Host Hotels & Resorts Inc (HST) 2013 Q4 法說會逐字稿

Good day, and welcome to the Host Hotels & Resorts Incorporated fourth-quarter 2013 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Gee Lingberg, Vice President. Please go ahead, ma'am.

Thank you. Good morning, everyone. Welcome to the Host Hotels & Resorts fourth-quarter and full-year 2013 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 reconciliations to the most directly comparable GAAP information, in today's earnings press release and our 8-K filed with the SEC and on our website at hosthotels.com.

With me on the call today is Ed Walter, our President and Chief Executive Officer; and Greg Larson, our Chief Financial Officer. This morning, Ed will provide a brief overview of our fourth-quarter and full-year results and then will describe the current operating environment as well as the Company's outlook for 2014. Greg will then provide greater detail on our fourth-quarter performance by markets and our balance sheet. Following their remarks, we will be available to respond to your questions.

But before I turn the call over to Ed -- and for the last time I would like to remind everyone that at the beginning of 2013, we adopted calendar quarter reporting periods; and to enable investors to better evaluate our performance, we have presented the fourth-quarter 2012 RevPAR and certain historical results on a calendar quarter basis we call the 2012 as-adjusted results.

The following discussion of the fourth-quarter operating performance will include a comparison between the three months of operations ended December 31. Now here is Ed.

Thanks, Gee. Good morning, everyone. We are very pleased to report a positive fourth quarter and year for our Company. Our results were driven by a combination of strong demand growth which allowed us to drive rate in both our group and transient segments, and excellent cost controls which led to another year of strong margin improvement. Additionally, we continue to make progress on several important Company initiatives including executing asset sales, completing acquisitions in target markets, and strengthening our industry-leading balance sheet.

Before we get into the details, let's review our results for the quarter and the year. Comparable revenues increased 6% for the quarter and 4.9% for the full year. RevPAR for our comparable hotels on a constant currency basis increased 6.6% for the quarter and 5.8% for the full year. On a nominal basis, comparable RevPAR increased 6.2% for the fourth quarter and 5.6% for the full year. Our comparable domestic portfolio outperformed the industry RevPAR by a strong 140 basis points for the quarter and by 50 basis points for the full year as our hotels continued to generate meaningful gains in market share.

Strong growth in our group growth -- in our group business led to increase banquet activity, resulting in comparable hotel F&B revenue growth of 6.1% for the quarter. Overall for the year, comparable F&B revenues increased 4%, driven primarily by a 4.8% increase in catering activity. This improvement, combined with our strong rate performance, resulted in an increase in comparable hotel adjusted operating profit margin of 130 basis points for the fourth quarter and 100 basis points for the full year.

Adjusted EBITDA was $322 million for the quarter and $1.306 billion for the full year. That represents a 9.7% increase over the prior year. Our adjusted FFO per diluted share was $0.33 for the fourth quarter and $1.31 for the full year, which exceeded consensus estimates and reflects a more than 19% increase over 2012.

Throughout the course of the year, we experienced favorable trends in our business mix as room nights grew in our higher-rated segments in both transient and group. In the fourth quarter, despite the government shutdown, we saw momentum pick up in our group business, and we benefited from meaningful increases in our average rates in both our group and transient business.

Starting with our group business, the fourth quarter was the strongest quarter of the year with room nights growing more than 3.5%, driven by increases in our higher-rated association and corporate business. Group business continued to benefit from positive mix shift as demands in our corporate and association business increased nearly 7%, while discount demand fell more than 5%.

The favorable mix shift resulted in an increase in our group room rate of nearly 3% for the quarter which, when combined with a strong demand growth, resulted in group revenue increase of 6.5%, which we believe significantly outpaced the industry. For the year, group rate was up nearly 3% while demand was flat, resulting in an increasing group revenues of over 2.5%. We believe that the combination of the sequester and government shutdown reduced our group demand for the year by 1% to 1.5%.

We expect the group business momentum we saw in the fourth quarter will continue into 2014 as demand should benefit from less government uncertainty and continued economic improvement.

Looking at our transient business in the quarter, we benefited from strong demand in our higher-rated retail and corporate business, which increased more than 6.5%. This, combined with the previously mentioned strength in our group business, allowed the hotels to rely less on discounted transient business and helped drive rate across all segments. For the quarter, we saw an average rate increase of 4% and revenue growth of 7%. These same favorable trends played out over the course of 2013 as our higher-priced transient business saw a demand increase of 9%, our overall transient average rate growth equal 4%, and our revenues increase 7.5%.

Group revenues booked in the fourth quarter for 2014 and 2015 exceeded the prior year's strong pace. And for 2014, our group booking space was up 3% in room nights with average rates projected to be up in every quarter. More than 70% of our expected group rooms for the year have been booked. Revenues for the year up more than 5.5%, and we expect a solid year from our group segments.

It is worth noting that, while we've enjoyed four solid years of growth since the 2008/2009 downturn, we believe that we are plenty of opportunities to continue to grow earnings and value. A few points of comparison. For our comparable hotels, 2013 RevPAR was just 2% behind the 2007 peak; but, on an inflation-adjusted basis, we are still approximately 15% behind 2007 levels. While our overall occupancy of 76% in 2013 exceeded our 2007 peak, our portfolio ran at higher than 78% in 1999 and 2000, which suggests that we could expect further improvements in occupancy.

