Host Hotels & Resorts Inc (HST) 2018 Q2 法說會逐字稿

Good day, and welcome to the Host Hotels & Resorts Incorporated Second Quarter 2018 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.

Thanks, Jonathan. Good morning, everyone. Welcome to the Host Hotels & Resorts Second Quarter 2018 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 EBITDAre 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 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 our outlook for 2018. Michael Bluhm, our Chief Financial Officer, will then provide details 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 pleased to report a quarter that once again materially exceeded our internal expectations on the top and bottom line and beat consensus estimates for adjusted EBITDAre and adjusted FFO per diluted share.

For the quarter, comparable hotel RevPAR increased 2.8% with comparable hotel EBITDA margins up 90 basis points. Adjusted EBITDAre increased 6.7% to $476 million and adjusted FFO per diluted share increased 10.2% to $0.54. Based on our second quarter performance, we are again raising our full year guidance for RevPAR, adjusted EBITDAre and adjusted FFO per share.

For the full year, we have increased the midpoint of our comparable RevPAR guidance 12.5 basis points to 2.1%, increased the midpoint of adjusted EBITDAre by $20 million to $1.545 billion and increased the midpoint of adjusted FFO per share by approximately $0.04 to $1.74.

These results continue to demonstrate the benefits of our geographically diversified portfolio of iconic and irreplaceable hotels, our unprecedented scale and platform to drive internal and external growth and the power and flexibility of our investment-grade balance sheet. Together, these key pillars form the foundation of Host, the premier lodging REIT.

As mentioned in our press release, we closed on the previously announced sale of W New York on Lexington Avenue on May 9 for $190 million. In addition, we also stated that we have placed the W Union Square under contract for $171 million. The W Union Square has significant money at risk and we anticipate the sale closing before the end of the third quarter. Once complete, these 2 asset sales will have sold for a combined cap rate of approximately 1.3% and reduce our exposure to profitability-challenged assets in New York, a market that faces headwinds as a result of significant supply increases and continued expense inflation.

Selling the W Union Square exemplifies our continuing efforts to upgrade the quality and profitability of the portfolio. Including the W Union Square, over the last 18 months, we have recycled out of over $1 billion of low RevPAR, low growth and high CapEx assets at an aggregate 5% cap rate into hotels with higher RevPAR, higher growth and lower CapEx needs at the same cap rate. This accretive activity has only served to bolster the iconic and irreplaceable nature of our hotels.

Please note that included in the guidance is the one additional asset sale we discussed on our last quarter call.

The timing of that sell has been delayed, but we still do anticipate a closing by year-end.

The combination of a newly announced W Union Square disposition and the delay of our additional asset sale incrementally reduced our full year EBITDAre by approximately $2 million.

As Michael will discuss in further detail, our investment-grade balance sheet has never been in better shape. With leveraging only 2.4x over $500 million of cash on hand and $700 million of capacity available under our credit facility, we are well positioned to drive shareholder value, whether by acquiring assets, investing in our iconic portfolio or buying back stock. We continue to maintain a disciplined approach to capital allocation, and although we are evaluating and monitoring several acquisition opportunities, we are not including any additional purchases in our revised full year guidance.

As it relates to investing in our portfolio, we spent approximately $86 million on CapEx in the second quarter, which is consistent with our plan to spend between $475 million to $550 million on total CapEx.

Notable projects during the quarter included guest room and restaurant renovations at the Swissôtel, Chicago and the lobby and public place at the Westin, Seattle. We also completed our multiyear transformation of The Phoenician during this quarter, as we delivered the tennis and activity center and upgraded the golf course.

The Phoenician is nothing short of spectacular and we anticipate that the transformation will position the property to drive meaningful increases in revenue and profitability.

As I mentioned, our second quarter results exceeded our expectations on both the top and bottom line as our scale and platform continue to drive operational outperformance.

Working with our managers, our asset management and enterprise analytics teams did another exceptional job of driving margin growth in the quarter. Here are just a few of the highlights.

While the second quarter wasn't as dramatically impacted by holiday shifts as it was in 2017, holidays certainly influenced results in April and June. April was, by far, our strongest month of the quarter with RevPAR up 5%, as Easter shifted to the beginning of the month from mid-month in 2017.

