Host Hotels & Resorts, Inc. Q1 2009 Earnings Call Transcript

| About: Host Hotels (HST)

Host Hotels & Resorts, Inc. (NYSE:HST)

Q1 2009 Earnings Call

April 23, 2009 6:30 pm ET

Executives

Gregory J. Larson – Executive Vice President

W. Edward Walter – President and Chief Executive Officer

Larry K. Harvey – Chief Financial Officer

Operator

Good day and welcome to this Host Hotels and Resorts, Incorporated first quarter 2009 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 sir.

Gregory J. Larson

Thank you. Welcome to the Host Hotels and Resorts first quarter 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. 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 reconciliations 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.

This afternoon Ed Walter, our President and Chief Executive Officer, will provide a brief overview of our first quarter results and then will describe the current operating environment as well as the company’s outlook for 2009. Larry Harvey, our Chief Financial Officer, will then provide greater detail on our first quarter results including regional and market performance. Due to the equity issuance announced this afternoon, we will be unable to take questions on this call.

And now here’s Ed.

W. Edward Walter

Thanks Greg. Good evening everyone. We apologize for the short notice and late hour of this earnings call, but let’s start with our results for the quarter. Unfortunately as expected the first quarter proved to be a [inaudible] earning environment for the lodging industry.

First quarter RevPAR for our comparable hotels decreased by 19.8% driven by a decrease in average room rate of 8.6% and a decline in occupancy of 8.5 percentage points. For the quarter our average rate was $181 and our average occupancy was 60.8%.

Food and beverage revenues at our comparable hotels decreased more than 20% for the quarter. Overall comparable revenues decreased approximately 19.7% for the quarter. Aggressive cost cutting in light of the weak operating environment limited the decline in comparable hotel adjusted operating profit margins to 400 basis points and resulted in adjusted EBITDA of $174 million in the first quarter.

Our FFO per diluted share for the quarter was $0.10. That included a reduction of $0.08 due to non-cash impairment charges associated with potential asset sales. Excluding these charges our FFO per diluted share would have exceeded the consensus estimates by $0.07.

In looking at our mix of business for the quarter as expected the negative trends experienced at the end of 2008 accelerated into 2009 as both group and transient business were weak. On the transient side, our corporate and premium priced business continued to deteriorate as room nights fell by 26% and rates declined by 13. At this point our higher priced segments have fallen to roughly 12% of our overall business which is comparable to the levels we experienced in 2003.

Overall, our transient business was down by 10% and rate was off by 14% as hotels were forced by market conditions to reduce rates to compete for business and our mix of business tilted towards lower priced segment.

On the group side, room nights were down by 18.3% driven primarily by corporate cancellations and attrition at association events. Although we saw some weakness in corporate rates, overall group rates were down just by 1.8% as the majority of the business we did experience represented events booked prior to the downturn.

Looking at the remainder of 2009 it is clear that our group booking pace has deteriorated further. At this point our properties bookings are behind last year’s pace by approximately 19% due to increased attrition and cancellations. The year-over-year comparisons are worse in the second quarter and then improve in the second half of the year. We are also seeing additional weakness in average rates as more highly rated bookings are replaced by business booked at lower rates, reflecting the realities of our competitive environment.

It is worth noting that while there remains a risk that these trends continue to weaken, our operators are suggesting that the relative pace of short term bookings has improved over the last few weeks. And on the transient front while reservation activity continues to fall short of last year’s levels the shortfall appears to have stabilized over the last few weeks suggesting that the occupancy declines may begin to moderate.

As we said last quarter our level of capital spending will decline this year. In the first quarter capital expenditures totaled $108 million, a decline of approximately 28% from the prior year. These expenditures include return on investment and repositioning projects totaling approximately $59 million. The majority of our spending this year which should total between $340 and $360 million is dedicated to projects that were already in process such as the meeting space additions at hotels including the Swissotel in Chicago and our Washington Marriott at Metro Center, which will be completed during the first half of the year.

Given the $1.8 billion investment we made in our portfolio over the last three years, we are very comfortable with the fiscal condition of our properties and are confident in our competitive position versus the market.

On the investment front, while we are monitoring both domestic and international markets fairly carefully, we are seeing few transactions today that might satisfy our return and quality requirements. As the year unfolds we would expect to see deal flow improve as the combination of looming debt maturities and depressed operating results create more motivated sellers. We intend to be opportunistic as market conditions evolve and frankly are optimistic about the future prospects in this arena.

On the asset sale front, we are actively working several transactions that involve the sale of assets that are not part of our long term core portfolio but are attractive to the few buyers that are active in the market today. Given where pricing expectations are and the decline we’ve experienced in operating income levels, some of these sales may be consummated at less than the book value of these assets which is the reason why we booked an impairment expense in the first quarter. While the transaction market continues to be volatile and it is very difficult to predict the timing and volume of sales, our current forecast assumes that we will complete $100 million in dispositions over the remainder of the year.

