Host Hotels & Resorts Inc (HST) 2017 Q2 法說會逐字稿

Good day, and welcome to the Host Hotels & Resorts Inc. Second Quarter 2017 Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Ms. Gee Lingberg. Please -- Vice President. Please go ahead, ma'am.

Thanks, Chris. Good morning, everyone. Welcome to the Host Hotels & Resorts Second Quarter 2017 Earnings Call.

Before we begin, I'd like to remind everyone that many of the comments made today are considered to be forward-looking statements under federal securities laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed, and we are not obligated to publicly update or revise these forward-looking statements.

In addition, on today's call, we will discuss certain non-GAAP financial information such as FFO, adjusted EBITDA and comparable hotel results. You can find this information, together with reconciliations to the most directly comparable GAAP information in today's earnings press release, in our 8-K filed with the SEC and the supplemental financial information on our website at hosthotels.com.

This morning, Jim Risoleo, our President and Chief Executive Officer, will provide an overview of our second quarter results and provide our outlook for 2017. Greg Larson, our Chief Financial Officer, will then provide greater detail on our second quarter performance by markets, discuss margins and the balance sheet. Following their remarks, we will be available to respond to your questions.

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

Thank you, Gee, and thanks, everyone, for joining us this morning. We are very pleased to report solid second quarter results, which beat our internal expectations on both the top and bottom line. Once again, we materially outperformed industry upper upscale results by over 100 basis points.

As a result of our continued strong performance, we are raising the midpoint of our guidance for the year across the board. We now anticipate 2017 comparable hotel RevPAR to range between 1% and 1.75%, which is a 38-basis-point increase to the midpoint of our prior guidance. We also have increased the midpoint of our prior-margin guidance by 25 basis points and now forecast corresponding margin change of minus 15 to plus 15 basis points.

I continue to be impressed by our ability to drive this type of margin improvement, particularly given this level of RevPAR growth. This is a testament to the scale and information benefits of our portfolio driven primarily by our new enterprise analytics team.

As a result of these adjustments, we now anticipate 2017 adjusted EBITDA to range between $1.46 billion and $1.495 billion. This translates to a $20 million increase to the midpoint of our prior guidance. Similarly, our adjusted FFO per share is now projected to range between $1.64 and $1.68, a $0.02 increase from our prior midpoint.

The cadence of the year is playing out as we anticipated and as we discussed on our first quarter call. As expected, the strength we witnessed in the first quarter was somewhat offset in the second quarter due to the Easter holiday shift. Looking forward, that same holiday shift dynamic remains with the Jewish holidays moving back from October to September. This will negatively impact the third quarter but positively impact the fourth quarter, which we will believe -- which we believe will be strong and second only to our first quarter in terms of RevPAR performance. This is consistent with our prior and current commentary and is the basis for our forecast.

Macroeconomic forecasts remain relatively unchanged from the last time we spoke and appear supportive to overall economic and industry growth. The key statistics we follow closely, corporate profits and business investment, remain significantly above 2016 levels and have historically been a strong leading indicator of future RevPAR growth. In addition, employment remains strong, consumer sentiment is high, industrial production is rebounding, stock markets are at or near all-time highs and the recent decline in the U.S. dollar appears to be shifting from a recent headwind to a tailwind, particularly as it relates to increases in international arrivals. We have yet to see the clear impact of these positive factors on our business. However, we continue to be cautiously optimistic that the stage is set for economic expansion. Offsetting that is a general uncertainty with respect to government policy and economic initiatives, which may be putting a slight damper on corporate outlooks and business travel.

Moving to capital allocation, we continue to selectively prune what we believe to be the most geographically diversified portfolio of iconic and irreplaceable hotels in the sector. As mentioned in our press release, the sale of the Hilton Melbourne South Wharf is imminent. The hotel is expected to be sold for USD 182 million and ends our investment activity in Australia and New Zealand.

In addition, we remain committed to reducing our exposure to noncore assets requiring higher capital expenditures and in locations where lower growth is expected assuming we can pursue asset sales at attractive pricing. As noted in our press release, we have accounted for 1 additional unidentified disposition in our guidance, which we would categorize as noncore and which we expect to close late in the third quarter.

On the acquisition front, we remain disciplined in allocating capital to new investments. While we have evaluated several investment opportunities, the pricing has not met our rigorous underwriting requirements. Our 2017 guidance does not contemplate any additional acquisitions from what we have already disclosed this year. However, we will continue to source opportunities and sell assets where we believe we can add value and enhance NAV per share.

Our industry-leading balance sheet has never been in better shape with leverage at 2.4x as determined under our credit facility. As of quarter end, we have nearly $650 million of cash and over $775 million of capacity under our credit facility. Depending on the economic conditions and opportunities that present themselves, this investment capacity provides us the ability to effectively allocate capital and drive stockholder value in a number of ways. We can seek to increase earnings through disciplined external growth, judicious capital investment in our portfolio, opportune repurchases of stock under our existing $500 million buyback authorization or returning capital to stockholders through payment of a special dividend. We believe this flexibility to pursue a variety of outcomes sets Host apart from our peers.

