuremberg underperformed this past quarter due to less city-wide events and weaker trade fair demand. We remain cautiously optimistic about the third quarter for our European hotels. We expect to see some occupancy increasing, while ADR will likely decrease due to the inflated rates during the London Olympics last year.

One additional item to note. We successfully refinanced the mortgage loans secured by a portfolio of five properties in the European joint venture during the quarter. In the connection with the refinancing, the joint venture reduced the outstanding principal amount of the mortgage loan by EUR95 million to EUR242 million. Our portion of this reduction is EUR37 million, which was funded through a draw on our credit facility. The new loan carries a three-year term with a one-year extension, and bears interest at an initial all-in rate of 4.5%.

For the quarter, comparable hotel adjusted operating margin increased 180 basis points. Margin growth benefited from 75% of the RevPAR growth being driven by improvement in ADR. Also helping the improvement in margin was a 6.6% increase in food and beverage revenues, with F&D profit growth of 15.5%. The F&B profit increase was due to the positive mix shift to banquet and AV sales, as well as a solid catering contribution.

Strong group demand, which led to group revenue growth of 6.2%, further contributed to the increase in F&B. We also saw that corporate group business was particularly healthy throughout the quarter, and association group business primarily benefited from the shift of the Easter holiday to the first quarter. Support costs -- which includes G&A; repairs and maintenance; sales and marketing; and utility -- increased slightly less than 1%.

Looking to the rest of the year, we expect RevPAR will continue to be driven primarily by rate growth, which should lead to solid rooms flow-through. However, we are not forecasting F&B and other revenues to increase at the same pace as the second quarter. We expect support costs to increase slightly for the remainder of the year, and we forecast that utility rates will likely increase. We should also note that we successfully completed the process of renewing our property insurance program, which translates into insurance costs increasing at about inflation for the next 12 months.

As a result of the items I have just outlined, we believe full-year comparable hotel adjusted operating profit margin should increase 100 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 20% to 21% of our full-year EBITDA will be earned in the third quarter.

Moving to our balance sheet, during the quarter we repaid are redeemed $846 million of debt with an average interest rate of 7.2%, which was funded through the issuance of $400 million of 3.75% Series D senior notes and available cash. Since the beginning of 2012, we have reduced our total debt by $1 billion, decreased our average weighted interest rate to 5%, and extended the weighted average debt maturities to 5.6 years. We have significantly improved our credit statistics, including decreasing our leverage ratio. As of June 30, 2013, we have approximately $393 million of cash; $798 million of available capacity under the credit facility.

In the quarter, we issued 4.8 million shares of common stock, at an average price of $18.31 per share, for net proceeds of approximately $87 million through our at-the-market program. The proceeds were used to fund a portion of our Hyatt Waikiki acquisition. Additional issuances will be based on the level of acquisition and disposition opportunity, and the level of our stock price.

In summary, it was a successful quarter, highlighted by strong margin growth driven by increases in RevPAR outperformance, especially in the markets such as Houston, Seattle, Atlanta, Chicago, and Los Angeles. We completed a complex refinancing for our European joint venture, and we continue to work to improve our industry-leading, investment-grade balance sheet.

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

(Operator Instructions). Joshua Attie, Citi.

Thanks. Good morning. You highlighted that food and beverage and audiovisual revenue was a strong contributor to profitability. And I think you also said that you don't expect that to continue. Can you just talk about, what were the drivers of that growth in the second quarter? Were they a couple of large meetings? And can you provide some commentary on why it's not sustainable, or why you don't think it's the start of a broader trend?

Josh, I think that the primary driver of the strong performance in food and beverage in the second quarter was the strong level of group that we had in that quarter. Group room rates were up about 2.5%, and that obviously contributes to better F&B performance. As I mentioned my prepared remarks, our banquets and AV revenue were up about 8%, which is really -- we didn't quite research this, but my sense is that's probably the best we've seen over the course of this recovery.

On the other hand, because we also had some expansion on the transient side, our outlets did quite well, too. And that's been an area of focus over the last couple of years, so we were pleased to see that. Now, as it relates to the second half of the year, here's how I would probably explain this. Our first half of the year, if you combine the first two quarters, food and beverage growth was about 3%. Now, one of the things to remember is that 3% doesn't take into account the fact that last year had an extra day because of the leap year.