On the back end of the quarter, we saw the last week in June positively impacted by the July 4th holiday falling on a Wednesday, as business was pulled forward into the last week of the second quarter. As a result, our comparable hotels had a historic high RevPAR of nearly $197 in the second quarter, an increase of 2.8%. This was driven by a 2.2% increase in average room rate and a 50 basis point increase in occupancy. Year-to-date, RevPAR increased 2.1% to $185, driven by a 110 basis point increase in occupancy and a 70 basis point increase in average rate.

Given the holiday shifts, room business led the way this quarter and improved 3.1%, rebounding from the first quarter, as we expected. This was driven primarily by rates, which increased 2.7%, while group occupancy was up 40 basis points. Notably, corporate group revenues were up 15.2% and had a material impact on banquet and AV spent, which was up 6.6% in the quarter. We continue to see the quality of our groups improve, which is reflected in a significant banquet spend.

The strong group performance in the quarter gave our managers the confidence to push transient rates and continue to enhance profitability. Overall, for the quarter, transient revenue increased 2.2% driven by an increase in rate of 2.3%, offset by a slight decline in occupancy.

Speaking of transient, we witnessed a continuation of the first quarter theme on the business transient traveler returning in the second quarter. Combined that with a sizable increase in corporate group business and banquet F&B spend in the quarter, it is reasonable to conclude that the corporate customer is healthy. We're optimistic that business travel will remain strong over the course of the year and into next year, particularly as nonresidential fixed investments and corporate profits continue to project mid-single-digit increases.

Looking comprehensively at revenue, total comparable hotel revenues increased 3.7%, boosted by an F&B revenue increase of 4.8% and other revenues increasing 9.8%.

Our asset managers continue to do an excellent job working with our property managers, finding ways to increase ancillary revenues at our properties. These contribute meaningfully to our overall margin performance.

As was the story in the first quarter, we continued to do a great job improving profitability at our properties and driving comparable EBITDA margin growth.

In the second quarter, comparable EBITDA margins grew 90 basis points. We received a tax rebate at the Marriott Marquis in New York, which positively impacted margins by 40 basis points. The balance of the margin lift was a result of increased ancillary revenues, increased productivity and reductions in undistributed operating expenses.

This translated to adjusted EBITDAre of $476 million for the quarter and adjusted FFO per share of $0.54. Both were significantly above consensus estimates. Year-to-date, adjusted EBITDA was $846 million and FFO per diluted share was $0.97.

As we look into the second half of the year, our group booking pace is very strong with group revenues up 4.7%. The first -- fourth quarter of this year remains the strongest group quarter, with group revenue 5.4% ahead of last year. With approximately 95% of our group revenues on the books for 2018 and occupancies at all-time highs, we continue to see the booking window extend.

The global economy continues to exhibit strength and appears supportive of industry growth. The economic indicators we closely follow, corporate profits and nonresidential fixed investments remain strong. The forecast for nonresidential investments had surprise to the upside and now stands at 6.5% for 2018 with 4.5% improvement forecast for 2019.

As mentioned earlier, the pickup in business transient travel continues to gain traction and provides reason for optimism. Combined with a healthy group pace for the second half of the year, the stage is set for continued increases in rate, which should drive profitability at our hotels. This is only bolstered by continued strong leisure demand, resulting from record levels of consumer confidence and low unemployment.

This combination of better-than-expected first half results and increased macroeconomic optimism is driving the across-the-board raise to our full guidance. As a result, we're raising the midpoint of our comparable RevPAR growth guidance for the full year to a revised range of 1.75% to 2.5%. This is predicated on our belief that the first half, which materially outperformed our expectations from the beginning of the year will match our long-held top line expectations for the second half of the year. We feel very confident that this is achievable given the strength of our second half group pace and supportive macroeconomic factors.

Consistent with this trend, we are anticipating comparable EBITDA margins of 25 to 75 basis points based on our revised RevPAR range. At the new midpoint of 2.1% RevPAR growth, we expect comparable EBITDA margin growth of 50 basis points, an increase of 40 basis points from the midpoint of our prior guidance.

2018 adjusted EBITDAre has been raised by $20 million at the midpoint to $1.545 billion on a revised range of $1.525 billion to $1.565 billion. I would point out that this increase is on top of a $25 million increase in guidance we posted last quarter, while also factoring in an incremental $2 million in lost EBITDA, due to the W Union Square sale, offset by the delayed closing of one additional asset sale.