Despite our strong fourth quarter, our group business and our food and beverage revenues are still roughly 10% behind our 2007 levels, suggesting that we have significant room for further growth as the group segment continues to recover and our strategy to improve outlook performance bears further fruit.

Our 2013 adjusted margins are roughly 300 basis points behind 2007 levels, and we see no reason, given the operating improvements we have implemented, why we can't exceed those levels in the future. Overall, our comparable hotel adjusted operating profit is approximately 15% behind its last peak performance without taking inflation into account. We would expect to eliminate that GAAP over the next two years.

Supply in the industry is expected to fall short of the long-term average for at least the near term. Supply in the upper price points and our target markets, other than in New York, is even more constrained. Continued growth in the economy, accelerating capital investments, and continued growth in international travel should lead to revenue growth that comfortably exceeds inflation and the long-term averages. We believe the results should be improved asset to Company valuations in our industry.

Turning to investment activity. In November 2013, we opened the 255-room Hyatt Place in downtown Nashville, which was developed through a 50-50 joint venture with White Lodging Services. Since the opening, the hotel's had a fantastic start, with operations significantly outperforming its budget and underwriting.

On the investment front, as we announced this morning, we acquired the 151-room Powell hotel in San Francisco, along with over 8500 square feet of retail space anchored by Sephora, for a total price of $75 million. That price includes an estimated value of approximately $42 million for the retail space. The hotel is located in the city's premier shopping district near the Moscone convention center and is in close proximity to the Powell Street BART station and cable car line. Kokua Hospitality will manage the hotel and will work with us to complete a $22 million renovation for reopening as an upper upscale property. When completed, we expect our total investment in the hotel portion of the building to be approximately $365,000 a key, and I note that that value includes the value of the land that we purchased. Including the Powell Hotel, we invested $340 million in acquisitions in 2013.

With continued improvement in the outlook for the economy and the capital markets, the transaction market for dispositions improved in the fourth quarter, including the sale of the Philadelphia convention center and Courtyard Nashua, we closed on six asset sales in the last four months, five in North America and one in Europe, for approximately $540 million. These transactions reduced our exposure to non-target markets and allowed us to reduce our leverage and improve our overall cost of capital.

We expect to be active on both the acquisition and disposition front in 2013 as we look to increase our investment in target markets and remain focused on reducing our exposure to non-core hotels located in suburban and airport locations and on reducing our portfolio allocations of secondary markets. While we have active pipelines for both sales and acquisitions, given the difficulty in predicting the timing of completing these transactions, our guidance does not assume the benefit of any acquisitions, nor does it assume the impact of any sales beyond the transactions we have already closed.

In addition to transaction activity, we will continue to look to invest in income-generating additions to our portfolio, which typically drive returns well in excess of our cost of capital. For 2013, we invested a total of $97 million in these types of projects; and in 2014, we expect to spend $70 million to $80 million, including the completion of a $17 million brand conversion at the Sheraton Memphis downtown and a $40 million repositioning plan at the Houston Airport Marriott.

Additionally in 2014, we expect to spend $30 million to $35 million on recent acquisition assets and $320 million to $340 million on routine renewal and replacement expenditures.

Now let me elaborate on our outlook for 2014. As I discussed earlier, we anticipate that hotel demand will continue to grow in 2014, driven by improved economic output and consumer confidence, increased employment, and greater business investment. We also expect that group demand growth will exceed last year's levels. The increased demand combined with low supply growth should enhance efforts to drive both rate and profit margin. With all this in mind, we are expecting comparable hotel RevPAR on a constant currency basis to increase 5% to 6% for the year. While F&B activity is often volatile and difficult to predict, we are expecting comparable food and beverage and other revenue growth of 3% to 4%. We expect adjusted margins to be up 60 to 110 basis points. This operating forecast will result in adjusted EBITDA of $1.350 billion to $1.390 billion and adjusted FFO per share of $1.40 to $1.44.

With respect to our dividend, it is worth noting that our 2013 dividend increased more than 50% compared to 2012. Today we announced that our first-quarter common dividend will be $0.14 a share, which represents our 13th consecutive increase. Dividends for the rest of the year will depend on operating results as well as gains on asset sales.

I am pleased to say that the lodging recovery is progressing well due to continued demand increases combined with low supply growth. Given a positive industry outlook and strong underlying economic fundamentals, we believe this cycle will continue to gain momentum throughout 2014.

The capital we have invested in our hotels over the last several years ensures that our portfolio is in excellent condition and is well positioned to benefit from this improving marketplace.

As Greg will describe in more detail, our industry-leading balance sheet is only getting stronger and our cost of capital remains quite attractive. As we look at all of these factors, it gives us confidence that Host is well positioned to outperform in 2014.