If you adjust for that, food and beverage growth in the first half of the year was really more like 3.5%. As we have looked at the second half of the year, consistent with my comments, we see weaker group business in the third quarter and stronger group business in the fourth quarter. We would assume that food and beverage would probably -- performance would track those trends. We're estimating in our guidance that food and beverage could range from 2.5% to 3.5%. The midpoint of that is obviously 3%, so that would suggest that we'd be about equal with what we achieved in the first half of the year.

But I wouldn't really rule out the fact that we could do better in the second half of the year than we did in the first. I wouldn't be expecting to do as well as we did in the second quarter, but if you compare the halves I think there's an opportunity for upside. But as we've commented in the past, food and beverage is notoriously difficult to predict; and, consequently, we've gone with what we think is a realistic but hopefully conservative estimate.

Thanks, that's helpful. And a related question, your occupancy of for the portfolio was running pretty high, at close to 80%, and that's even with group being slower. I know it was good in the second quarter, but generally your occupancy is pretty high and that's even with weaker group. So you've been able to replace it with other segments.

Can you remind us, what is group on a full-year basis today, versus what you think it should be at this point in the cycle? And then, I don't know if you have this number handy, but can you help us think about what's the profit opportunity of closing that gap, of remixing toward greater group? And how much incremental profits you think you can get just from that remixing, from having greater food and beverage and ancillary revenue.

Yes, I don't know that we can really respond to the second part of your question, other than we would obviously expect that as we close the gap on the group side, that it -- because that will help both with food and beverage revenue, as well as with driving better transient pricing, because we will have essentially shrunk the hotels, we would certainly expect that that would be higher.

To put where we are in context on group, at this point, as we talked before, in the downturn we lost about 19% of our group room nights overall. And at this stage we're running about 9% or so behind where we were in 2007. So, broadly speaking, over the course of the recovery so far, we've closed about half the gap that developed in that 2008 and 2009 downturn. So obviously as we -- we're already back to the occupancy level that we had in 2007.

So part of what would be happening as we continue to add group in future years, is you'd be expecting that both the (technical difficulty) go up. As I mentioned in my comments, our pricing on group this quarter was already above where we were in 2007. But that pricing should continue to improve. And just as importantly, transient pricing should also begin to accelerate further.

Okay, thank you.

Felicia Hendrix, Barclays.

Ed, your quarter and the outlook were relatively more optimistic than your peers who have already reported, in general and on group, even though you've hedged some of the strength that you're seeing in group in your comments. Just wondering if you could talk us through what some of the differences are here.

Well, I think as it relates to the quarter, what I'd like to think is it's a combination of us owning the right assets in the right markets, combined with the fact that, as we've commented previously, we've invested a fair amount of money in our hotels over the last 3 to 4 years. And we were expecting to begin to reap the benefits of that this year as our construction spending declined a bit, and therefore we had less business interruption.

So, I think that is, in some ways, if I were to look at the primary driver of it, it really ties into the fact that it's the right assets in the right condition in the right markets.

Are you marketing to groups perhaps differently than your peers are?

I don't know that we would necessarily assume that. It depends on which peers we're talking about, of course. Though to the extent that the peers share the same operators that we do, I don't know that we would be marketing any differently to those groups.

I think part of this, again, ties back into some of the capital investments we've made. And we have tried to, wherever we could, create more flexibility in our meeting space platforms. So as trends ebb and flow relative to the size of groups, and the frequency of groups, that we're in the best position possible to be able to attract that business.

And your answer actually is a good segue to my next question, which really is that you'd still have a fair amount of properties under renovation, so how should we think about the RevPAR impact of those as they roll off?

Well, certainly as we work our way through the cycle, as a particular hotel has been renovated, I would expect that you'd see better performance in the following year, both because the disruption and secondarily because we would've made the property better.

If I were to look at this year, though, in the context of what we would call maintenance CapEx, we're talking about a range of $280 million to $300 million for this year. So that, to me, is a level that we would generally expect to sustain going forward. So, it could drop down in a particular year. But the reality is that that's probably a relatively constant -- that would be what I would expect we would need to spend.

Okay. All right, that's helpful. Thank you.

Joe Greff, JPMorgan.

Good morning, all.

Joe, we can't hear you, if you're speaking.