We are increasing 2018 adjusted FFO per share by approximately $0.04 at the midpoint to $1.74 on a revised range of $1.71 to $1.76.

In closing, we are pleased with another beat-and-raise quarter, as it continues to demonstrate the attributes of our premium lodging REIT. Our diversified portfolio of irreplaceable assets, our unmatched scale and platform and our investment-grade balance sheet positions us well to continue to outperform our peers in the near, medium and long term.

With that, I will turn the call over to Michael, who will discuss our operating performance and our balance sheet in much greater detail.

Thank you, Jim. Good morning, everyone.

As Jim mentioned, we had an outstanding second quarter with impressive beats to our internal top and bottom line results as well as consensus estimates, enabling us to increase our guidance for the full year.

Comparable RevPAR increased 2.8% on a currency neutral basis, of which 80% was driven by average room rate and in part drove comparable EBITDA margins to increase an impressive 90 basis points this quarter. 40 basis points of the margin expansion was related to a tax rebate at the New York Marriott Marquis with the remainder of the strong performance driven by rate-driven RevPAR growth, better-than-expected F&B revenues, an increase in ancillary revenues and broad operational efficiencies.

As a result, adjusted EBITDAre increased 6.7% to $476 million this quarter, which was $21 million or 5% above consensus estimate. In addition, adjusted FFO per share grew over 10%, which was $0.03 or 6% above consensus estimate this quarter.

We remain impressed by the exceptional job of our property and asset managers to bring more profit to the bottom line.

Now I would like to address the Marriott Starwood integration as it has been a topic of discussion this earnings season.

We have not seen any measurable impact from the sales integration. In fact, the RevPAR index for our legacy Starwood portfolio actually outpaced that of our Marriott legacy portfolio in the quarter. Furthermore, we continue to reap the benefits from the Marriott Starwood revenue and cost synergies. In particular, we continue to accrue benefits from reduced OTA charges, procurement, credit card, reward and centralized system costs. We will continue to monitor and work with Marriott to ensure a smooth transition. We are very pleased with what we have seen to date.

Looking at specific performance in our individual markets. Our best-performing domestic markets this quarter were New Orleans, San Antonio, San Francisco and Orlando. RevPAR increases range from 8% to almost 12% in these markets, generally benefiting from strong corporate group business. Overall, group revenues increased double digits in these markets with growth ranging from 12% to over 14%.

Our New Orleans Marriott outperformed this quarter with RevPAR growth at 11.8%, exceeding the STR upscale results by 440 basis points. The impressive results were driven by increases in average rate of 7.4% and a 3.4 percentage point increase in occupancy. Strong citywide demand in the quarter resulted in an increase and corporate group grew nicely, which allowed our managers to drive transient rate. Group revenues increased 13.5% and transient rate increased over 9% this quarter.

In addition, the strong group business at the property contributed to a 7.5% increase in the more profitable banking and catering business.

Our hotels in San Antonio increased RevPAR by 10% this quarter, driven predominantly by average rate that grew 8%. Strong group business, in particular, improved group revenues over 14% and boosted food and beverage growth by almost 19%.

The RevPAR growth at our San Francisco hotel exceeded our expectations with a significant increase of 8.6%, driven by 6% improvement in average rate and a 2.1 percentage point expansion in occupancy.

The Fisherman's Wharf hotel benefited from its rooms renovation, while other hotels benefited from strong corporate group business. Total group revenues increased 13.5% and food and beverage revenue grew 15.4%, with the more profitable banking and catering revenues increasing 19%.

Our Orlando World Center hotel continues to benefit from strong overall leisure transient demand. However, in the second quarter, the hotel's RevPAR growth of 8% was primarily driven by strong group business. Group occupancy grew 6.3 percentage points and group average rate increased 5.7%, combining for 12.4% group revenue growth. Once again, strong group business allowed for more aggressive pricing, driving up the average rate by almost 7% and increased banquet and catering revenues by over 10%.

Looking to markets that were more challenged in the quarter. Our hotels in Boston experienced a RevPAR decline of 2.9% in the second quarter, as weaker citywide contributed to the decline in group business. It was a 40% drop in the number of citywide this quarter and only one event at the Hynes Convention Center, which impacted our 2 large hotels in Boston.