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

Thank you, Ed. As you have already noticed, we've made some changes to our press release this quarter. In our effort to provide greater clarity on our operations, we have replaced the regional RevPAR results with RevPAR results primarily based on cities. In addition, we added a comparable hotel RevPAR in local currency, defined as hotel RevPAR in constant currency. This new presentation will enable investors to evaluate the performance of both our domestic and international hotels without the impact of currency fluctuations. In constant currency methodology, this is described in the notes for the financial information in our press release.

With that, let me begin by touting our impressive fourth-quarter results. Despite the negative impact of the government shutdown in October, we had our strongest quarterly RevPAR performance of the year. Our comparable domestic portfolio RevPAR increased 6.5%, which was 140 basis points over the industry performance. And our consolidated international portfolio RevPAR increased 7.2% in constant currency, resulting in total comparable RevPAR increase of 6.6%. The outstanding results for the fourth quarter were driven by strong performance in our group business. As we have stated in the past, when group business performs, our portfolio outperforms.

Moving to our detailed RevPAR results, our West Coast properties once again had very strong results, with RevPAR growth of 8.1% driven primarily by an average rate increase of 5.6%. The San Francisco market grew fourth-quarter RevPAR by 14%, with all five Bay Area hotels achieving double-digit RevPAR growth. This RevPAR increase was driven almost entirely by a 13.7% increase in average rates, which resulted from the continued business mix shift from contract to higher-rated transient and group business.

RevPAR at our San Diego hotels grew 10% in the fourth quarter primarily through occupancy gains of 4.6 percentage points driven by strong group and transient demand. Our San Diego hotels RevPAR growth more than tripled the STAR upper-upscale market growth of 3.1%. In addition, due to the strong group production in the fourth quarter, our San Diego hotels also had strong food and beverage revenue growth of 11.6%.

In Hawaii, RevPAR growth of 2.5% was impacted by a decline in occupancy of 430 basis points due to the renovation and the timeshare construction at the Hyatt hotel in Maui. However, the Hawaiian hotels benefited from average rate gains of 8.2% from stronger group demand that boosted both group and transient rates in the fourth quarter.

We expect the West Coast properties to continue to outperform in 2014, particularly in San Francisco, Seattle, and Hawaii. We expect San Diego and Los Angeles to perform in line with the portfolio in 2014.

Our properties in our Southwest locations also had an impressive fourth-quarter, with a combined increase in RevPAR of 16%. Our New Orleans hotel benefited from three strong, high-rated medical citywide events in the fourth quarter that resulted in a RevPAR increase of nearly 22%, largely due to a 20.5% increase in ADR. Houston once again significantly outperformed the portfolio, growing RevPAR at 14.3% in line with a 13.5% improvement for the first three quarters. Offsetting a slight decline in occupancy, the four Houston hotels grew average rates by a combined 16.7%. Both San Antonio properties also outperformed in the fourth quarter, with RevPAR increase of 12.5%. Both hotels had strong group production with higher group ADR, which allowed our operators to change the transient mix, which resulted in better average rates. For 2014, we expect RevPAR at the JW Houston and the Houston airport hotels to be negatively impacted by the renovation scheduled in the second half of 2014.

In the East, RevPAR growth of 5.6% was driven by strong results in Philadelphia and Boston, offset by weaker results in New York and Washington DC. Our hotels in Philadelphia posted RevPAR gains of 16.9% in the fourth quarter, with a 12.3% increase in demand as the hotels benefited from year-over-year comparisons to the hurricane impact in fourth quarter of 2012. Austin had strong RevPAR growth of almost 11% due to the Major League Baseball playoffs in October as well as the positive year-over-year impact of Hurricane Sandy. The RevPAR increase for the Boston properties consisted of a balanced mix of increases in both occupancy and rate.

Despite the increasing supply in the New York market, our New York hotels increased RevPAR by 3.9% in the fourth quarter in a market where RevPAR for the Star upper upscale segment was negative 0.1%. The hotels in Manhattan reported very strong fourth-quarter RevPAR growth of 4.6%.

Our Washington, DC, hotels grew RevPAR by 1.8%, identical to the growth achieved in the first three quarters (technical difficulty) hampered primarily by the shutdown of the federal government in October and ongoing effects of the sequester. Our comparable hotels in the downtown area increased RevPAR by 8.8% in the fourth quarter, offset by a 6.5% decline at our hotels in the Virginia and Maryland suburbs.

We expect our hotels on the East Coast to underperform the portfolio in 2014, with weak Washington, DC, and Philadelphia markets offsetting the stronger results forecasted for Boston and New York. Despite the supply in New York, we expect our hotels there to outperform our portfolio in 2014 due to the Super Bowl and other citywide events.

[Our] fourth-quarter RevPAR for the consolidated international portfolio grew 7.2% in constant currency. Canadian hotels grew RevPAR by a combined 7.5%, led by ADR growth of 13.8% in Calgary. In Latin America, RevPAR increased 7.1%, driven by strong double-digit RevPAR growth at our JW properties in Rio and Mexico City, offset by a small decline in the RevPAR at two hotels in Chile. The Chilean hotels were impacted by labor strikes in the country during the fourth quarter. Asia-Pacific portfolio grew RevPAR 7% through solid transient occupancy growth in Melbourne. Our international hotels had a great quarter; however, due to the negative impact of the unfavorable exchange rate this quarter, our nominal comparable international hotel RevPAR grew only 0.9%.