And Joe, your line is open. Please proceed.

Good morning. Can you hear me?

Now we can.

Great. With regard to the non-room revenue performance in the second quarter, was there a noticeable divergence in performance between April and then May and June?

I think April was stronger in general, but in part because there was probably some better spending as related to some of the group events in golf and spa and things like that. But a lot of the improvement that we saw in the first half of the year in other revenue was probably most affected by the fact that we're getting the benefit of the new retail deal that we have at the Marquis; which, of course, has significantly increased the rent that we are paid relative to the retail there.

Got it. And then --

And that would apply to across the quarter. That wouldn't be specific month-to-month.

Great, that's helpful. And Greg, looking at the weighted average diluted share count contemplated in the guidance, it looks like you have contemplated within the guidance additional ATM proceeds. Is that correct? And roughly how much do you have in there?

That is correct. In our forecast, if you look at it for the rest of the year, we're forecasting that we'll issue another 5 million shares for the rest of the year. But of course as we said in our comments, that's all really going to depend. It depends on our outlook for acquisitions; it clearly depends on our outlook for disposition; and certainly it also depends on our stock price. So, look, that number could vary, but that's what we have in our forecast.

Great. That's all for me. Thank you.

Ryan Meliker, MLV & Company.

Hey, good morning, guys. I appreciate a lot of the color from your prepared remarks. Obviously group has been kind of the big topic this week with regards to earnings and new lodging space. You gave some good color on the quarter. Can you put some numbers behind where your group pace is looking for the rest of the year? I know you said that you're looking weak in 3Q and strong in 4Q. Last quarter I think you had said that demand was pacing up 3%, and revenue up 6% for the year. How much has that fallen off now?

I'm not certain it was quite that high at the last call. I think the numbers were a little bit lower than that, to be honest. But what I would tell you is at this point for the year, we would be expecting that -- look at the second half of the year. I think we're going to find that room nights are probably about flat, but that we've got a pretty solid rate increase for the second half of the year. So we would expect revenues to be up, call it 3% to 3.5%; but the room night element of it to be roughly flat.

I think if you go back to look at where we were at the end of the first quarter, I think we were looking there -- we probably were thinking for the remainder of the year we were higher. But that, of course, included what we knew was going to be a very strong second quarter. So that might be what you were remembering.

Sure, that makes sense. And then do you feel like you guys have any material mix shift left in the portfolio that can help boost RevPAR without necessarily seeing like-for-like demand, and like-for-like rates moving [up]?

Yes, I think we do. We're still at a point where, despite the fact that we've had -- just to stick with group for a second -- despite the fact that we had really strong corporate group improvement in the second quarter and in the first half of the year, we've only recovered about half of the decline that we saw in that area from 2007 to 2009. So I would really expect that as we continue to see the economy recover; and, in our minds, more importantly, as we continue to see employment recover, that we will see continued growth in corporate group. And that will displace the discount group that we had taken in -- when that number -- when that corporate group had declined.

When you switch up to transient, certainly what we're going to be attempting to do over the course of the next few years is continuing to try to drive all of our transient business into higher price segments. And so I would expect we would continue to seek mix shift. I'd also expect to see continued increases in rate within segments, too.

Great, that's helpful. And then one last question. Your margin assumptions for the back half of the year imply pretty material deceleration from the front half. I know 2Q was really strong in terms of margins. But is there anything else going on in the back half of the year, that that's going to limit margins? I know, Greg, you mentioned utilities being higher, and lower F&B revenues in the back half of the year and group not being quite as strong. But is there anything else we should think about that might limit margins?

No, I think that when we looked across the board, most of the difference relates to the fact that -- I mentioned previously that we were benefiting in the first half of the year from the significant increase in rental that we were receiving relative to retail project on the Marquis. We began to receive that increased rental in the third quarter of last year.

So as we look at the second half of the year, we're generally expecting lower levels of other income than what we saw in the first half of the year, in terms of lower levels of growth in other income compared to what we saw in the first half of the year.

And that's a primary driver because of that. On the food and beverage side, we have been both -- I think tried to be conservative relative to the level of revenue. We've also been conservative relative to the level of flow-through on that revenue, so that makes a difference. And then as Greg mentioned, we've been pleased to see utility expenses down in the first half of the year. We have forecast modest increases for the second half. I'll be honest, that's hard to predict exactly what's going to happen because it's not -- it's both rate and how hot or cold it is. So both of those have an effect.