Now let me address our outlook for 2009. In considering our full year forecast I should again caution you that visibility is very limited as the varied timing of the Easter and Passover holidays always presents challenges in interpreting the data in March and April. While the first quarter generally played out slightly weaker than our expectations on the revenue front and slightly better than we projected with respect to expenses, the acceleration in group cancellations we experienced in February combined with the rate weakness we are seeing in our transient business and the change in timing for the Easter holiday, suggests that RevPAR will likely decrease further during the second quarter and then begin to improve on a relative basis in the second half of the year as the comparisons become easier.

With the assumption that demand stabilizes at current levels for the remainder of the year, but we do see improvement in the second half as the comparables ease, we would anticipate that the full year RevPAR decline would range between 18 and 20%. This assumes that the economy generally follows current expectations and remains weak for the remainder of the year, and that modest improvements in the financial markets continue. Additional disruption in the financial markets or the economy would threaten this estimate.

To the extent that the economy rebounded aggressively in the third or fourth quarter, there is some chance that RevPAR growth could surpass this estimate but typically our industry lags a recovery. While margins will weaken as we work our way through the year at these RevPAR levels we would expect our margin decline would range between 540 and 600 basis points, which leads to a projected EBITDA range of $800 to $850 million. This will translate into FFO per share of $0.68 to $0.76 for the full year.

Given our perspective on the business, it is not surprising that our operating strategy for the next several months remains consistent with our prior description. At the property level we have stretched realistic revenue forecasting and aggressive expense reductions in an effort to maximize our EBITDA and property cash flow. At the corporate level we have been intensely focused on maintaining our liquidity and proactively addressing any debt maturities.

While we are comfortable with the progress we’ve been achieving on our refinancing activities, the recent strength of the equity market has provided an opportunity to strengthen our balance sheet and enhance our ability to both retire debt as well as build capacity for what we expect will be a target rich acquisition market. While the current environment is challenging, the longer term fundamentals of our business are improving. Supply growth is moderating, especially after 2010 and will likely remain at historically low levels for several years, setting the stage for solid RevPAR growth once demand recovers. In this environment the value of our portfolio will appreciate meaningfully.

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

Larry K. Harvey

Thank you Ed. Let me start by giving you some detail on our comparable hotel RevPAR results. Looking at the portfolio based on property types, our suburban hotels performed the best during the first quarter with a RevPAR decline of 18.3%. RevPAR for our airport hotels decreased 18.9% and RevPAR for our urban hotels fell 19% while RevPAR at resort conference hotels decreased 23.9%.

Turning to our regional results as expected the D.C. metro region had a very strong quarter with RevPAR growth of 11.7% led by our downtown properties as both group and transient business performed well due to the inauguration and other government related activities. We expect the D.C. metro region to continue to outperform in the second quarter.

The south central region also outperformed on a relative basis as RevPAR fell 16.1%. The outperformance was driven by our Houston properties, primarily due to strong transient group business and partial renovations at two properties in the first quarter of 2008. We expect the Houston and New Orleans markets to perform better than the overall portfolio in the second quarter due to relatively strong booking pace and rate trends.

The north central region also performed better with RevPAR declining 16.7% led by our downtown Chicago hotels which benefited from favorable year-over-year comparisons with two downtown assets under renovation in the first quarter of 2008. We expect the north central region and Chicago in particular to have a weaker second quarter as a result of weaker citywide activity and lower transient and group pace.

RevPAR for our Florida region fell 22.2%. Our Tampa properties outperformed due to strong transient business and a lift from the Super Bowl. The rest of the region struggled with lower transient and group demand. We expect the Florida region to under perform in the second quarter.

Overall RevPAR growth for our Pacific region fell 22.5% for the quarter. However, results varied by market. RevPAR for the San Francisco market declined 17.5% as citywide room nights were down 31% year-over-year due to cancellation and booking cycles of groups. Transient business declined due to overall weakness in international, corporate and leisure demand. The Fisherman’s Wharf Marriott was also under a rooms renovation in the first quarter of this year.

RevPAR for our Hawaiian properties decreased 22.3% because of lower airline capacity which led to lower leisure transient and group demand. Our properties increased promotions and significantly reduced rates in order to gain occupancy.

RevPAR for our Seattle hotels was down 32.4% due to tough comparables as the first quarter of 2008 was an unusually strong citywide quarter. Transient business was affected by layoffs at Microsoft, Boeing, Starbucks and Nordstrom. For the second quarter we expect the San Francisco market to perform in line with the rest of the portfolio and the Hawaiian market to have a challenging quarter and an improvement in the second half of the year due to easier comparisons. However, we do continue to see resistance from groups to book at luxury hotels and resort destinations. We expect the Seattle market to perform much better in the second quarter.

