Host Hotels & Resorts Management Discusses Q2 2012 Results - Earnings Call Transcript

Host Hotels & Resorts (HST)

Q2 2012 Earnings Call

July 17, 2012 10:00 am ET

Executives

Gregory J. Larson - Executive Vice President of Corporate Strategy and Fund Management

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

Larry K. Harvey - Chief Financial Officer and Executive Vice President

Analysts

Eli Hackel - Goldman Sachs Group Inc., Research Division

Joseph Greff - JP Morgan Chase & Co, Research Division

David Loeb - Robert W. Baird & Co. Incorporated, Research Division

Ryan Meliker - McNicoll, Lewis & Vlak LLC, Research Division

Joshua Attie - Citigroup Inc, Research Division

James W. Sullivan - Cowen and Company, LLC, Research Division

Harry C. Curtis - Nomura Securities Co. Ltd., Research Division

Carlo Santarelli - Deutsche Bank AG, Research Division

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Host Hotels and Resorts Incorporated Second Quarter 2012 Earnings Results Conference Call. Just a reminder, today's conference is being recorded. Now for opening remarks and introductions, I'll turn the conference over to your Executive Vice President, Mr. Greg Larson. Please go ahead, sir.

Gregory J. Larson

Well, thank you. Welcome to the Host Hotels and Resorts Second Quarter Earnings Call. Before we begin, I'd like to remind everyone that many of the comments made today are considered 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, together with reconciliation to the most directly comparable GAAP information in today's earnings press release, in our 8-K filed with the SEC, and on our website at hosthotels.com.

With me on the call today is Ed Walter, our President and Chief Executive Officer; Larry Harvey, our Chief Financial Officer; and Gee Lingberg, our Vice President of Investor Relations.

This morning, Ed Walter will provide a brief overview of our second quarter results and then we'll describe the current operating environment as well as the company's outlook for the remainder of 2012. Larry Harvey will then provide greater detail on our second quarter results, including regional and market performance. Following their remarks, we will be available to respond to your questions. And now, here is Ed.

W. Edward Walter

Thanks, Greg, and good morning, everyone. Well, we are pleased to report another solid quarter of operating results, which were driven by substantial improvements in group demand and average rate growth. Strong F&B and other revenue growth, combined with improved flow-through, led to earnings results that exceeded consensus estimates. In addition, we just completed the acquisition of a great hotel and have taken advantage of our largely unsecured asset base to arrange a very attractively priced term loan, which Larry will talk about during his commentary.

First, let's review our results for the quarter. Our comparable hotel RevPAR for the second quarter increased 6.1%, driven by an improvement in our average rate of 3.7%, combined with an occupancy increase of 1.7 percentage points. Our comparable average rate was $195 and our average occupancy was 77.6%, which exceeded our portfolio's prior peak occupancy in the second quarter of 2007, the first time we have seen this happen since the start of the 2008 downturn. For the calendar quarter, our RevPAR growth was 6.8%. Comparable hotel food and beverage revenue growth of 5.7% was driven by a strong banquet and AV revenue and contributed to overall comparable revenue growth of 5.8% for the quarter. The increase in profitable banquet activity contributed to 120 basis-point improvement in our comparable hotel adjusted operating profit margins for the quarter, resulting in adjusted EBITDA of $348 million, an 11% increase over prior year.

Our adjusted FFO per diluted share was $0.34 in the second quarter, an increase of nearly 10%. On a year-to-date basis, comparable hotel RevPAR increased 6.1%, driven by a 3.3% increase in average rate and a 1.9 percentage-point improvement in occupancy. Total year-to-date comparable revenue growth of 6%, combined with an adjusted operating profit margin setting increased 110 basis points, resulted in year-to-date adjusted EBITDA of $523 million. This represented an increase of more than 14% over the prior year and generated adjusted FFO per diluted share of $0.49.

Overall, we are extremely pleased with our operating results and the progress we are seeing in lodging fundamentals. The key driver of our second quarter results was the strong increase in demand in our group business, especially in the higher-priced segments. The favorable trends that we noted in group demand since Q4 of 2011 continued to accelerate in the second quarter as our overall group occupancy increased more than 5%. The demand improvement was evident in all of our group segments led by a more than 9% increase in our higher-rated association business and a 5.5% increase in our Corporate business.

Overall, combining the demand improvement with the rate increase that exceeded 1.5%, resulted in improved group revenue of nearly 7%, which exceeded our transient revenue growth for the first time in over a year. As we had anticipated, one major benefit of the significant increase in group demand was our managers were able to focus on driving rate in our transient segments, which became the primary factor behind our transient revenue growth in this quarter. Rate growth in each of our major segments exceeded 5%, led by a 6% increase in our Special Corporate rate. On the demand side, as might be expected, our government transient business, which represents about 3% of overall demand, declined by less than 3%. The strong increase in group business we experienced did result in a slight decline in transient room volume as midweek availability was constrained. As a result, overall transient revenue increased slightly less than 5%.

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