I think we've gone with a more conservative estimate there, but that could turn out differently. So, I don't know that there is -- certainly we're incredibly pleased with how well we did in 2Q. And we're going to strive our best to try to continue that type of success. But we're not going to predict that it's going to stay that strong for the second half.

That makes sense. Thanks a lot. I appreciate all the color.

David Loeb, Baird.

Good morning. Could you give us a little color on your return expectations for Waikiki, and what kind of cap rate you achieved on the sale of The Ritz-Carlton San Francisco?

Yes, our return expectations for Waikiki, would to be -- we think we're going to generate a fairly significant premium to our cost of capital. And I think in terms of unlevered IRR, we'd be expecting to be in the 9.5 to 10 range for that asset. And then, Greg, what did we end it up? What have we disclosed relative to The Ritz?

The Ritz. Look, I think the cap rate, David, on that Hyatt property was north of 6%. And I'd say that, on The Ritz, it was probably -- the cap rate was half that.

That's a nice spread. And to follow up on the renovation question, you have finished some major projects. You really put the portfolio in a very good position. Do you think you're seeing some RevPAR tailwinds now from those renovations? And how long do you think those continue?

I think we are seeing some tailwinds from that, and I think that would account for the outperformance in the second quarter. I would expect that that should continue through the year, to be honest.

Okay. Then can you comment a little bit on transaction markets in Europe and Australia? Do you see portfolio deals coming together? Is there financing for that? Is there a lot of competition for assets in those markets?

Speaking of Europe first, we're not -- we haven't really seen much in the way of portfolio transactions there, or at least ones that had a realistic chance of happening. There were a few portfolios that were on the market because there were some challenging financial circumstances. But it does not look as if it was possible for anyone to structure a deal that would work that would appease the lender. So, generally what we're looking at there is more single asset transactions. And we are certainly looking at a couple of transactions over there right now.

In Australia, I'm aware of one, maybe two, smaller portfolios that are on the market. But our sense is that those portfolios will probably end up being broken up and sold in ones and twos, as opposed to in fives and sixes. The market there is fairly healthy and fairly rational, which is good to see. And while we have some concern in Australia about the impact of lower demand for commodities, overall we still feel pretty good about economic growth in Australia. So that continues to be a market we are interested in acquiring in.

Okay. And one final housekeeping. Was there any one time-charge related to severance with Larry's departure?

Yes, there would be on normal severance charge related to that, which is incorporated in our --

Incorporated (multiple speakers).

Expenses for the second quarter.

Okay, great. Thanks.

Bill Crow, Raymond James.

Good morning, guys. Couple of questions here. Ed, can you just remind us, is group -- what, 40% of your total demand? Is that a fair number?

It's just a little bit less than that, Bill. I'd say right now we would probably expect on of full-year basis it's about 37%. But you're right, in the past it had been more along the lines of 40% to 41%.

Yes, and I think at the peak of the last cycle we were a [size] 42%.

Okay. And then if you look at how you typically enter a year, you typically have, what -- 80% of it on the books? And 20% is in the year, for the year. Is that a good way to think about it?

I would say it's probably more 70% to 75% at the beginning of the year, and then you fill in during the course of the year. At this point, as we look at the full year, we have about 95% of the group rooms we would expect to do on the books at this point.

So, how does next year look from a percentage of your expected total, as well as the pace?

We are -- over 50% of the rooms that we would expect to do in 2014 are on the books. And we are continuing to trend ahead of where we were at this time last year for 2014.

So your pace is up, then?

Pace and rate.

Yes, pace and rate.

Right, right. Ed, I think I've heard you say before that you could ultimately sell $2 billion worth of assets; that you've identified a portfolio that may not be core long-term for the Company. Is there any sense of urgency, given interest rates moving up, et cetera, getting further into the cycle, to start accelerating the pace of those divestitures; or maybe taking the place of ATM issuances, therefore?

Well, certainly we -- as we highlighted in, I believe, both the press release and our comments, we are hopeful of completing at least a couple more sales over the course of this year. And we will be intending to put about a handful of properties on the market in the fall with the goal of selling all of them.

