Host Hotels & Resorts' (HST) CEO Edward Walter on Q2 2014 Results - Earnings Call Transcript

Aug. 2.14 | About: Host Hotels (HST)

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

Q2 2014 Earnings Conference Call

July 31, 2014, 10:00 am EDT

Executives

Gee Lingberg – Vice President of Investor Relations

W. Edward Walter – President Chief Executive Officer and Director

Gregory J. Larson – Chief Financial Officer & Executive Vice President

Analysts

Robin M. Farley – UBS Investment Bank

Kevin J. Varin – Citigroup Global Markets Inc.

Wesley K. Golladay – RBC Capital Markets, LLC

Andrew G. Didora – Bank of America Merrill Lynch

Anthony F. Powell – Barclays Capital, Inc.

Anto M. Savarirajan – Goldman Sachs & Co

Thomas G. Allen – Morgan Stanley & Co. LLC

Joseph Greff – JP Morgan Chase & Co.

Ryan Meliker – MLV & Co LLC

C. Patrick Scholes – SunTrust Robinson Humphrey

Smedes Rose – Evercore Partners Inc.

Operator

Good day everyone, and welcome to the Host Hotels & Resorts, Incorporated Second Quarter 2014 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.

Gee Lingberg

Thanks, Jamie. Good morning, everyone. Welcome to Host Hotels & Resorts' second quarter 2014 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 on our website at hosthotels.com.

With me on the call today is Ed Walter, our President and Chief Executive Officer; and Greg Larson, our Chief Financial Officer.

This morning, Ed will provide a brief overview of our second quarter results and then will describe the current operating environment, as well as the Company's outlook for 2014. Greg will then provide greater detail on our second quarter performance by markets and our balance sheet. Following their remarks, we will be available to respond to your questions.

And now, here is Ed.

W. Edward Walter

Thanks, Gee. Good morning, everyone. We are pleased to report another quarter of solid operating results driven by strong rate in demand growth across our business. Combination of our strong operations through the first half of the year and our continuing optimism about the state of the lodging industry have resulted in improved full-year guidance which I will discuss in a few minutes.

First let's review our results for the quarter. Adjusted EBITDA was $411 million for the quarter and $819 million year-to-date, which exceeds consensus estimates. Our adjusted FFO per diluted share was in line with estimates at $0.43 per share for the second quarter and $0.76 year-to-date. These strong results were driven by several factors. First, for the quarter, our portfolio achieved a cycle high occupancy level of 81% which allowed our hotels to thrive rate increases exceeding 4%, resulting in an improvement in comparable hotel RevPAR on a constant currency basis of 5.1%.

As Greg will describe in greater detail our consolidated comparable international hotels continue to perform quite well generating RevPAR growth of more than 16% in the quarter. Our growth in the second quarter was driven primarily by our transient segments as group demand moderated primarily because of the shift of the Easter holiday, from March of 2013 to April of 2014.

Transient demand increased 1.6%; transient rate jumped 5% which lead to a transient revenue increase of more than 6.5%. As expected, the holiday shift resulted in a smaller increase in group business, as group demand increased by just 0.8% and group revenues increased by slightly more than 2%.

Looking at our results for the first half of the year, which eliminates the noise generated by the higher holiday shift, provides a clear insight into the health and character of our business. For the first half of the year, group demand increased nearly 3.5%, rate increase by more than 2.5% and group revenues increased by more than 6%, one of our best performances since the last peak.

The primary driver of these excellent group business trends with corporate group which benefited from a 5% plus increase in demand and a 5% increase in rate, leading to a revenue increase of more than 10.5%. The increased group bookings limited transient demand growth to 0.7%, but allow hotels to push transient rate increases that average nearly 4.5% leading to transient revenue growth of more than 5%.

With these two key elements of our business performing quite well, comparable RevPAR growth on a constant currency basis for the first half of the year was 5.9%. Matching the strong group demand our banquet revenue increased 6.6% for the first half of the year leading to total comparable F&B revenue growth of 4.8%.