RevPAR at our hotels in Atlanta decreased 2.7% in the quarter, primarily from an average rate decline of 3.2%. Our performance was particularly challenged from the renovation disruption at The Whitley, a luxury collection hotel, which is undergoing a conversion from Ritz-Carlton.

In Los Angeles, RevPAR at our hotels declined 2.2%, resulting from a 2.9% decline in average rate, slightly offset by a 60 basis point increase in occupancy. Impact from the Marriott, LAX and Manhattan Beach Marriott renovations in 2017 negatively impacted our properties in the market. If we exclude Boston, Atlanta and Los Angeles, the remainder of our portfolio grew RevPAR at 3.7%.

Moving away from our quarterly results and looking to our forecast for the full year, we expect our hotels in Miami, Philadelphia, Maui and San Francisco to outperform our portfolio. Conversely, we anticipate the D.C., Houston and Atlanta markets to underperform.

In July, we paid a regular second quarter cash dividend of $0.20 per share, which represents a yield of approximately 4% on our current stock price. In addition, this represents a payout ratio of 46% on our adjusted FFO per share. We did not repurchase any shares in 2018, but have $500 million of capacity available under our -- under the current share repurchase program. We continue to operate from a position of financial strength and flexibility as we are the only lodging REIT with an investment-grade balance sheet, which we are committed to maintain as we believe it is a prominent differentiator to our peers and provides flexibility to take advantage of value-creation opportunities throughout the cycle.

In June -- as of June 30, 2018, we had cash of $646 million and $551 million of available capacity remaining under the revolver portion of our credit facility. Total debt was $4.2 billion with an average maturity of 4.5 years and a weighted average interest rate of 4%. In addition, we have no debt maturities until 2020.

Subsequent to the quarter-end, we repaid $150 million under the revolver portion of our credit facility, and as a result, had approximately $500 million of cash and $700 million of available capacity. Our leverage ratio was approximately 2.4x as calculated under the terms of our credit facility, providing a significant dry powder for external growth opportunities.

Moving to outlook. Lastly, as you model and forecast out the remainder of 2018, please keep in mind that we generally earn approximately 20% to 21% of our total adjusted EBITDA in the third quarter.

Overall, we're pleased with our strong operating results, which enabled us to increase our guidance across-the-board for the year. Our performance continues to demonstrate that owning a portfolio of iconic, irreplaceable and geographically diversified hotels, having the scale and platform to drive value, combined with a powerful investment-grade balance sheet is a strong strategic position to deliver significant value to shareholders over the long term.

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

(Operator Instructions) Our first question comes from Rich Hightower from Evercore ISI.

So I've got one, I'll make it count. With respect to capital allocation, clearly Host is interested in portfolio recycling, which entails both buying and selling assets, and you guys have done a fair amount of both recently. My question here is, on the acquisition side, given the fact that private markets are pretty strong. There is liquidity out there looking to be allocated to hotels and a lot of that carries a low cost of capital. How do you sort of thread that needle between being a public vehicle with a certain cost of capital versus the private market for acquisitions, which may or may not accommodate that at any given time?

Sure, Rich. Happy to address your question. As we think about our strategy, which we have articulated very clearly, it is to continue to build out the iconic and irreplaceable portfolio of hotels, which we identified in our supplemental disclosure, the top 40 -- the top 40 hotels, which have a RevPAR of roughly $234, accounted for roughly 62% of our EBITDA last year and generated closely over $900 million in EBITDA. So the portfolio within the portfolio is larger than any other stand-alone REIT that's in the public marketplace today. So we think about iconic and irreplaceable, we think about having scale and geographic diversity and the last pillar really is the investment-grade balance sheet. So as we sit back and say how do we get there? How do we continue to build out iconic and irreplaceable? Our view is that there are 2 ways to do it. If the markets are -- depending on where the markets are, you either buy hotels or you sell hotels. And we take a constant read of acquisition opportunities in the marketplace. We take a constant read of where the capital markets are today. And if we see an opportunity to recycle capital out of lower RevPAR hotels with slower growth prospects and in need of CapEx, that's certainly something we would consider to do, because it's very consistent with our strategy.

Okay. And then maybe one quick follow-up there. I mean, where -- what do you think the public markets are telling you to do right now?