So, I think it's fair to say that we do have a goal of selling more properties. And while we feel good about the length of the cycle, and therefore don't feel as if we're running up against a deadline where we need to push things out quickly, on the other hand we also recognize that you got to start and each of these deals tends to be a process.

And we generally feel that we're at a point in the cycle where we can achieve, for the assets we're selecting to sell, fair prices relative to the whole values we would assign to them.

Great. And then finally for me, any update on your thoughts for next year for both DC, which is obviously mired in some government issues and new supply, as well as New York?

As it relates to DC, we're still not seeing group bookings or convention bookings picking up for 2014. And I think the general sense was that 2014 would be relatively flat to 2013. So I think what will be the driver for DC will not be group, but rather whether -- what happens with government, and what happens on the Hill to the extent for the downtown hotels that can drive business if there is enhanced legislative activity.

New York is a little bit harder call. I think most of the industry experts, and certainly our analysis suggests, that supply growth in New York will be fairly considerable next year. I think we're looking at numbers that approach 7%, which is a pretty big number, especially given the amount of supply that has hit over the course of the last three years there. The New York market has been remarkably resilient in accommodating the new rooms; but, as all of you have commented, it has been difficult to achieve rate growth in New York, given the new supply.

New York will get a little bit of a boost in the beginning of the year because they will be hosting the Super Bowl. And so I've noticed that our group bookings in New York are up meaningfully, and I think a lot of it relates to the Super Bowl event, which is -- especially when it hit the market during a non-peak time, which is what will be happening here. It can have a considerable impact. But I think, unfortunately, we'll find that New York is still going to be not as strong as we'd like it to be, because of the supply coming into the market.

Thank you.

Jeff Donnelly, Wells Fargo.

Good morning, guys. And, Greg, congratulations on the new role.

Thank you.

Not to beat a dead horse on group demand -- but, Ed, do you think that, ultimately, we'll see group reclaim its historical share of industry revenue and profit? And how long do you think that could take?

Well, first of all, that certainly is a very good question. And I know that I hope that it does. It's hard to tell right now whether it will. Certainly this is been a topic throughout the industry over the course of the last couple of years. And I would say, broadly speaking, we're probably all a little bit disappointed with the pace of the group recovery. I probably, in terms of assessing this, the broader perspective that we have is in some areas, it does seem as if the overall level of demand -- in this context, I'm thinking of association business -- may have reset itself at a slightly different trajectory than where it was pre-downturn.

And by that I mean that in the course of the downturn, we have the sense that a number of the associations shrunk their events by a day or so in an effort to reduce costs and continue to attract attendees. And it seems that those events were successful enough in a shorter form that we may have seen a reset in association demand. I'm not certain that that necessarily applies as much to the corporate level demand.

As I commented earlier, corporate demand is still -- in our portfolio, and I'm going to assume for the industry -- well behind where it was in the prior peak. But as I mentioned last year -- or last quarter, rather -- we have often found a relatively close correlation between employment growth or employment, and corporate demand. And I think that when you're still in the -- I think the stats today came out at, what was it? 7.4% unemployment. We're still in an area where companies are being very thoughtful about costs. And I'm not convinced that they are necessarily as focused on having events that are designed to retain employees.

If we get back to 5%, 5.5% unemployment, and the employment markets become a bit more competitive, it seems logical to me that companies will have a different perspective about that. So I'm probably more optimistic about the ability to recover the shortfall that we're seeing on the corporate side than I am necessarily the shortfall that we're seeing on the association side.

So, at the end of the day, I think it will take a while to get back to where we were before. In our case, we may have a better shot at getting to those levels in part because of the investments we've made in incremental meeting space. But, clearly, it's been a slow recovery from what was an incredible downturn in 2008 and 2009.

And concerning the Grand Hyatt you purchased in DC -- I know Washington, DC, has probably been a little weaker than you guys originally underwrote. But I guess I'm curious, how has that property performed maybe versus your original expectation? And does this cause you to maybe reset particularly, with the Marriott coming online in the next year or two, what your prospects are for that property?

We had been fairly conservative in our underwriting for 2013 for the Hyatt. We had known that group would not be particularly strong. We also knew that we were going to be doing some renovation at the hotel, carrying over into the first quarter. And so my guess is the only part that we were probably a bit disappointed in so far this year was that inauguration turned out to be less of an event than it typically was. And I think that probably happened for a variety of reasons. But other than that, I think we've actually been relatively pleased with how that property has done.