The comparable hotel RevPAR for the European joint venture increased 5.1% for the quarter in constant euros. Group revenue outperformed our expectations in the fourth quarter. The improvement was driven by increases in both occupancy and rates due to large citywide events, highlighted by the Climate Change Congress event in Warsaw. Strong group demand at several of our hotels, including group business generated by the newly renovated meeting space at Westin Madrid and a EUR1 million wedding at Hotel Arts Barcelona drove an impressive 8.8% increase in banquet sales.

We expect European joint venture hotels RevPAR to increase from 2013 levels but will continue to underperform our total portfolio 2014. However, there are encouraging signs of economic improvement in Europe. The GDP forecast for the majority of the European economies have increased since October 2013 and are all trending positively.

Our fourth-quarter comparable hotel adjusted operating profit margin increased 130 basis points due to a rate-driven increase in RevPAR and strong food and beverage sales and flow-through. Our fourth-quarter food and beverage flow-through was a strong 54.2%. This is the third best food and beverage flow-through since the beginning of the recovery in 2010.

Looking to 2014, while we believe there's still room for occupancy growth, especially in our group business, we expect that RevPAR will continue to be driven primarily by rate growth in 2014 and should lead to solid rooms flow-through. However, certain savings realized in 2013 will likely be difficult to replicate 2014, such as the decline in utility costs we reported in 2013 and savings related to certain sales and marketing costs. As a result, we expect comparable hotel adjusted operating profit margins to increase 60 basis points at the low-end of the RevPAR range and increase 110 basis points at the high end of the range for 2014.

When analyzing our EBITDA growth for 2014, consideration should be given to the negative effect on EBITDA from asset sales and one-time transactions. Approximately $45 million of EBITDA was lost due to our recent sales of five properties. The sales included the Philadelphia Marriott Downtown and the Courtyard Nashua sold in the first quarter 2014. In addition, there was a $21 million one-time gain related to the Newport Beach land sale in 2013. The negative EBITDA impacts are partially offset by certain positive factors we are forecasting for 2014, such as the benefits received from the non-comparable renovation hotels at the Ritz-Carlton Naples and Orlando World Center, the completion and opening of the Hyatt Place in Nashville, the full-year impact from the acquisition of the Hyatt Place Waikiki, and the EBITDA derived from the Hyatt Maui timeshare sale.

I should also note that the EBITDA generated from the Hyatt Maui timeshare sale will negatively impact the first three quarters of 2014 as revenues from the sale cannot be recognized until the units are completed and can be occupied, which will likely occur in December 2014. Until that time, sales and marketing expenses, which are estimated to be approximately $5 million per quarter, will negatively impact EBITDA for the first three quarters. For the full year, we estimate that the timeshare project will increase EBITDA by approximately $12 million. At this point, we are forecasting approximately 21% of our full-year EBITDA will be earned in the first quarter.

Shifting to our balance sheet. We achieved a one-notch upgrade to BBB-flat from Standard & Poor's due in part to our low leverage, balanced debt maturities, and large-pool unencumbered assets. In the fourth quarter, we refinanced a 5.55% $134 million mortgage loan on the Harbor Beach Marriott with a new 10-year loan at 4.75% and repaid the 8.5% $31 million mortgage loan on the Westin Denver Downtown. Subsequent to year-end, we redeemed the remaining $150 million of the 6 3/4% Series Q senior notes. Further, we intend to repay the $300 million mortgage debt on the Ritz-Carlton Naples resort and spa and the Newport Beach Marriott when due on March 1, 2014 with available cash.

After adjusting for the transactions that occurred, or are planned to occur subsequent to year-end, we have approximately $310 million of cash, $779 million of available capacity under our credit facility, and a debt balance of approximately $4.1 billion with a weighted average debt maturity of six years. 2014 cash interest expense is forecasted to be approximately $195 million, compared to cash interest expense of $282 million in 2013 and $401 million in 2007.

Our year-end leverage will be the lowest in the Company's history -- the best in the industry and a significant reduction from 2007. In addition, our fixed-charge coverage has also improved significantly, with a $1.54 billion decrease in debt and 105 basis point reduction in our average interest rate since 2007. Even with the significant leverage reduction, we have meaningfully increased FFO per share over the last three years, as our industry-leading FFO CAGR for those three years was 21%.

In summary, we are excited with our fourth-quarter results, as this was the best-performing quarter for the year. We have the best balance sheet in the history of the Company with the lowest leverage, the highest fixed-charge coverage ratio, and the lowest annual cash interest expense, resulting in meaningful cash flow. We are very close to achieving our leverage target of three times and would expect to reach that goal in 2014.

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

(Operator Instructions) Joshua Attie, Citi.

The RevPAR guidance of 5% to 6% is similar to what you did in 2013, and consensus expectations are for GDP to accelerate this year. Plus the government shutdown in October, it seems like it was a one-time negative event. How did you think about these things when you formulated guidance? And I mean, I don't mean to split hairs, but why did you decide not to make the high-end 7%, which would've implied some acceleration?