One of the places where we have allocated capital and will continue to do so is within our existing portfolio. This is evident in the results of our non-comp hotels, where RevPAR for the quarter was up nearly 11% building on the momentum we witnessed at these assets in the first quarter. While this performance is not reflected in our full year RevPAR guidance, these assets are contributing significantly to our EBITDA and represent another lever that we can pull in our diversified portfolio to successfully allocate capital.

Looking at CapEx for the full year, we expect to spend $275 million to $290 million on renewal and replacement capital expenditures and $100 million to $110 million on redevelopment and ROI projects.

Let me now discuss our results for the quarter. Adjusted EBITDA was $444 million, reflecting an increase of 1.8% and exceeding consensus estimates. Second quarter FFO per diluted share was $0.49, also exceeding consensus estimates. Year-to-date, adjusted EBITDA was at $811 million and FFO per diluted share was $0.94.

These results were driven by several factors. While we expected to see some disruption from the Easter holiday shift, group average rate exceeded our expectations and transient demand was better than expected. As a result, on a constant-currency basis, our comparable RevPAR improved 1.7% in the second quarter to nearly $194, driven by an 80-basis-point increase in average room rate. Better-than-expected demand resulted in occupancy improvement of 70 basis points to 83.2%. Our domestic comparable properties had RevPAR growth of 1.8% with a 10-basis-point delta between total and domestic comparable RevPAR growth, a result of the tough comp at our properties in Rio de Janeiro, which benefited from pre-Olympic activity last year.

Comparable hotel revenues were roughly flat for the quarter and up 1.4% so far this year. I am pleased to report that comparable EBITDA margin grew 15 basis points in the second quarter and 45 basis points year-to-date. Greg will elaborate on where that margin improvement is specifically coming from.

Starting with our transient segment, the Easter and Passover holiday shift into April, coupled with spring break travel, boosted leisure demand for the month by 3.5%. May and June demand grew a combined 1.3% for an overall quarterly demand increase of 2%. Transient rate for the quarter increased 1% driven by a nearly 2% rate increase in the month of May. Our strong book of group business allowed us to drive transient rates. Overall, the favorable demand and rate results led to a 3.1% increase in transient revenue for the quarter. We continue to be impressed with our transient business, particularly leisure, which remains strong and buoyed by high customer sentiment, low oil prices and strong employment. As expected, our group results for the quarter were also impacted by the holiday shift as group revenue decreased 2.7% for the second quarter, notably impacted by demand declining more than 8% in the month of April, specifically a result of the holiday shift from March into April. While we expect group to continue to be impacted in the third quarter as a result of the Jewish holiday shift, these trends have been incorporated into the revised guidance we presented this morning.

Let me spend a few minutes discussing our group outlook. We have over 90% of our group revenues on the books for 2017 and continue to see the group booking window extend. With nearly all of our group business on the books, combined with record occupancies at our properties and transient demand strength, there isn't that much additional capacity remaining for groups to book for 2017.

This means that groups are looking out to 2018 and beyond, which is a great trend that helps our managers shore up their business, shrink the hotel and drive future transient pricing. In fact, we were encouraged by strong booking activity for 2019 and beyond during the quarter. Combined with solid 2018 group revenue pace, our outlook for group business remains positive.

One additional item I'd like to address is a question which has been raised regarding a decelerating second half for our business. Please keep in mind that 2 onetime events, both in the first quarter and the third quarter cause a little noise when looking at our guidance. As you know, in January, we benefited from the inauguration and the Women's March, business we were thrilled to have but which skewed first half results higher. As we look to the second half, it is important to remember that we expect to be impacted by the difficult comps in Brazil due to last year's Olympics in the third quarter. When you smooth out those 2 events, our forecast does account for a slight deceleration in the second half but not nearly as much as the forecast would suggest.

Looking at the remainder of the year, we remain cautiously optimistic and confident in the raised guidance we put out last evening and would describe our outlook as steady as she goes. Before I turn things over to Greg, I would sum up by saying that our geographically diversified portfolio of iconic assets continues to drive positive results as illustrated by our performance and our upward revision to 2017 guidance. We continue our strategy of utilizing our portfolio scale and access to information to identify and generate opportunities both internally and externally that we expect to produce strong returns for our investors.

Finally, we continue to benefit from our disciplined capital allocation decisions and maintain the flexibility to create value in numerous ways due to our strong balance sheet.

With that, I will turn the call over to Greg Larson, our Chief Financial Officer, who will discuss our operating and financial performance in much greater detail.

Thank you, Jim. We continue to be pleased with our RevPAR and EBITDA margin growth as our results exceeded our expectation again this quarter, allowing us to raise both our RevPAR and margin guidance. Now I will provide an overview of some of the markets.