Be prudent allocators of capital, maintain the discipline and don't be shy about recycling, when you see the right opportunities and don't be shy about buying, when you see the right opportunities. And if your stock price happens to dip and you think your stock is a good buy, we have a $500 million authorization. And we certainly won't be shy about buying back shares.

Our next question comes from Anthony Powell with Barclays Capital.

In New York, there is a talk that there could be hotel undersupply over the next few years, given strong off-space in construction and increasing Airbnb regulation. How do you balance the opportunity to continue to monetize assets in New York at low cap rates versus what seems to be a improving long-term outlook in the market?

Well, Anthony, I think, we would agree that New York generally as a market is always going to be a good hotel market. Clearly, it's the highest RevPAR market in the country. I would tell you that we look asset by asset as we always have and we look at how we think our hotel is going to perform over the near to medium term and build out whole value scenarios and we look at alternative uses for every property in the portfolio, including our New York hotels. And as we mentioned in our release, we closed on the W Lex and we have the W Union Square under contract. And as we look at the right strategy for each of those assets, we took all of those factors into consideration. I think for the near term, New York is going to continue to have supply headwinds. We're obviously very (technical difficulty) in line with what's happening with leveling the playing field from an Airbnb perspective, but New York is still going to have a lot of supply for the next 2 or 3 years, in our opinion. And it's a high cost market in which to operate. And as I said in my prepared remarks, we're taking steps to reduce our exposure to profitability-challenged hotels. And those are hotels with high expense ratios, high expense loads and expense inflation and hotels that are in the need of CapEx.

Our next question comes from Michael Bellisario with Baird.

Just wanted to stick to the topic of CapEx. I guess maybe, if you think out to 2019, how are rising costs both labor and material kind of affecting your thinking? And does it change timing of any projects that you have in the hopper and kind of how does it move up and down, or how do assets move up and down on the potential sellers, as you think, about CapEx needs?

Well, CapEx is obviously one factor that we look at, Michael, when we evaluate what we think a hotel is worth to us. We are early into the budgeting process for our comprehensive 2019 capital plan. We'll have some meetings in September to really drill down, and as we do every year, look at hotel by hotel, project-by-project and make some determinations on, if owner funded CapEx is required, is there a value play? And are we willing to invest in the asset? So obviously, we have a full in-house capability with our design and construction group. And we're very current on trends in both labor and materials cost and when we sit down, we will have all those facts and figures in front of us.

Understood. And then as you think about acquisitions and what you're underwriting, does that change your thought process on maybe redevelopments or deeper repositioning opportunities for the potential deals you might -- may or may not be looking at today?

I think that when it comes to acquisition underwriting, it's the same process. And of course, if we feel that as part of our underwriting that the CapEx needs of any particular potential acquisition or any value enhancement project that we might undertake are such that we will not be able to underwrite to our return hurdles then that will change our point of view about moving forward.

Our next question comes from Smedes Rose with Citi.

I wanted to ask you when you look at some of your larger hotels in the portfolio, is there an opportunity or would you take the approach to kind of incrementally group up that others seems to be having some success on? You mentioned some hotels like more profit challenged, would that be a strategy at some of your hotels?

I think we developed, Smedes -- we develop a optimal revenue strategy for every property in the portfolio. And those strategies are revisited on a daily basis, quite frankly. So as I mentioned, we have 95% of our group on the books. And we saw a nice pickup in corporate group, which is frankly more profitable, given the higher total spend with food and beverage and AV revenues. So I think there's a balance. And clearly, at some hotels, it makes sense to take more group depending on what's happening in the particular market in a particular year. In other hotels, you want to take less group because you feel that you can drive corporate group with your short-term bookings and higher-rated transient business in the property. So we have always had the strategy of optimal group transient mix. It's nothing new for us. It's something we've been doing for years. And we're right at about 40% group now and it's going to vary by hotel and by market.

Okay. And then I just wanted to ask, you mentioned the tax rebate for the Marriott Marquis in New York. Was that related to just an appeal or something else? And then as you look at your margin expectations going forward, are there any tax rebates expected in those numbers?

It's not related to an appeal, it was an inducement. An inducement to redevelop. As you may recall, we, in partnership with Vornado. Redeveloped a retail parcel there. And we had some help from the CITY. We also got some help from the CITY on the Westin Grand Central. There will be a minor tax high cap rebates in the second half of the year, but it's nothing material or worth talking about.