You know, Josh, it's a good question. And we certainly would agree with all of the positive points that you raised. Which is that certainly it feels like a lot of the basic fundamentals of the economy are better this year, and a lot of the disruption that we felt in 2013 from whether it was the sequester or the shutdown, it would certainly appear at this point we're not going to see that reoccur in 2014.

I think what you are generally seeing here is that, as we move later into the cycle, we are just -- we feel good about the year. We're probably trying to be maybe a hair on the conservative side. But I certainly would -- I agree with all the positive points that you raised, and we'll sort of see how the year plays out, and hopefully that allows us to be more optimistic later in the year.

Thanks. That's helpful. And one more question -- your guidance assumes other hotel revenue growth of 3% to 4% versus the RevPAR growth of 5% to 6%. And you mentioned group business is getting better. And in the fourth quarter, you saw that GAAP narrow where hotel revenue increased at the same rate as RevPAR. I know it's only one quarter, but do you not expect that trend to continue, or is there just not enough visibility at this point to factor it into guidance?

I think what we have seen throughout this entire recovery is that other revenue lines has lagged, even the food and beverage line. So whereas I talked about food and beverage revenues being up roughly 10% to 2007, we're up maybe more in the [15%] to [20%] range in the other revenue area. So we've been hopeful that that will start to accelerate; and the improvement in group activity will help that because a chunk of that relates to spas and golf, and a lot of times those revenues are driven by enhanced group travel. But generally it's been lagging, as we've watched this recovery progress, and so we've assumed that it would continue to be a bit more modest. But, again, as we've sort of commented in my comments that, even on the food and beverage side, these things have been difficult to forecast, and we been pleasantly surprised in a couple of quarters. But certainly there exists the opportunity to be pleasantly surprised on that front, too.

Okay. Thank you.

Andrew Didora, Bank of America.

Ed, certainly appreciate your commentary on the comparison to prior peak. Just wanted to ask a question with regards to if F&B revenues relative to prior peak. When you look at them on an occupied room night basis, how far off are they? And I guess when you think about next peak this cycle, what impediments do you see in terms of reaching prior peak on an F&B basis? And I guess do you think you can exceed those at some point later on this time around?

I guess since occupancy -- I don't have that number clearly in my head, but just thinking through the facts. If we are off about 10% in revenues and we are up slightly in terms of occupied room nights, then I would suggest we're probably off slightly more than 10% in F&B activity per room night, just sort of working through the math.

I would say -- I would expect that over the next few years we should certainly close that 10% [gap]. Some of that's going to be tied to how -- what ultimately happens on the group side. We have been, I think, collectively as an industry a little bit disappointed with the recovery in group. We are certainly feeling better about it in looking at 2014. So I think that gives us an opportunity to do better on that side.

But I would also note that while I don't know that this effort is yet significant in the context of looking at getting back to 2007 revenues, we are, where we can, looking to outsource restaurants to third parties. And so when that happens, our profits go up but our revenue growth goes down because we no longer in some of those cases report the revenues. So that may be a bit of a drag as we look to get back to that overall revenue number, but it will certainly help on the profit side.

Great, that's helpful, Ed. And then Greg, you obviously have done a lot of work around the balance sheet over the last few years. And with your leverage coming down pretty close to your goal, how should we think about your balance sheet capacity going forward? Will we see more acquisitions, some buybacks, or do you kind of want to maintain those levels through the cycle peak?

As we talked about in the past, our ultimate goal has always been to push down to three times leverage. And you can tell that subsequent -- if you look at those transactions that we have completed subsequent to the quarter end, you should assume that we're fairly close to our goal.

And so I think, going forward, we would like to keep that three times leverage or maybe a tad below. So I think when you look out into the future, it's really going to depend on the opportunities. If we see acquisitions, we're certainly -- we certainly have cash to pay for some of those acquisitions. Obviously, if we continue to sell hotels, which we think we will do, we'll have those proceeds to buy assets as well. And so I think when I think about 2014, it's really going to depend on the level of acquisitions and the level of dispositions on what exactly happens to our balance sheet. But I think the ultimate goal for us is to keep at this three-times leverage as we go forward.

Okay, that's great. Thank you.

Joe Greff, JPMorgan.

I may have missed some of your comments, but, Ed, it sounded like you didn't spend too much time talking about the acquisition market. Can you give us your views on that? It certainly sounds like you're more of a net seller than a net acquirer.

And then with respect to your group-based commentary, I think implicit from your comments is that pricing was up about 2.5%. If you could just confirm that. Thanks.

Yes, I think last -- I'm going to do those questions in reverse order. I think last year, our pricing was up just a hair over that. I think if you look for the full year, we were -- our rate was probably up right around 2.7% to 2.8%. So I think you're generally right there. As we look at this year, we are hoping that will see some stronger growth in that, but we're probably in that same range for right now.

If you look at the acquisition market, I'd say generally we've seen -- we saw some -- we're seeing increased activity in the second half of 2013. We were -- I'd say that's driven by a combination of capital continuing to be attracted to the sector because of a perception that we would share, which is that the cycle has room to run. That capital is not just an equity capital. I think we've been finding that, while debt terms are nowhere near what they were during the 2006/2007 time frame, you are seeing leverage being extended at higher levels and an attractive rates. And so I think that's helping to improve the acquisition market at least from a seller's perspective.