Our hotels in Seattle outperformed our expectation in the rest of the portfolio with an 18.7% RevPAR increase, which was over 1000 basis points above the STAR upper upscale market result of 8.1%. The impressive results were driven by both occupancy and average rate increases of 5.2 percentage points and 11.8%, respectively. Our Seattle hotels benefited from a strong citywide calendar, displacement from a competitor's room renovation and tailwinds resulting from the W Seattle renovations last year. Strong transient retail and special corporate business coupled with solid group business helped our managers drive transient ADR, which was up 14.1%.

We continue to witness strength in Phoenix, where RevPAR at our hotels grew 11.8% in the quarter driven by a 6.6 percentage point increase in occupancy and a 2.1% growth in average rate, more than tripling the STAR upper upscale market results of 3.6%. This was the result of a combination of strong transient and group business during this quarter. Specifically, transient revenues increased 17% while group revenues grew 5.2%. In addition, the continual ramp-up of the strategic 2015 redevelopment and franchising of The Camby hotel benefited our Phoenix results in the first half of this year.

Despite the expected lack of citywides this quarter, our hotels in Denver grew RevPAR a significant 8.8% driven primarily by a 6 point -- 7.6 percentage point increase in occupancy mainly from transient demand which increased almost 23%. The RevPAR increase exceeded the STAR upper upscale result by 520 basis points. In addition, our managers strategically targeted short-term group business, which enabled the hotels to increase food and beverage revenues by almost 15% in the quarter.

Our Boston properties also meaningfully outperformed our portfolio this quarter with RevPAR growth of 8%, 380 basis points in excess of the STAR upper upscale results for the market and better than we had anticipated. Occupancy increased 3.2 percentage points and average rate grew 4.1%. Two additional citywides helped to compress the city and drive incremental ADR growth. Once again, transient revenues were strong with a 16.7% increase. We expect continued strength in Boston as several companies are moving into the area or expanding. Although much of this activity is in the Seaport District, we do anticipate the overall market will benefit.

Hawaii RevPAR grew 5.7% beating STAR upper upscale market results by 110 basis points. Resort destinations such as Hawaii benefited from stronger leisure business related to the Easter holiday shift. Average rate for the overall market at our hotels was up 7.3%, which was offset slightly by an occupancy decline of 1.4 percentage points. However, our resorts in Maui were even stronger and saw a 15% increase in transient average rate as they benefited from pricing strategies that replace lower-rated group business with higher-rated leisure customers. The Maui properties are also benefiting from the anemic supply growth on the island and the low national supply growth of resort properties overall.

Shifting gears to some of our more challenged markets. RevPAR at our hotels in Houston declined 12.7% mainly driven by challenges in the group segment. These included 2 fewer citywides this year and lower-than-expected attendance at 1 large event in Houston this quarter. Our hotels in Houston will likely continue to underperform the portfolio as additional supply continues to negatively impact the market especially on the weekend. However, it remains worth noting that Houston represents only 2% of our total EBITDA.

In Atlanta, the RevPAR decrease of 3% in the second quarter was driven by a reduction in occupancy of 1.7 percentage points and a drop of almost 1% in average rate. Both transient and group business were negatively impacted by the Easter holiday shift and renovations at the Ritz-Carlton Buckhead hotel.

In San Francisco, RevPAR declined 2.8% in the second quarter largely due to the anticipated and well-documented closure of the Moscone Convention Center. However, our hotels outperformed the STAR upper upscale market results by 280 basis points. Going forward, we anticipate hotels in San Francisco will continue to struggle as the Moscone Convention Center is scheduled to be completely closed in the third quarter, negatively impacting all hotels in the Bay Area. However, keep in mind that once the expansion project at the convention center is completed in 2018, we expect citywides to return to San Francisco and business to positively follow suit in a meaningful way in 2019. For our domestic hotels in the second half of the year, we expect Phoenix, Los Angeles, Boston and Hawaii to outperform the portfolio and Houston, New York, San Diego and Denver to underperform the portfolio.

Moving to international operations. Our consolidated international hotels second quarter RevPAR decreased 3.1% in constant currency. As expected, the story of these 2 countries continued, outperformance in Canada and underperformance in Brazil. RevPAR at our hotels in Canada grew 11.5% but was offset by a RevPAR decline of 14.6% at our Latin America hotels. Specifically, the business leading up to the Olympics in Rio last year provided for difficult comps at our Brazilian hotels. We expect these difficult comps to continue into the summer and estimate that it will impact our total portfolio RevPAR results by 100 basis points in the third quarter.

Another bright international note is the performance of the hotels in our European joint venture, which showed encouraging signs of improvement in the quarter. The portfolio continued to show signs of recovery and is benefiting from accelerating economic growth across the continent. Many of the countries where we own assets such as Belgium, France, Germany and Spain have increased GDP forecasts since our last call. RevPAR for the 10 hotels in the portfolio improved 8.2% in constant euro with occupancy growth of 4.3 percentage points and average rate increase of 2.7%. This performance was driven by strong transient and group business at several properties. For the full year, we expect RevPAR growth at these hotels will continue to outpace our comparable hotel results.