The increase in banquet spending fueled more than a 50% flow through in the food and beverage department. That combined with the rate driven RevPAR growth resulted in adjusted operating profit margin expansion of 60 basis points for the quarter and 80 basis point for the first half. Overall, we are quite pleased with our results for the first half of 2014.

On the acquisition front, we continue to look for opportunities to increase our investment in our target markets; we do have an active pipeline at this juncture and expect to complete additional transactions before year end. However, given the timing and certainty of these – given that the timing and certainty of these transactions is difficult to predict, we've not included any additional acquisitions in our forecast.

On the disposition front, we continue to actively market properties and we expect to close on one or more transactions by the end of the year, in this incidence while the sell market is also difficult to predict, the guidance I will discuss in a few minutes does assume that we will complete incremental sales of approximately $200 million by year end.

Turning to capital investment, this quarter we invested over $90 million on a variety of projects that we believe will enhance the competitiveness and value of our portfolio. Specifically, we invested approximately $71 million on renewal and replacement projects including the renovation of the Sheraton Boston 428 room South Tower. In addition to 2700 square feet of restaurant and public space at that hotel.

On the value add side of the equation, we invested $4 million into our recent acquisitions. And more importantly $18 million on ROI capital expenditures, including the repositioning of 10,000 square feet of restaurant and public space at Denver Marriott West.

Looking at total capital expenditures for the first half of the year, we spent over $180 million on our properties, resulting in improvements to 2800 guest rooms over 100,000 square feet of meeting space and 60,000 square feet of public space. Of that amount $147 was spent on renewal and replacement CapEx, $7 million on acquisition CapEx and $29 million on ROI investments.

For the full year we would expect to spend $330 million to $350 million on renewal and replacement CapEx. $25 million to $30 million on acquisition CapEx, and most importantly $65 million to $75 million on redevelopment and ROI CapEx. We remain focused on this last piece of capital investment as we believe it provides an opportunity to drive superior returns from our already strong portfolio.

Now let me spend some time on our outlook as there are number of factors that keep us optimistic about the remainder of the year. While full-year expectations for GDP growth have obviously tempered most economists expect second half growth to be quite strong. That, supplemented by better job growth and continued strong inbound travel, bodes well for strong demand growth.

Supply growth in most of our markets, excluding New York continues to be constrained especially in the upper upscale segment. Our year-to-date occupancy is running well north of 77% and well above our 2007 peak which suggest that we should benefit form strong rate growth.

Our group booking pace for the remainder of the year is quite strong, with revenues exceeding the prior year's pace by more than 6%. This is an improvement over our position at the end of Q1. Bookings in Q2 for the quarter and the remainder of the year ran better than 14% ahead of the prior-year's pace.

It is worth noting that our third quarter bookings are trending better than our bookings in the fourth quarter which generally attribute to year-over-year comparability challenges, to change in holiday timing, and some increase in a renovation activity at a few large group hotels.

Overall in addition to providing a foundation for strong RevPAR growth, this group base should also support solid banquet activity, leading to good F&B flow-through. The combination of these factors some easier expense comps, reduced insurance expenses, and lower unallocated costs suggest that second-half margin should increase to the better rate than we experience in the first half of the year.

With that in mind, we expect the comparable hotel RevPAR for the full year will increase between five and three quarters in 6.25% and adjusted operating profit margin growth will range between 100 and 130 basis points. These assumptions result in adjusted EBITDA of between $1.380 billion to $1.405 billion and adjusted FFO per share of $1.44 to $1.47.

The midpoint of this updated guidance reflects a $12.5 million increase in adjusted EBITDA and a $0.02 increase in FFO per share, compared to our prior guidance. I should note that this guidance also includes a reduction to account for the $200 million in sales we expect to complete in the fall, but does not include the benefit of any of the acquisitions we might complete.

In summary, we are pleased with our results for the first half of the year and remain confident about our outlook for the remainder of this year and into 2015. We expect the fundamentals in our business will remain solid and with continued low supply growth, we will continue to deliver meaningful growth.

Thank you and now let me turn the call over to Greg Larson, our Chief Financial Officer, who will discuss our dividend increase and operating performance in more detail.