We expect to continue to be active in the sales market this year. And I'd like to have us have a reasonable level of activity there as we continue to try to reposition the portfolio by selling what we view as slightly slower growing assets out of the Company. I'd like us to be a net acquirer this year, so I think from the way we're looking at the world, we would like to be more than -- buy more than we sell. But it ultimately comes down to pricing and opportunity. And if we find that we can hit the number on the sales side and we can't get to the number on the acquisition side, then that may mean we end up being a net seller.

Thank you.

Ryan Meliker, MLV & Co.

A couple of questions. First of all, Ed, did I hear you correctly that you valued the retail component of the Powell at $42 million?

That's correct.

Correct me if I'm wrong, but that's about $5000 a square foot for the retail component. What gives you confidence that the value of the retail is so high?

The best thing I have is that this hotel -- or this building was originally marketed to retail buyers, not necessarily to the hotel world. And as we went through our process, we wanted to really understand the value of the retail in terms of just making certain that we were comfortable with the price we were paying. We have already received unsolicited offers from more than that valuation since we've acquired the hotel. So no guarantee that they'll close; but based on the market commentary we have, this is apparently one of Sephora's top locations in the country. And it's a very special space from their perspective. They've renewed their lease. They're going to invest a significant amount of capital in the space. They couldn't be happier with their location, and my sense is they're fairly happy with us buying the building. But while I agree with you that's a big number, and we look pretty carefully at that, the reality is there appears to be pretty good market support for it.

Can you give us any indication what the rental payments with Sephora are or what the cap rate was on the retail component given that big number?

Yes, I guess what I would tell you is that we can't disclose -- we have agreed not to disclose any of the actual pricings there, but I would tell you that it's mid-single-digit cap rate.

Okay, that's helpful. Thanks. And then the second question -- and you gave some good color on how you're looking at the dividend right now. By my calculations, it sounds like around Q1 you're going to be close to that target three-times leverage level. You're going to have over $500 million in cash probably still available on the balance sheet. What is the plan for that cash? And are there more assets that you're looking to dispose of [drop] them into the cycle? And if you do, what will be the plan for that cash, obviously, in excess of the required dividend from capital gains, et cetera?

I think I don't -- our answer to that is probably consistent with what we've said in the past, which is that we would -- as we continue to sell assets, the first thing we'll look at is what is the opportunity to reinvest that capital? That will either be in new acquisitions. It will be in ROI investment in our existing portfolio. I think you're right that there will be -- given where we -- things we been accomplishing on the leverage side, there's less likelihood that it would be deployed to pay down debt. Although, remember when you're selling assets, there is -- you do need to maintain leverage there. It's not -- there's a little bit of an adjustment that's required there.

And then I think beyond that, you look at what's the smartest thing from a shareholder perspective. So that could be a bigger dividend in a lot of cases because will be selling at gains; there will be a need to increase the dividend because there'll be taxable income associated with that sale. And then obviously depending upon what the stock price is, buying back stock is another option. So I think we're -- we'll ultimately look, as we have in the past, to as we generate those proceeds from sales and recognize sort of what amount of that is available to us that's outside of a dividend or required debt pay-down, we'll look to see what's the best use of that capital and then choose to do that.

And, Ryan, I think the good news is right when you look at the cash balance of $310 million, you add in sort of the cash flow that's going to be generated by operations, and then you add in some of the asset sales, you can tell that we could acquire a significant chunk of assets this year and not need to issue equity.

Sure, all right. Thanks a lot.

Harry Curtis, Nomura.

Ed, going back to your answer to the first question, you commented that you were being conservative perhaps because we were later in the cycle. As far as it comes to buying assets, I guess the question is when is the wrong time to buy assets? And the reason I'm curious is that when I look at host stock versus some of the C Corps, the stock is underperformed. And I'm wondering if it's underperformed because you are really not returning as much cash to the shareholder as you might be.

I can't say, Harry, that I've necessarily looked at that particular question related to the C Corps. As I looked at how we have compared to the rest of the hotel REITs, one of the things we have consistently noticed is that we've been doing a better job of generating FFO growth, and Greg spoke to that, at the same time that we've been speaking to accomplish our goals on the balance sheet side, which we think in the long-term are very beneficial for the Company.

I think our dividend is growing; it went up a lot from 2012 to 2013. The fact that we've announced another increase means it will continue to grow at a relatively sizable rate. We're probably running, I guess at this current level, just right around 3% in terms of a yield. And I don't see any reason as the cycle progresses that we won't continue to see the dividend grow. So, to the extent that that's been one of the issues, we're going to be feeding into the solution because I would be expecting our dividend to continue to grow.

Then back to the first question -- or first part of the question, is there a point in time when you and your Board feel a bit more defensive about making acquisitions, given where you guys feel we are in the cycle?