On the margin side, Smedes, as we mentioned on the call, we got a -- the property tax rebate had a 40 basis point impact to our margins at the same amount and -- for the year-to-date. For the full year, the high cap margin impact will be 17 basis points.

Our next question comes from Thomas Allen with Morgan Stanley.

Just following up on the last question. Were those tax rebates included in guidance before, or -- that helps guys? I think you still would have raised, even if it's new.

I'm sorry, Thomas. Can you ask the question one more time?

Yes, so you said, you raised your full year guidance by $20 million, right? Was the Marriott Marquis New York tax rebate in your prior guidance, or was it not in your prior guidance? And I imply, it helped you by $5 million to $6 million, is that fair?

Thomas, it was not in our guidance. And your assessment is fairly accurate.

So you still would have raised, but not as much. And then on the W New York sales, you highlighted earlier on that you sold them at a 1.3% cap rate. Obviously, that's a very impressive cap rate for a sale. One would assume that buyers have -- I don't want a 1% cap rate, can you just talk about what you expect they will do? And did you look at other options for those properties and kind of how is your thought process around the eventual sale?

Sure, Thomas. Yes, we did look at other options for the properties. We go back to -- let me take it back to 2006 for a moment, because we've been involved in New York for a long time. And in 2006, just to give you a sense of how we think about New York City, we own the Drake Hotel at 57th and Park. And we saw an opportunity to increase the FAR available to that hotel through purchasing air rights from adjacent property owners, really on 56th Street. And we assembled incremental FAR and we're able to deliver the hotel free and clear of the management contract. It was the Swiss at that time and recognized significant value. We sold the hotel for $440 million. And I think that was somewhere in the mid-20s from an EBITDA multiple perspective back then. I just say that by way of background to let you know that we look at all options that are available to us on every asset. And we are keenly familiar with New York and the current legislative landscape and what you can do and what you can't do. And that's all been taken into consideration, and we were very comfortable and very happy with the pricing we achieved.

Our next question comes from Chris Woronka with Deutsche Bank.

I was hoping if you could drill down a little bit on some of the components of margins, and just kind of conceptually, I know there's been some help with food and beverage strength and I know there has been some help on some of the resort fees and other fees and some of the green programs that might help on housekeeping costs and then there is, obviously, core inflation working against you. Can you kind of bucket that, whether you want to look at it for the quarter or the full year? What are some of the pluses and minuses? And how sustainable do you think some of them are going forward ?

Sure. So a couple of things. So first, right, why don't we talk about the margins of 90 basis points, in which rate 40 basis points was attributable to property tax rebate, taking us down to 50 basis points sort of operational improvement. Of that, it was a mixture -- it really was a very broad mixture of things, both top line and bottom line. In particular, we saw super strong F&B revenues, particularly banquet/A&V, driven by over 15% corporate group business in the quarter. We also had, right, as we talked about earlier, 80% of our ADR growth this quarter -- or 80% of our RevPAR growth this quarter driven by ADR, which, as you know, just drives more profitability to the bottom line. We had a fair amount of an increase in ancillary revenues, which are high profit and our managers continue to try to find ways to continue to find those higher profit opportunities in ancillary revenues. But then when you go down to departmental expenses as well, we saw a fair amount of efficiencies coming out in those departments as well as undistributed operating expenses. So when I sort of think about where we were finding savings and opportunities, it really was very broad, both top line and bottom line.

And one thing I would also throw in there on the food and beverage, we saw improvements in productivity and we saw improvements in group cost and -- with the outsized spend on food and beverage being driven by corporate group and improvements on flow through that really helps our margin performance.

Our next question comes from Shaun Kelley with Bank of America.

Just to follow up on the margin question. Maybe to pack it a little differently, though. Obviously, you guys called out some of the very favorable initiatives that Marriott's kind of merger is delivering for you guys now that that's complete. Would you have any ability to break that piece out separately and say, "Okay, look, when we kind of look at Marriott's initiatives, they're contributing this much versus our core operating efficiencies and some of the mix shift things you just mentioned are contributing, why?" So just kind of internal versus external a little bit.

