Host Hotels & Resorts (HST)

Q1 2011 Earnings Call

April 28, 2011 9:30 am ET

Executives

W. Edward Walter - Chief Executive Officer, President and Director

Larry Harvey - Chief Financial Officer and Executive Vice President

Gregory Larson - Executive Vice President of Corporate Strategy & Fund Management

Analysts

Shaun Kelley - BofA Merrill Lynch

Jeffrey Donnelly - Wells Fargo Securities, LLC

Joseph Greff - JP Morgan Chase & Co

Chris Woronka - Deutsche Bank AG

Robin Farley - UBS Investment Bank

Ryan Meliker - Morgan Stanley

David Loeb - Robert W. Baird & Co. Incorporated

Joshua Attie - Citigroup Inc

Presentation

Operator

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Good day, everyone, and welcome to the Host Hotels & Resorts Inc. First Quarter Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Executive Vice President, Mr. Greg Larson. Please go ahead, Mr. Larson.

Gregory Larson

Well, thank you. 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.

Additionally, 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 in today’s earnings press release, in our 8-K filed with the SEC and on our website at hosthotels.com.

This morning, Ed Walter, our President and Chief Executive Officer, will provide a brief overview of our first quarter result, and then we'll describe the current operating environment, as well as the company's outlook for 2011. Larry Harvey, our Chief Financial Officer, will then provide greater detail on our first quarter results, including regional and market performance. Following their remarks, we will be available to respond to your questions.

And now, here's Ed.

W. Edward Walter

Thanks, Greg. Good morning, everyone. We are pleased to report another solid quarter of operating performance. Increased pricing strength during the quarter resulted in our strongest average rate growth since 2007. Our first quarter results were in line with our expectations, and accordingly, we are reconfirming our RevPAR guidance for the full year, and as a result of our acquisition activity, slightly increasing our earnings and adjusted EBITDA guidance. But before I get to our outlook, let's talk specifically about our first quarter results.

First quarter RevPAR for our comparable hotels increased 5.4%, driven by an increase in average rate of 4.8% combined with an increase in occupancy of 0.4 percentage points. While these results were in line with our expectations, our reported RevPAR increase was negatively affected by substantial renovations at both our Sheraton New York and Philadelphia Marriott hotels, where RevPAR declined approximately 18% for the quarter.

In addition, it is worth noting that due to the timing of our reporting period, our first quarter does not include the operating results for a significant portion of the portfolio for the month of March, which was the strongest month of the quarter. Comparable hotel RevPAR for the calendar quarter omitting the 2 very disruptive renovations, increased 8.4%.

Our comparable hotel adjusted operating profit margins, which declined by 10 basis points, were meaningfully impacted by year-over-year increases in property levels bonuses, significant increases in state-assessed payroll taxes, and a reduction in cancellation fees. Larry will give you more insights into each set of issues in his comments.

Adjusted EBITDA for the quarter was $144 million, an increase of 14% over last year. Our first quarter FFO per diluted share of $0.11 was negatively impacted by $0.01 of acquisition costs associated with successful transactions. Overall, we are pleased with our operating results and the progress we are seeing in lodging fundamentals.

First quarter demand displayed the same positive trends we experienced in the second half of last year, as group demand continued to increase and transient demand shifted higher-price customers. Operating results in the quarter were negatively affected by poor weather conditions in the Northeast and the threatened government shutdown. Overall, average rate growth was better than we expected as we continue to narrow the gap from peak rate levels of 2007.

Starting with our Transient segment, business trends continue to be positive with an overall average rate increase of 6.2% for the quarter, driven by an 8% increase in our Premium and Corporate segments and a 5-plus percentage increase in our Special Corporate segment, while overall transient demand slipped by 0.7%, demand within these more highly rated segments was up more than 5%. Discount room nights fell 6% as hotels relied less on lower-rated channels and we were able to replace this business with higher-rated corporate demand. The net result was an increase in Transient revenue of 5.4%.

Turning to our Group business, we benefited from a demand increase of 4% at an average rate increase of more than 2%, resulting in an overall Group revenue increase of 6.4%. The main driver for these results was the 24% increase in demand from our higher-rated Corporate Group business as that segment continues to recover ground lost in the downturn. Our Association business, which has longer booking lead times, was off this quarter by 17%, but it is expected to recover significantly over the course of the remainder of the year.

Every segment of our Group business experienced average rate growth, and all but the Corporate segment are now exceeding 2007 rate levels. However, given that overall group demand is still more than 13% behind 2007 levels, we are still expecting to see increasing Group business drive our recovery.

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