Yes, I think there is. And I think we sort of saw this happen in the last cycle, although in this case, it will probably be a little bit different. At the point in time, we been pretty disciplined about what we have bought. I, in some ways, wish we had been able to acquire more in the last four years. But we've been pretty thoughtful and careful about making certain that when we make an investment, it's actually going to accomplish the return goals that we have as opposed to just speaking to add size because obviously we're already at a pretty good size.

So when we find that the market starts to get to be too pricey for us to hit our return targets, which are generally going up to 100 to 100 -- in the regular asset, 100 to 150 basis points over our cost of capital, then we can naturally back away from acquiring assets. When we're looking at trying that -- looking at trying to establish what the return is going to be from an investment, we're also going to be taking into account where we are in the cycle and, more particularly, where that individual market is in the cycle. So as you start to get to the point where supply is increasing and you begin to get concerned that that's going to exceed demand growth in a particular market, that will naturally make us more cautious in our underwriting, which I think oftentimes will have the effect of making us less competitive since others may not do that.

We're -- as I think was part of my prepared remarks, right now we don't see that situation existing in any market other than New York, where supply seems to be growing even at the -- New York is the only market that has got a high level of supply. Just about everywhere else, especially in the markets that we're looking at and especially in the price points where we tend to compete or tend to acquire, we feel very good about the overall supply-demand equation.

So I think there is a point down the road, just as in every cycle and as in every real estate cycle, we will find the supply will start to exceed demand. And that will end up -- we'll have to be thoughtful about that in our underwriting. And I suspect that as that happens, you will see that we will just not be buying anything.

Okay, very good. Thank you.

Nikhil Bhalla, FBR & Co.

Ed, you talked about dispositions this year. Should we assume that a level of dispositions in 2014 mirror very closely to 2013, or do you have sort of a higher target? Any color you can provide there?

We don't have a hard target. It wouldn't surprise me if we didn't end up in the sort of the level that we've been over the last couple of years. I think we have [sold] a little over -- about $1.1 billion in 2012 and 2013. So that's an average of $550 million a year. So that type of a number is not -- would certainly make sense from our perspective, but it would be early right now to kind of commit to any particular number. And a lot of that is going to -- is all predicated on pricing. Just as we try to be disciplined about what we buy, we are also fairly disciplined about what we sell.

Sure thing. One follow-up question on RevPAR guidance that you've given here. When you think about quarters, do you suspect 1Q maybe is at the low-end of that guidance range? If you could give us some color about the cadence of RevPAR growth this year, that would be very helpful.

We actually -- certainly at the beginning of this year, we were actually looking at Q1 as being one of the stronger quarters of the year. And I think that is despite the fact we knew we wouldn't get the benefit of the inauguration activity in Washington. We were looking at both the benefits of the Super Bowl in New York as well as the fact that in the last week of March we would have a normal week, from our perspective, from group activity compared to an Easter week that we had last year.

We've obviously had a fair amount of weather, especially in the Northeast and to some degree in the Southeast, and so I think that's tempered our expectations a bit. Having said that, though, and this is without knowing exactly how bad last week was but knowing that it wasn't great, we still would expect that the first quarter would actually be -- if we were ranking the quarters, we would still expected to be at the high end of the range that we talked about for the full year.

Great. Thank you very much.

Ian Weissman, ISI Group.

Most of my questions have been answered, but just a quick question as it relates to deals. Jon Gray recently said that he has seen better opportunities in Europe than he has in the United States. I know you guys are active over there., and you've commented in the past about opportunities. I think you noted that the bid ask spread was built pretty wide in Europe. Maybe you could just comment about what the landscape looks like in Europe today given their recovery versus the United States.

Ian, it's a great question because that is one of the places where we hope to be more active this year. Last year, we purchased the one hotel in Stockholm. But as we look at Europe, while the recovery there is still slow and certainly not progressing at the same pace that we hope to benefit from an United States in 2014, we do have a sense that the continent has turned the corner. And consequently in our discussion with our partners, we first need to finish investing the second fund that we had created, which I think has about a little over $100 million in euros of capital to invest. But I think we're open to the notion of potentially doing a fund three or certainly potentially investing on our own if necessary to try to do -- have more activity in Europe. We see opportunity; we do not see as much competition. We've never seen as much competition on the asset management side, and consequently we think there is an opportunity to invest there.

Would you include London in that mar -- I mean, when you think about Europe and opportunities, is London part of that focus?

We would like to buy more in London. But, you know, if I were to broadly characterize Europe and say that there is not a lot of competition, I'd unfortunately need to leave London out of that characterization. London has seen some pretty aggressive pricing. We have looked at a couple of these transactions that have been on the market and have really not gotten comfortable paying the prices that we see there. So we would probably -- we actually -- the more we study the Nordics, the more interested we've gotten there. We are certainly still interested in investing in Germany. And we may even lightly look at some smaller opportunities in Spain only because we're seeing some signs that some of the markets in Spain are recovering, and it may make sense to step back into those markets.

And finally -- if I missed this I apologize. But in your comments, you seem pretty bullish on New York City, which is counter to what everyone is saying in light of the supply, which you even talked about. Super Bowl I know was not great; it's not a big group market. So what are some of the core drivers of your optimism as it relates to New York City?