I think it's a little challenging, Shaun, to break it down with respect to what Marriott's doing. I would tell you that as we think about what Leeny has said that they continue to see margin improvements and continue to work hard for the owners to reduce costs and expenses that we should see continued benefits from the various initiatives at Marriott, whether it's reduced OTA commissions, we'll start seeing a benefit when the rewards programs are merged together with lower charge-out ratio on the expense side, as we get our -- start with legacy hotels fully integrated into Avendra. We'll see lower procurement costs. We're seeing lower workers' comp costs on Marriott legacy properties as a result of Marriott implementing Starwood workers' compensation policy. So think about it in 2019, maybe that's worth 50 basis points.

And we're still expecting now a fair amount of expectation around revenue synergies driven by the sales force integration, the loyalty program integration, among others.

Great, that's perfect. Jim, you mentioned the 50 basis points in 2019, is that incremental or would that be sort of all-in, including some gains that are being recognized this year. I appreciate that a lot of things you said are still on the comps, so maybe more of it's next year. But is that like incremental or total all-in?

I would think about it as being all-in, Shaun.

Our next question comes from David Katz with Jefferies.

It's [Kwa Nolan] for David. If I can just jump back on to the capital allocation topic. There's clearly a big event going on in this space among your competitors. And just trying to get your thoughts on your decision-making process around company level versus at the level, that would be great.

I'll answer the question first by saying, David, (sic) [Kwa Nolan] you never say never. However, our strategy has been clearly enunciated that we are focused on iconic and irreplaceable hotels with scale and broad geographic diversification and investment-grade balance sheet. So when we look at individual assets versus portfolios versus other companies, our first screen is iconic and irreplaceable hotels, and that's how we think about it.

Our next question comes from Stephen Grambling with Goldman Sachs.

Maybe a follow-up on that one. If you look at the non-top 40 hotels, how would you characterize the typical potential buyer of those types of assets? How demand from that group may be evolving? And how you would generally expect sales of those assets as you compare one-offs versus the portfolio?

Sure. I think the buyer can come from very -- from different places. The buyer could be another REIT. The buyer could be a private equity firm or the buyer, frankly, could be a sovereign. And we stay in close touch with everyone and keep a close view into the capital markets and what debt financing might be available and what the cost of that debt financing might be and level of proceeds. And all that informs our decision as to what course of action we might take.

And then maybe one unrelated follow-up, and maybe I missed this in the beginning of the call, but I guess, what are you seeing when you referenced the forward booking strength? Are you seeing any deviations across markets or cities? And any kind of color you can provide there as you look into the back half of '18 and even '19?

We're really not seeing any deviation. As you know, some markets -- performance market to market, but all in all, we're not seeing any deviation.

Our next question comes from Bill Crow with Raymond James.

Jim, in your published reports, you are marketing $1.2 billion worth of assets. And I'm, a, curious on that front and where you are in that process? And b, as you think about -- if those reports are accurate, the use of proceeds would either be to build a war chest for transactions that may be on the market or coming to market and then you all kind of identify strategic and a couple of other things that are out there or that maybe to take quicker action on shifting the portfolio make-up kind of in response to some of The Streets request through the year. So I'm just wondering, how you're thinking about what you would do if you, in fact, are selling that portfolio?

Well, Bill, you know that we don't comment on published reports. We only talk about press releases that we might issue. But if you think about what I said earlier with respect to our desire to really build out the portfolio of iconic and irreplaceable assets and if iconic and irreplaceable assets are not available or if it would make economic sense and be accretive to shareholders, to buy back stock or reinvest in our portfolio, those are always all levers that we have to create shareholder value. But to answer your question a little more directly, there are 2 ways that we can build out the iconic and irreplaceable portfolio. We can do it: number one, by those types of hotels; or number two, we can do it by selling hotels that don't fit that profile. From a sales perspective, everything that we do starts with a disciplined review of each asset and our view of value, our whole value taking into account what we believe is the reason, operating pro forma as well as the capital needs of the asset going forward. That is the first screen when we're thinking about selling the hotel and when we're buying the hotel as well. Let's wait and see what happens.

All right. I appreciate that. If we fast forward a year, 18 months, do you think you still have investments outside the U.S.?