We would still be of a mind that the completion of the Marriott and the enhanced positioning of DC from a convention perspective would be a good thing for the market. And while we are leery of having one other big competitor in the market, we would tend to view our hotels as better positioned for that leisure customer, relative to the new Marquis just because of where we are located in the city.

But we'll also be in a position that, because they will be the primary convention hotel, it will afford us more flexibility when events are held in town to be able to be maybe a little bit more aggressive in the pricing that we look for. Because we will not need to commit the same amount of group block that we did in the past in order to attract an event.

And maybe just two more questions. One is, just to angle in a little differently maybe than others have on trends in asset prices. If you had to sell the Grand Hyatt again today, do you think you could sell it for more than you purchased it for?

Hard to say. My guess is the pricing would be about comparable to where we are, recognizing what has happened with the asset.

Right.

But I would also say, we obviously bought the property for less than what we had originally contracted for it. And I wouldn't be anxious to sell a lot of properties in DC right now. I think DC is one of the red-letter markets in the country. And so, if anything, we still believe, in the long run, that Washington is going to continue to be an attractive market.

The things that are happening in the city, if you leave out some of the challenges around the government side, the things that are happening in the city are making the city that much more attractive from a leisure perspective; and, frankly, from a business perspective, too.

So, we haven't really lost any confidence in Washington. We had assumed that this was going to be -- and recognized, because of some of the weaknesses on the group side -- that it was going to be a more challenging market for the next two years. But as I think Arnie commented in his -- either in his comments or in his answers to questions -- we've lost so much government business already, there's not a lot more to lose. So at some point you're going to start to see things turn around, and it's still a great place to visit.

And, Jeff, despite the challenges that Ed mentioned, that hotel, just this quarter -- its RevPAR growth is north of 5.5%.

That's helpful. And just one last question. Certainly due respect to my friend Greg, but can you talk about maybe what led to the decision to remove Larry as CFO? Because, just from our perspective, it seemed rather abrupt. And I'm just curious what color you can offer there.

I think, Jeff, it's only appropriate to really refer back to what we said in the press release, that it was really just a decision to make some restructuring in terms of management. And that was the -- in this case, Greg was the best answer in that role.

Okay. Thanks, guys.

Smedes Rose, Evercore.

Hi, thanks. I just wanted to ask you about your disposition of The Ritz. That it looks like you have an operating guaranteed for payments of up to $4 million a year. Is that just a special situation for this particular hotel? Or is that -- these kinds of guarantees, is that what you need to offer to get deals done now? Or maybe just a little more color around that. And would you expect to fund that?

Smedes, I think this is a special circumstance. As we talked about, the cash flow at this property was quite low. And so I think we realized early on that it was going to be difficult for a buyer to really put property level debt on this property. And so we felt comfortable putting up this 3.5 year guarantee, where we're guaranteeing certain level of cash flow each year. And as you point out, it's really capped at $4 million per year, and there is an overall cap of $11 million.

And we think that, when we look at our forecast for that property, we think we'll be out a small amount under the guarantee. So, when we looked at everything, we thought that by offering the guarantee we could really increase the price significantly, and so we thought it was worth it.

Great, okay. Thank you.

Robin Farley, UBS.

(technical difficulty) you had commented previously that you expect to see a net buyer of assets for the year. Is that still the case?

I would say that we still hope to be a net buyer. If I look at the number of assets that we are at least evaluating right now for purchase, I think that it is very conceivable that we could be a net buyer. But I would also say that we -- if we end up being a net seller at the end of the year, because we were getting attractive pricing for our sales, and we're not able to buy at levels that we're comfortable with, then that's also fine.

Okay, great, thank you.

And that will conclude the question-and-answer session for today. At this time, I would like to turn the conference back over to our presenters.

Great. Well, thank you for joining us on the call today. And we appreciated the opportunity to discuss our second-quarter results and outlook with you. We look forward to providing you with more insight in the remainder of 2013 on our third-quarter call in the fall. Have a great weekend, and enjoy the rest of your summer.

And that does conclude today's conference. Thank you all for your participation.