Gregory J. Larson

Thank you, Ed. I am pleased with our solid performance this quarter, which exceeded our expectations. Our Latin America hotels were the best performing hotels in the quarter with an impressive constant currency RevPAR increase of 40%, as our JW Marriott Rio that benefited from the World Cup and our JW Marriott Mexico City benefited from the completion of its renovation. A few hotels combined to grow RevPAR 53% in the second quarter.

More specifically, June RevPAR at the JW Marriott Rio increased 182% to over $790. The World Cup continued to boost RevPAR in Brazil through mid-July, with strength in Rio and Mexico City's post renovation lift, we expect our hotels in Latin America to outperform the portfolio in the third quarter. As expected, the West Coast was once again the strongest performing domestic region with RevPAR growth of 7.1% for the quarter. The increase in RevPAR was driven primarily by average rate, which grew nearly 7%.

The San Francisco market continued to lead our West Coast market, with RevPAR growth 12.4% for the quarter. This was predominantly driven by an ADR increase of 11.3%, as our properties have benefited from the positive mix shift from lower rated special corporate and contract business to higher-rated transient and group. We expect our hotels in San Francisco to continue to outperform the portfolio in the third quarter.

Seattle and Phoenix both had a great quarter with RevPAR growth of approximately 9.5% in each market. Our Seattle hotels increased ADR by 8.8% by positively shifting the mix from lower rated contract business to higher-rated transient business. Our Phoenix hotels RevPAR growth was driven by both occupancy and ADR gains. Our hotels in Phoenix had strong weekday group business which enabled the hotels to drive better transient mix.

For the third quarter, we expect our hotels in San Francisco to continue to outperform the portfolio with a strong group phase and continued positive mix shift. And our Phoenix hotels should perform inline with the portfolio with good group and leisure demand. Our hotels in Denver exceeded our expectations with a RevPAR increase of 7.5% for the quarter driven by strong business transient demand which translated into transient ADR gains.

Based on the strong group business on the books for the hotels in Denver, we expect these properties to outperform in the third quarter. The Hawaii market underperformed in the quarter, with RevPAR growth of 2.9%, due to the negative impact of the timeshare construction next into the Hyatt Maui hotel. With stronger group activity and projected increase arrivals to Maui, we anticipate the performance of the hotels in Hawaii to improve in the third quarter. Generally, we expect our West Coast properties to continue to be our best performing markets in the third quarter.

As expected, Florida was the bright spot for the southern region. And our Florida hotels benefited from the Easter shift with RevPAR growing 16.5% in April, and 13.5% for the quarter. Since the summer months typically not strong months in Florida we expect our Florida hotels to perform inline with our portfolio in the third quarter.

Houston RevPAR grew only 2% in the quarter, as hotels lost 2.3 percentage points in occupancy while growing ADR by 5.1%. The occupancy loss was due both to a difficult comparison at the JW Marriott in Houston and attrition related to city-wide conferences. Due to the lack of city-wide events for the remainder of the year, and our planned renovations at the JW Marriott Houston and Houston Airport Marriott in the fourth quarter, we expect the Houston market to underperform the portfolio for the rest of the year.

Atlanta and Chicago both reported declines in RevPAR of 0.5% and 1.8% respectively. Atlanta experienced a difficult comp with the NCAA Final Four in April of 2013, while Chicago had a weak city-wide calendar when compared to last year. In fact, June 2013 was a record month with five city-wides, those events did not repeat this year which resulted in the RevPAR declined for the Chicago hotels. We expect improvements in the third quarter for both Atlanta and Chicago, as city-wides for both markets improve.

RevPAR in Boston increased 7.8%, driven by an average rate growth of 8.3%. Our properties in Boston were able to shift from group to transient business and raise the average rate. With reduced activity at the Heinz Convention Center, we expect our Boston hotels to underperform the portfolio in the third quarter. RevPAR in New York grew 5.5% exceeding our forecast with better an expected occupancy, offsetting weaker average rate growth. A strong May drove the quarter's group volume increase of 13.8% and contributed to the 8.5% improvement in food and beverage revenues for the quarter.