We continued to -- as we talked earlier, Bill, over the course of the last several quarters, we continued to explore options with respect to the Euro JV. We're making good progress. I have nothing to report at this time. I hope to be able to have something to report over the next 2 calls with respect to the Euro JV. The other assets that we have, we have 3 hotels in Brazil and one in Mexico City and a couple of hotels in Canada that really would be the balance of our exposure outside the U.S. So we're focused on bringing our complete focus back to the U.S.

Our next question comes from Robin Farley with UBS.

I'm wondering, if you could give a little bit of color, I think you mentioned the increase in group in 2018. I don't know if I heard 2019. And I'm also just wondering how that pace of future group for 2019 changed during the quarter. Others have suggested that some of the improvements in GDP haven't necessarily translated into better demand yet. I'm just curious for your take on that.

Sure, Robin. Group booking activity in the quarter for all future periods is up 22%. And group booking activity in the quarter for 2019 is up 10%.

And then in terms of any thoughts on how changes in macro, improving the GDP have affected demand in your view or not affected as the case may be?

I point to the outsized performance we had at corporate group in the second quarter. It was up almost 15%, and we saw strong spend with food and beverage and AV revenues. And we're hopeful we're going to continue to see that trend continue over the balance of the year. We may not get a full 15% for the rest of the year, but we still anticipate corporate group to be up. And we also are hopeful that we're going to see corporate group continue to come back to our hotels in 2019.

Our next question comes from Jared Shojaian with Wolfe Research.

Two-part question from me. I mean, can you talk about what you're seeing with international inbound demand right now and whether you've seen any impact from the stronger dollar? And then just a follow-up on that last question, as I think about the demand environment, everything we're seeing, whether it's record occupancies, 4% GDP, tax reform, et cetera, historically, you think you'd see a little bit more than 2% RevPAR growth right now. So maybe you could talk a little bit about what do you think is limiting that upside right now, and as some of this group booking pace has been building, going forward into next year and beyond, you could start to see some acceleration from there.

Sure, Jared. We'll talk about international inbound demand first. We saw about a 13% pickup in the first quarter and we saw an incremental 5% pickup in the second quarter. And the inbound demand was really very broad-based in Q2. International accounts for roughly 10% of our business. And it's obviously on the coast where it's most impactful. So it's a tale of different markets, as everything is in the hotel business. San Francisco, Seattle, Los Angeles, a lot of that inbound demand is coming from Asia. And New York, Boston and Florida, it's coming from Europe and Mexico, Middle East. So we're really seeing it across-the-board. That was one question. Can you repeat the second question?

Yes, it was really sort of a follow up to Robin's question and just the demand environment overall seems pretty strong right now with...

We finished this quarter with 84% occupancy in our hotels. We have not seen that occupancy since 2000. And going into the balance of the year, the hotels continue to remain full. 95% of our group is on the books for this year. Where we have opportunities to yield out lower-rated business and increase rate, we are doing that. We see the leisure traveler as being particularly strong. No signs of any weakness on that front. We're encouraged that corporate group is coming back. We're encouraged that the business traveler has returned. And I'm confident that over time, assuming that those trends hold, which we have every reason to believe that they will, that we will be able to increase rates.

And just to add to that, remember this quarter was interesting, because you look at sort of what the attribution of RevPAR growth was last quarter -- in the past couple of quarters compared to this quarter where you had 80% of your RevPAR growth driven by rate. We're certainly seeing our ability to start pushing ADR.

Our next question comes from Wes Golladay with RBC Capital Markets.

Can you provide an update on the retail signage at the Marriott Marquis? How much, if at all, is this helping other revenue growth this year? And then talk about the inducements at that property? Is this a onetime event should we back it out for next year?

The retail is virtually completely leased, as is the signage. I think we have one space left. The high cap will be around, but it will be around for a number of years, but it's going to be in lesser amounts.

Okay. So for that leasing, how much of that rent is -- or I guess, the lease payment, is that increase -- if I recall correctly, that has various step-ups, where you can start to get, I imagine just a higher lease based on -- forget the formula, but may be a percentage of the lease rent at the property. Or can you give us a quick update reminder how that works?

Allow me to take this one offline. There is a lot of detail behind it and probably best to do that separately.

Ladies and gentlemen, at this time, I would like to turn the conference over to Mr. Jim Risoleo for closing remarks.

Thanks, everyone, for joining us on the call today. We look forward to discussing third quarter results and how the year is progressing on our next call. Everyone, please enjoy the rest of your summer.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.