RevPAR for the Mid-Atlantic region decreased 26.7% as our New York properties experienced a RevPAR decline of 29.4% with significant declines in both rate and occupancy. Both group and leisure demand particularly international leisure demand declined. We expect New York City to continue to struggle in the second quarter with new supply entering the market and overall declines in both rate and demand.

The Philadelphia market slightly outperformed the overall portfolio for the quarter with a RevPAR decrease of 18.6%. We expect the Philadelphia market to continue to outperform the second quarter as there are five additional citywides compared to 2008.

As we anticipated, the New England region had a rough first quarter as RevPAR declined 30.8%. The New England region and Boston in particular had a very strong first half of 2008 due to strong group bookings and citywides. In the first quarter of this year the market had approximately 32% less citywide room nights versus 2008 and we had two hotels under renovation. This weakness will continue into the second quarter for the region and Boston.

For our European joint venture RevPAR calculated in constant euros decreased 29% for the quarter. Due to overall weak demand the majority of the properties experienced considerable decreases in both occupancy and rate. On a relative basis the three properties in Brussels outperformed the rest of the portfolio while renovation contributed to the under performance of the Crown Plaza Amsterdam.

For the quarter adjusted operating profit margins for our comp hotels declined just 400 basis points which is very strong performance with a 19.8% RevPAR decline. It is worth noting that two special items that we discussed on the year end earnings call reduced our margins for the first quarter by 60 basis points.

These items were the business interruption proceeds received in the first quarter of 2008 for our New Orleans Marriott which did not recur in the first quarter of 2009, and the second item is the treatment of the ground lease payments on the New York Marriott Marquis.

Our managers continue to actively cut discretionary spending and have been very proactive in continuing to implement cost saving measures. Profit flow through in the rooms department was higher than anticipated due to the implementation of cost containment measures that drove reductions in controllable expenses and a significant improvement in productivity. Food and beverage flow through was affected by the loss of higher margin meeting room rental and audio visual revenues, as well as significant decline in other revenues. A decrease in food and beverage costs as a percentage of revenues and reductions in controllable costs helped offset the impact of some of the revenue declines.

Overall wages and benefits decreased by approximately 12.8% and unallocated costs decreased by 9.1% for the quarter as hotels reduced the management headcount and significantly lowered other controllable costs. Utility costs decreased 4.3% for the quarter. While real estate taxes increased by 9%, property insurance costs decreased nearly 30%. However, for the remainder of the year we expect to see an increase in our property insurance costs as rates have started to increase. Incentive management fees fell 70%.

Looking out to the rest of the year, we think that margins will decline more than we experienced in the first quarter due to further rate deterioration and changes in the business mix, as well as lower food and beverage margins due to further declines in high profit banquet and audio visual business. In addition, we expect an increase in hourly wage rates. Comparisons will also become less favorable as we move throughout the year as the implementation of contingency plans increased throughout the year in 2008 and in particular were at high levels in the fourth quarter. As a result, we expect comparable hotel adjusted profit margins to decrease 540 basis points at the low end of the RevPAR range and decrease 600 basis points at the high end of the range.

We finished the quarter with $653 million of cash and cash equivalents and $400 million of capacity on our credit facility. We continue to [main] higher than historical cash levels because of the uncertainty in the credit markets and we will continue to do so until the credit markets stabilize and the timing of economic recovery is more clear.

Prior to the end of the quarter we closed on $120 million mortgage secured by the J.W. Marriott in Washington, D.C. with a new lender. The loan matures in four years with a one year extension option and the loan devalues approximately 55%. We have two remaining debt maturities in 2009, the $175 million mortgage on the San Diego Marina Marriott, which we expect to refinance with the existing lender prior to its July 1, 2009 maturity and the $135 million loan on the Westin [Kerlan] which we do not intend to refinance but will repay the loan with available cash.

During the first quarter we repurchased 75 million of our three-and-one-quarter exchangeable senior debentures for approximately $69 million under our stock and equity linked security repurchase program. These repurchases along with our fourth quarter repurchases have reduced the outstanding balance of these debentures to $325 million.

Over the last several weeks we have seen many signs of enhanced liquidity in the public equity and debt markets. During this period the spreads on our outstanding senior notes have tightened significantly. We have also seen further signs of enhanced liquidity in the secured debt market and we are in the process of negotiating additional loans on some of the more than 100 properties that we own that do not have any mortgage debt.

Now I’ll turn the call back over to Ed.

W. Edward Walter

All right. Well thank you very much everybody for joining us on this call this evening. Again we apologize for the late hour. We appreciated the opportunity to discuss our first quarter results and outlook with you. We look forward to providing you with more insight into how 2009 is playing out at our second quarter call in mid-July. Have a good evening everybody.

Operator

That does conclude our conference for today. We appreciate your participation and hope that you have a good day.

Question-and-Answer Session

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