We remain impressed by the efforts of our managers and asset managers as they continue to do a phenomenal job in bringing more profit to the bottom line. We increased margins by 15 basis points with a RevPAR increase of 1.7%. And on a year-to-date basis, we have increased margins by 45 basis points on a RevPAR increase of 2.5%. These are impressive results in an environment with rising labor costs.

Broadly speaking, our margin outperformance can be broken down into 3 categories. First, we attribute about half of the performance to productivity gains. As we described on previous calls, a large portion of the productivity improvement is related to time and motion studies conducted by third-party consultants at our hotels. We still have a portion of the portfolio where we have yet to complete such studies, so we anticipate continued benefits from this into at least next year.

We are also pursuing other initiatives to drive productivity improvement. These include continued expansion of Marriott's green choice program, which allows customers to forgo housekeeping service in exchange for loyalty points. We have also implemented a room technology solution at many of our hotels, which facilitates more efficient deployment of housekeeping labor.

Our operational initiatives are also delivering outperformance. One example includes recently outsourcing 4 Starbucks operations. These were high revenue but low profit operations. So converting them to rental income stream benefits overall margin.

We have also continued efforts to restructure in-room dining operations. We now have 26 hotels in our portfolio with some form of modified or completely eliminated in-room dining in favor of packaged food pickup or delivery. Other smaller targeted initiatives consist of reviewing maintenance and service contracts or food procurement practices.

Finally, further outperformance was achieved from sub-inflationary growth in operating expenses not allocated to specific departments, such as administrative and general expenses, sales and marketing and utilities. Higher purchasing card rebates and savings in training, recruitment and travel helped reduce A&G expenses. Savings in sales expense through more targeted media and e-commerce spending and reduced group concessions held down sales and marketing expenses. We also continued to benefit from ROI projects such as high-efficiency central plant equipment replacement, LED lighting retrofits and solar panel installations which drove continued savings in utilities.

Going forward, we continue to execute on productivity improvements through our time and motion studies at our medium and small hotels. We also expect to garner cost savings from the Marriott Starwood merger through lower OTA commissions and better procurement costs, both of which should continue to drive future margin improvement. With the benefits of 2 quarters behind us and with these productivity savings in mind, we have increased the midpoint of our margin guidance by 25 basis points this quarter and 40 basis points since our initial guidance in February.

In July, we paid a regular first quarter dividend of $0.20 per share, which represents a yield of 4.5% on our current stock price. We continue to operate from a position of financial strength and flexibility and believe we have one of the best balance sheets in the lodging REIT and overall REIT space. Importantly, this key competitive and strategic advantage enhances our ability to sustain the dividend throughout the lodging cycle, while also allowing us to invest when accretive opportunities arise in either -- to either buy assets, buy back stock or reinvest in high-yielding value add projects. During the quarter, we meaningfully extended the maturity of our revolver and 1 of our 2 term loans and lowered the interest rate margin on the term loan. This transaction demonstrates our ability to take advantage of our strong investment grade balance sheet and our financial flexibility to opportunistically manage our maturity schedule while remaining within our target leverage range. As Jim mentioned, we ended the second quarter with approximately $644 million of cash and $775 million of available capacity remaining under the revolver portion of our credit facility. Today, our leverage ratio is 2.4x as calculated under the terms of our credit facility.

As Jim noted in his remarks, we are excited to have reached the first half in an even better position than we anticipated. We have therefore increased the midpoint of our RevPAR and margin guidance for the year.

Finally, I would urge you to keep the impact of the holiday shift and the tough comps related to the Olympics in Brazil last year in mind as third quarter results are anticipated to be weaker than the first half of the year with a rebound expected in the fourth quarter.

Looking specifically to the third quarter, we expect 21% of our total EBITDA for 2017 will be generated in the current quarter. Overall, we are pleased with our strong results to date particularly with the improving profitability of our assets in what continues to be a competitive market and lower growth environment.

This concludes our prepared remarks. We are now interested in answering any questions you may have. (Operator Instructions)

(Operator Instructions) And we'll go first to Barclays with Anthony Powell.

You mentioned the strength of leisure demand several times in your prepared remarks. Looking back, have you seen prior examples where leisure outperformed business transient for an extended period of time? And how long do you think this dichotomy could last?

That's a good question, Anthony. I think that the -- we're very, very pleased with the book of business we're seeing from the leisure traveler. So long as consumer confidence remains strong and unemployment remains low and people feel good about their wallet and their balance sheet, we expect to see the leisure traveler continuing to spend money. We see no slowdown, if anything, we're seeing acceleration. So we'd like nothing better than to see the business traveler return and put us in a better position to yield rates in an even more aggressive manner at the hotel.

Got it. And as a follow-up, I think in the past you've said leisure made up about 30% of your overall room night mix. Has that mix changed in recent years?

No. It's about the same.

Next we'll go to Shaun Kelley of Bank of America.

Greg, you mentioned some detail around the margins and I think in the last part of the prepared remarks, that you kind of see some benefits on to come from the Marriott Starwood merger and integration. Do you think both in the performance that we saw this quarter and possibly even on the RevPAR side, you're seeing any of that benefit sort of real-time? Or do you think more of the opportunity from the merger is slated to come in the months and years ahead?