Ian, this is Greg. We mentioned that, yes, we think New York will perform sort of better than the average of our portfolio. Part of that is because of the strong results from the Super Bowl. Part of it is, I agree with your comment on citywides, but we do have some strong group activity for our hotels, especially in 2014, already on the books. And then, as you know, over the last couple of years we fully renovated most of our New York properties. And so they are all in great condition, and I think ready to outperform New York in general just like they did in the fourth quarter.

Ian, I'd add to that is to Greg's point about the construction is that our Sheraton had its meeting space out of service for the first quarter of last year, and the W on Lexington was going through a pretty invasive HVAC renovation for the first five months -- five or six months of 2013. So we are getting the benefit there of overlapping a weaker time period.

Okay, great. Thank you very much.

Chris Woronka, Deutsche Bank.

Just a quick question, drill down a little bit further on the groups if I could. Did you guys notice a change in kind of some of the booking behaviors in the fourth quarter or is it just -- it sounds like what we saw in the first half, group didn't really come through quite as strongly as you guys and everyone else thought. Did something change there in the fourth quarter and that's maybe giving you the optimism for 2014?

You know, I'd say fourth quarter was obviously great for us from a standpoint of group room nights. As you look at the booking activity during the course of the quarter, it was incredibly inconsistent, at least kind of compared to prior-year metrics. You had good months; you had lousy months. Net net overall, as I said in my comments, when you step back and look at the revenues that we booked in the fourth quarter for 2014 and for 2015, we were up compared to the prior year. So we take some comfort from all of that in terms of looking at the direction of group business for 2014.

Okay. That's helpful. And then just kind of going in a different direction. Could you guys maybe give us an update on where you are in terms of some of the management contracts? And are you seeing any opportunities to -- are any of these things coming up, and maybe there's an opportunity where you renegotiate or re-flag? Just an update on the portfolio generally.

You know, I guess what I'd say is probably the most interesting opportunity for us that falls into that bucket is the Four Seasons in Philadelphia. And you may have noticed that Four Seasons has announced that they're going to be part of the development that's tied in with Comcast communications building -- new building that they're going to create in downtown Philadelphia. Four Seasons has decided to move to a smaller platform in Philadelphia. While we have certainly enjoyed our association and relationship with Four Seasons, we view this as a very interesting opportunity to take what is really one of the classic hotels in Philadelphia, as the timing happens to be quite good for us in that we're envisioning a significant capital investment in the hotel. We've been planning to reorient the food and beverage at the hotel. And so to have the opportunity to do that in a -- where we will not have to do it as a Four Seasons and have the opportunity to look at other brands or look at it an unbranded hotel is a fairly exciting opportunity for us. And I think that's something that we're going to be working on over the course of the year. I'm sure we'll have more to say about that in the second half of this year or sometime early next year.

Chris, I would add also that, as you probably know, we also have a pool of Marriott properties and Starwood properties that, over time, we can convert those properties either to franchise or fully unencumbered; and sometimes, you know, we can do that either today, or we can do it upon sale. So those are also interesting opportunities. And then, as you sort of hinted to, we always just have some contracts coming due or some flexibility on contracts for other reasons. So we obviously look at all of those [friends].

Okay, but nothing is really in the guidance, right, related to that?

No, there's nothing that would be impactful to that EBITDA number that flows from that.

Okay, got you. Thanks very much.

Wes Golladay, RBC Capital Markets.

I'm just curious about how you see the Marriott Marquis opening in DC impacting second half of the year.

It's a great question. We assume that it's going to be a negative impact on the second half of the year. I mean, the convention business in DC is not slated to start to accelerate in response to the Marquis until 2015 and 2016. So since the -- as we've watched that hotel progress, we net net have felt that it would be a long-term benefit to the city, but we do not think it's going to be a benefit to us in 2014. It appears that there was not enough confidence in the group segment or the association group segment a few years ago to book an event into DC without really them being really confident that the hotel would be finished (technical difficulty). And we're not real close to the construction schedule for that, but my sense is that it is going to finish generally on time in the middle of the year. And so, given that while I'm sure Marriott has been actively trying to book the business into the hotel, it's going to be competing in a market that has been seeing less demand than it's normally accustomed to. So it won't be a positive impact.

But we've captured that in the investments we've made in the District, and have always believed that that was the likely result; and certainly it is captured in our outlook for Washington this year in the guidance we discussed before.

Okay. Thank you. And real quick on the -- you mentioned potentially doing a European fund three. And I was just curious what is the fee income you guys generate from funds one and two, approximately?

Greg, you know that.

I think we're not supposed to disclose the fees from that, but I don't know that number of the top of my head.

Okay. Thanks a lot, everyone.

At this time, I would like to turn the call back over to Mr. Walter for any closing comments.

Thank you all for joining us on this call today. We appreciate the opportunity to discuss our results and outlook with you. As you may have heard, we are planning an investor day for April 10 at our Ritz-Carlton in Tysons Corner, Virginia. We view that as an opportunity for you to learn more and hear more from our executive management team about how we look to create value for our shareholders. Invitations and additional information will be coming out soon. We hope to see you at our investor day then. Thank you for your time. I'm sure we'll see you soon.

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