I think, look, we're benefiting obviously from quite a few the things I mentioned this year. The time motion studies, the energy ROI project, the green choice program, et cetera. But I think benefits that will accrue to us from the Starwood Marriott merger really that's going to happen later, either late this year or really into '18 and '19 as well.

Got it. And I guess, as we think about sort of the broader overall mix and we look at the portfolio, it feels like this quarter we saw a demonstrable outperformance in some of the kind of non-top 5 or top 10 cities, places like Denver, Phoenix, I guess even Seattle. As we head forward, A, do you think that pattern is likely to continue? And B, kind of what's your plans for how you view your portfolio right now in terms of -- I think over time people have often time to -- tried to prune and get out of some of those, the kind of, let's call it, non-top 10 markets. What's Host's view towards those top 10 or 15 markets versus your overall diversification?

Shaun, that's a really good question. I think that we are very comfortable with the geographic diversity that we have in the portfolio today. I've mentioned in the past that we're very open-minded to looking beyond the top 10 to 12 markets that we had invested in. In fact, while the Phoenician, in and of itself, is non-comp right now because of a renovation plan that we have ongoing, that asset is in Phoenix. That is a good example of the type of property that we'll be looking for, a large asset with scale and an asset where we can add a lot of value. So I don't think that you will see us exiting those markets for the sake of exiting them. I think I'd go back to the comments that I made earlier. If we have a noncore hotel that is situated in a market that's under -- that is likely to underperform the rest of the portfolio over time and is in need of a lot of capital outside of the reserve, those are the types of assets that we'll continue to prune.

And we'll go next to Rich Hightower from Evercore.

So let's -- I want to break down the back half guidance a little bit. So it really does sound like Brazil combined with the holiday shifts are throwing a wrench into the third quarter certainly vis-à-vis the fourth quarter, if not the first half as well. And just trying to get a sense of -- and I appreciate the color you guys give on contribution of EBITDA relative to the full year so we can sort of back into some numbers that way. But what is the breakdown between RevPAR and margins in the third quarter versus the fourth quarter, if you don't mind? And if we go negative, how negative could it be in the third quarter?

Rich, this is Greg. Hey, look at it, I completely agree with almost everything you just said there. Clearly, we are, as we mentioned in Jim's comments, impacted in a positive way because of the inauguration and the Women's March in the first half of the year. And in my comments -- as I mentioned in my comments, Brazil, even though we only own 2 small hotels and the JW down in Brazil, those 3 hotels will impact our RevPAR by 100 basis points just in the third quarter. So there is some noise as we've all talked about. I think the other thing I would add that sort of impacts first half, second half is we have 2 hotels that just became comps this year, The Camby hotel and The Logan hotel. Those 2 hotels were really ramping up in a meaningful way this year. Clearly had strong RevPAR growth year-to-date. Those hotels are going to perform more in line with our portfolio in the second half of the year. So that's 1 additional item that sort of skews first half versus second half. Look at it, Rich, as you know, we don't give third quarter guidance here. I do try to help you out by telling you how much EBITDA. But look at it, I think when I look at the shift of the Jewish holiday and think about 100 basis point impact from Brazil, you should think that clearly for us, I think, RevPAR is going to be negative in the third quarter. And as Jim mentioned, it rebounds in a strong manner in the fourth quarter.

Okay, that's very helpful, Greg. And then just one quick question on some of the quarterly results from 2Q. As I kind of look at Host's performance versus the STR [MSA] tracks, that most of us get on a weekly basis, you did outperform in several of those markets. I'm curious, though, if you take markets like San Francisco, DC, maybe Boston as well, how your CBD assets did relative to maybe some of the suburban assets in those markets, just given some of the particulars last quarter?

Hey, Rich, San Francisco might be the best example of what you just described. In total, right, our RevPAR declined 2.8% compared to the STAR data which was down 5.6%, obviously great outperformance. But when you look at our big hotels, the Moscone Center, it was down about 2.8% so similar performance with some of our more, I guess, suburban properties around San Francisco. I think the one thing that really helped us in San Francisco is that our revenue manager, our asset managers and our manager, we identified this quarter and this year as being, obviously, it was going to be a weak year in San Francisco. And so because of that, they really focused on booking in-house group business, which really, I think, helped us in the quarter. They also booked some, what I would say, high-rated contract business, which also helped us out in the quarter. So with the benefit of hindsight, sitting here today, I think that was a great strategy and really helped our results out. In fact, frankly, if you look at sort of the branded hotels in the area around the San Francisco Moscone property, frankly, most of those hotels were down double digits in RevPAR.

And Rich, I'll give you just a little bit of color on Washington, D.C. looking at suburban versus CBD hotels. So we continue to be very focused on driving performance at every property in the portfolio. And a good example of that, I think, is the Westfields Marriott, which is not in the central core of Washington, D.C., but we had strong in-house group performance in that property in particular. And our RevPAR for that hotel exceeded our previous forecast as once we had the group on the books we were able to yield stronger transient business in the property as well.

Up next, we turn to Thomas Allen from Morgan Stanley.

So just on the EBITDA revisions or the 2017 guidance revisions, how much of -- what would have been -- what's the impact from the additional property sale that you're assuming? I'm assuming that's not the Melbourne sale that you had already anticipated last earnings, right?

Yes, that's correct, Thomas. The undisclosed disposition that we referenced in the press release and our remarks will have an effect -- a negative effect of about $2.5 million roughly for the balance of the year.

Which is in our guidance.

Yes, of course, it's in our guidance. And so the $20 million would've been closer to $23 million.

Perfect. And then I think there's been some concern in the market just that if you looked at the STR data, June RevPAR decelerated from May despite it should have gotten the benefit from the July 4th shift. Did you feel like there was any kind of change in demand trends in June versus the prior quarter or prior months and quarters?

No, we did not, Thomas. Actually, we had a pretty good June. I'm not going to give you specific RevPAR numbers but we're really comfortable with how June performed.

And I guess July also?

July, look, obviously, we're still in July but, so far, July has been pretty decent as well compared to our internal forecast.

Our next question comes from Michael Bellisario of Robert W. Baird.

First question just on acquisitions. Jim, how far off do you think you are on pricing? And then maybe from your seat, with your investment history and acquisitions history, are you seeing others underwriting differently than you are? Or do you think it's just simply a cost of capital difference that you guys have versus your competitors out there today?

Well, I don't think it's necessarily a cost of capital difference, Michael. I think that as we're looking at investment opportunities today, I think, first and foremost, we don't think it's time to be a buyer of any commodity type of asset. So we are focused at this point in the cycle on unique hotels that I would categorize as iconic and would fall into that section of the assets that we own today. We are taking into consideration the growth environment that we're operating in as we're underwriting hotels. And as we talked before, we take into account a full 10-year capital plan and look to solve for an unleveraged IRR on a 10-year basis that is at least 100 basis points in excess of our cost of capital, if not higher, depending on the facts and circumstances of the particular deal. So we have not -- I wouldn't say that we are wildly off underwriting expectations, pricing expectations of buyers today. But I would say that, given the attractiveness of the debt markets and the availability of debt capital both from a pricing perspective and proceeds perspective, there has to be a real reason for an owner of an asset to want to sell today. So they become indifferent to a refinancing unless they can really achieve a valuation that excites them. And I think that is what's happening in the markets today.

Got it. And then just one other question on group. Can you maybe provide some metrics on the in-the-quarter bookings for all future periods? Did you see that pace tick up or down in the second quarter?

Well, it depends on how you define all future periods. When we look from bookings sort of in the quarter or for this year but for '18, '19 and beyond, the bookings were actually stronger. Bookings in the year, for the year, as we expected and as we talked about last quarter, were, as expected, a little bit weaker.

Yes, I would -- '18, specifically, Michael, we are ahead of group pace in '18 relative to where we were this time last year for '17. So we feel pretty good about what's happening with group in '18 as we look at the numbers today.

Our next question comes from Ryan Meliker of Canaccord Genuity.

Jim, I guess just 1 for you. You've now been in the big seat for 6 months, obviously been with the company a lot longer. But I'm just wondering if there's anything that you've learned over the past 6 months that surprised you or has caused you to rethink some ideas you had coming into the seat?

Boy, I'll tell you, if anything, Ryan, I've come to appreciate better what a great company Host is. When I sit back and look at the attributes of Host Hotels & Resorts and I look at the geographically diverse portfolio that we have, which I think is unmatched by anyone else in the industry, the scale that we have, the access to information and the ability to utilize that information to be effective on asset management and effective on the acquisition side and then the balance sheet that we have, it's never been in better shape. I'm really excited about where we sit, and I think that the results that we have for this quarter and the fact that we were able to beat consensus and raise estimates is a testament to everything that I just referred to in many ways. So no surprises, excitement and looking at ways to move the company forward as we think about where we are in the cycle and what the next leg might be.

Okay, I appreciate that, Jim. And then as we think about going forward, as we move through the cycle and what the next leg may be, coupled with the balance sheet that you just mentioned that's obviously in great position, where do you see Host, call it, 5 years from now? Is Host going to be a lot bigger? Are you going to continue to prune the portfolio in one-off transactions similar to what you've been doing this year? Do you see M&A on the horizon? How are you thinking about the portfolio on a go-forward basis?

Well, it's difficult to answer that question in a vacuum because it's so dependent upon what happens in the economy and whether or not we see a reacceleration of economic growth depending on what comes out of Washington and general economic trends. So the thought that I have is I want to make certain that Host is the best-performing REIT in the space, and the actions we take will be with an eye toward increasing our performance, increasing our margin performance and outperforming as we look to the future.

And from Deutsche Bank, we'll go next to Chris Woronka.

I wanted to ask you about your Hyatt hotels. I think you have about 9 of them and I know they're going through kind of a contract renegotiation of sorts with the couple of the OTAs. What -- do you -- is there any embedded, do you think, that's going to create any kind of friction for you temporarily in the third quarter? And I think they've sent the owners some communications about their plans. But I mean, do you see that as a potential source of surprise for you?

Chris, I'm going to be careful with how I answer this question because we've been in close communication with Hyatt. And as you might imagine, we are among the many owners in the industry that advocate for lower distribution costs. And I feel that over time Hyatt's strategy will achieve this result for us and really that's about all I want to say on this subject.

Okay, fair enough. I also wanted to ask you on the -- I know on the non-comparable hotel guidance, I think that is up $9 million or so at the midpoint versus prior. I guess the question is kind of how much visibility do you have on that? And then looking out to next year, maybe, Greg, can you explain to us how the comp set might change next year?

Yes. So I mean, Chris, as you mentioned, I mean, obviously, we've been very pleased with our non-comp and our comp results so far this year. In fact, if you look at year-to-date our non-comp is up north of 13% in RevPAR growth. So I would expect, when I look at the non-comp assets that are in the group, Denver Tech, the Hyatt in San Francisco, which is actually up over 20% in the quarter in RevPAR, the Marriott Marquis in San Diego, Axiom and our 2 new acquisitions, the Don and W, I would expect all those hotels to continue to have decent results in the second half of this year. As far as which assets will fall out, I think that the Marriott Marquis, I think, becomes comp next year. But -- and I know the Axiom becomes comp next year. Beyond that, really what we always try to do is have a full year of sort of what we would consider normalized results before we put it in the comp. So it's hard for me, sitting here today, knowing -- to tell you exactly what will be non-comp next year.

Next we'll go to Smedes Rose with Citi.

I just wanted to ask you how you're thinking about your position in New York. We've just sort of heard anecdotally that buyers are perhaps more interested in the market now, given that the pace of new supply is likely to start declining? Do you think that's accurate? And maybe just in terms of overall portfolio repositioning, are you interested in selling a property or more here?

Smedes, I think you are starting to see some interest in New York. There's a lot of noise in the background here. The city has undertaken an initiative with respect to Midtown East rezoning, which will likely be approved and signed into law in -- later in August or September of this year. I think that could potentially open up opportunities for repurposing of certain hotels today to office and -- /residential. So we, as you know, we have a number of properties in Midtown. We are looking at a number of the assets. We've had conversations with different prospective purchasers. I would not say today that we're close to a deal, but it is something that's at the top of our list.

Our next question comes from Patrick Scholes, SunTrust.

My question is on your expectations for the fourth quarter. Certainly, we know October has a very easy group comp, but what do you think about the strength or weakness of group business in November and December?

Hey, Patrick, as you probably already know since you're a specialist on forecasting future RevPAR, November -- I think November surprisingly, even though it's a difficult comp, November looks pretty decent right now. And as Jim said in his prepared remarks, we expect the real rebound in the fourth quarter. Now having said that, we think it probably -- it's a decent quarter but it's probably our second best quarter of the year.

Now let me quiz you a little bit more here. I completely agree with you on November. This is interesting because, a year ago, November sort of surprised to the upside and November, I would say, has one of the harder back half comps. Why do you November looks decent for group? And I relate that to, when I go back and look at the Smith Travel results around the election, it doesn't look like there's a terribly easy comp. I mean, group was up 15% or 17% the week after the election. What do you think might be going on for another good November here?

I mean, Patrick, it's a great question. If you remember, November of last year was really the first year that we and, I think, the industry in total, actually we all beat our internal forecasts after experiencing about 1 year and 1.5 years of always sort of coming up short on internal forecasts, November was a very strong month. December was a strong month. And obviously, for us, the first quarter and second quarter were both strong months -- first quarter was a strong quarter and the second quarter is strong as well. So it's a good question. Look, in all I know, I don't know if I give specific answer but what I can tell when I look at our group booking pace in the second quarter, especially November and December, it looks real decent sitting here today.

Our next question comes from Bill Crow of Raymond James.

First question is going back to something you said earlier about the potential savings from the Starwood/Marriott merger. Just curious, you referenced lower OTA commissions. What is the average commission, OTA commission, you're paying today? And if we had to take a guess how much -- how many basis points could we see that decline over the next year or 2?

Yes, Bill, I think that when we look at our sort of Starwood legacy hotels and look at the contracts that they had versus Marriott, I think once those contracts are fully negotiated, my guess is, is we save 1 point or 2, which is obviously material. I mean, the other -- so the -- but the other thing that we're hoping for, obviously Marriott is a larger company going forward, we were -- I mean, I'm speculating now, but I'm hoping as a bigger company they have more leverage in the future on negotiations as well.

Okay. And then the follow-up was on Europe. Just with the weaker dollar here in the back half of the year, I'm just curious whether that has an impact on your forecasts for the balance of the year? And whether you're contemplating -- now that you've kind of cleaned up Australia, whether you look at Europe as a potential area for capital recycling?

Great question, Bill. I would say with respect to inbound international travel, it's probably neutral to up a bit. We are happy, from our perspective, to see the dollar weaken a bit because we do think we'll see more inbound travelers. With respect to Europe generally, as you know, Europe contributes roughly 2.5% of our EBITDA on an annual basis. And we are invested through a joint venture with 2 really terrific partners, the government of Singapore and APG. And it's been a great relationship. We've been in the Euro JV since 2006. That said, we are evaluating the way forward in Europe. And a couple things can cause one to stop and think, well, cost of capital in Europe is -- appears to be much more aggressive than it is in the U.S. So frankly, it makes it more difficult for us to compete. And we start with that premise and we'll take it from there.

Our next question comes from Jeff Donnelly of Wells Fargo.

Just first, I wanted to ask a follow-up on Moscone. The group booking contribution from Moscone, is just marginally better in '18 than it was in '17. So I'm just curious, I know it's early, but is it your sense that San Francisco could commence a recovery in RevPAR as early as next year or is your sense that 2018 could be more of another year of, call it, transition before we really get into that period of '19 and '20 where they're -- the Moscone are bookings are quite strong.

Jeff, I would agree with the latter comment that you made. I think that as we look at citywide events in San Francisco for '18, it is not as strong as '17 or '16. We really start to see group room nights come back on the books in '19. '19 is the year when we're likely to see performance levels in total group room nights of 2016.

That's helpful and then maybe just another question on expense growth. I mean, it's been pretty low this year. Can you guys talk about how much longevity you feel there is to holding expense growth low? Is that going to be isolated to 2017? And could it persist into 2018 if you think RevPAR kind of remains around this 1% to 2% level? And I guess maybe a second part to that, we had estimated some of the synergies that you guys might face from the Marriott Starwood combination to ultimately approach call it 50 to 100 basis points cumulative on margins over the next few years. Do you think that's a reasonable estimate of the tailwind you could get from Marriott Starwood?

Jeff, to answer your first question, is it sustainable? We're working really hard at making it sustainable. As we mentioned, we have completed time and motion studies at a number of the hotels in the portfolio. We're continuing to roll those studies out throughout the portfolio to improve productivity and improve margin on a regular basis. So Greg also mentioned when he talked about other avenues that we're taking along with our managers to enhance productivity, like how you schedule housekeeping rooms and the green choice, I mean, we're looking for continuous and working with our managers to find new initiatives that's going to allow us to be more productive in our hotels and keep costs down. Answering your question regarding the impact of the Marriott Starwood merger going forward, I don't think that your assumption is unreasonable at all. Over the next 2 to 3 years, as the companies are fully integrated, we will likely see benefits top line as well once the rewards programs are fully integrated, hopefully, by the end of '18. So when I look at margin performance, I think it's difficult in many ways to separate margin performance from RevPAR performance. So all in all, we feel really good about what's happening with the Marriott Starwood integration and the fact that Marriott is managing 81% of our rooms.

From UBS, we turn next to Robin Farley.

Great. Two questions. One is just looking at your change in RevPAR guidance for the year, it mostly has sort of gone up by the amount of the beat in the second quarter, just at the midpoint, so how should we think about -- is your outlook for the second half pretty much the same as what you thought it was a quarter or so ago? Is that the best way to think about that? And then, I have one other question.

Hey, Robin. This is Greg. I think that you're generally right that our increase in -- if you look at the midpoint of our RevPAR guidance increasing nearly 38 basis points. It's primarily because of the success we've had in the -- both the first and second quarter beating our internal forecast. And I think we've -- pretty much sitting here today have a similar outlook for the second half of the year.

Okay, that's helpful. And then just in the opening comments, Jim, you'd mentioned that you'd like looked at some opportunities that didn't meet your IRR standards. And can you give us a sense of just what types was it -- was that -- were they portfolios or individual properties similar to the Don and the W acquisitions you have made? Were those just sort of individual properties? And is it that there were other bidders that had a lower cost of capital or something?

Well, I'm not certain that, Robin. I don't think I said that the other bidders had a lower cost of capital. I think we're very comfortable with our cost of capital and it puts us in a position to compete to create accretive value over time and we underwrite to that perspective. So they were not portfolios. They were single asset deals and we spent a lot of time on one, in particular. We were very close on it and frankly the -- as I mentioned earlier and in response to, I think, a question that Michael raised, when a buyer can go out and borrow at very attractive rates, or I'm sorry -- an owner can go out and borrow at very attractive rates, at high proceeds levels, they change their mind and they decide they want to own the asset, I think, for many of the same reasons that we continue to be cautiously optimistic about where we're going.

This concludes today's question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Risoleo for closing remarks.

Well, thank you for joining us on the call today. As I said earlier, we are pleased with our solid results earnings beat and 2017 guidance raise across the board. We look forward to providing you with more insight into the remainder of 2017 on our third quarter call this fall. Have a great day, and enjoy the rest of your summer.

And this does conclude today's presentation. Thank you all for your participation. You may now disconnect.