Despite the strong group business in New York, supply growth in the market hampered our ability to increase transit rates. We expect the New York market to experience similar growth in the second half of the year as the first half of this year. Washington DC and Philadelphia RevPAR declined 2.4% and 2.7% respectively for the quarter. The decline in Philadelphia was related to the loss of group room nights due to a decrease in city-wide events in the second quarter.

As expected our hotels in Washington DC are having a challenging year. The majority of our hotels experienced ADR decline versus last year with the entire deficit in group ADR. For the quarter, group room nights were down 9.2% compared with last year. For our DC hotels were able to replace the loss in group nights with transient and contract rooms, we have done so at lower rates. We expect Washington DC hotels will continue to lag in the third quarter.

The comparable hotels RevPAR for the European joint venture increased 0.6% for the quarter and 1.5% year-to-date and constant Euros. F&B revenues grew 2.5% for the quarter and 5.7% year-to-date, the strong banquet revenue growth of 7.2% in the quarter and 12.3% year-to-date. We continue to be impressed with our European hotels ability to increase food and beverage revenues as well as controlled costs and to drive EBITDA growth.

EBITDA grew 3% in the quarter and 4.5% year-to-date. International travel from the U.S. and other parts of the world for both leisure and business travel should have a positive impact on the rest of the year. We expect the second half RevPAR to significantly outperform the first half of the year.

During the second quarter, we refinanced the loan secured by three properties in Brussels at a very attractive initial all-in rate of 2% and extended and extended the maturity to 2019. Comparable hotels adjusted operating profit margin expansion of 60 basis points in the quarter and 80 basis points year-to-date. Lackluster group performance due to the Easter holiday shift in the second quarter resulted in a slight increase in comparable food and beverage revenues and modest margin growth.

However, our second quarter results were anticipated and do not represent a trend going forward as we had indicated that full year comparable hotel adjusted operating profit margin growth is expected to be over a 100 basis points. Based on RevPAR growth that is driven by stronger ADR growth, easier comparisons for certain room expenses, and decreases in our insurance, utilities and repairs and maintenance expenses, we expect to achieve a full year margin forecast of 100 to 130 basis points which will result in second half margin growth well in excess of the first half.

We anticipate 22% of our full-year EBITDA will be earned in the third quarter. During the quarter, we amended and extended our existing credit facility. The borrowing capacity on the credit facility remains the same. Under the amendment the maturity was extended to 2019, including extension and we reduced pricing by 30 basis on the revolver and 32.5 basis point on the term loan. U.S. dollar denominated revolver borrowing today would result in an initial all-in rate of 1.35%. At this time, we have approximately $220 million outstanding under the revolver and $500 million under the term loan.

Based on our outlook for the industry and our operating performance, we have determined that we can sustain a meaningful dividend increase. Therefore, our Board approved a 33% dividend increase to $0.20 for the third quarter.

Given our strong extended operating outlook and significant amount of free cash flow, we anticipate this will be the dividend for at least the next several quarters. In addition, to ensure that a dividend represents 100% of our taxable income including gains from potential asset sales, we may need to pay a special dividend at the end of the year.

Finally, as we have indicated previously while we intend to use available cash predominantly for acquisitions or other investments in our portfolio to the extent that we are unable to find appropriate investment, we may elect in the future to use available cash for other uses such as a special dividend, which would be in excess of taxable income.

In summary, we are excited to have the best balance sheet in the history of the Company. And we are in a remarkable position with all options open to us as we progress through the cycle. We will continue to assess the best use of our free cash flow and ensure that we are focusing on creating value for our shareholders.

This completes our prepared remarks. We are now interested in answering questions you may have.

Question-and-Answer-Session

Operator

(Operator Instruction) and we will take our first quarter from Robin Farley with UBS.

Robin M. Farley – UBS Investment Bank

Great. Thanks. Looking at your North American RevPAR performance and just kind of looking at the FTR data, there is a couple hundred basis points of difference. And I wonder if you could address that and it may just have to do with the comp set. You're seeing a same-store comp set and SCR is not seeing a same-store comp set. And if that's the case I wonder if you could kind of characterize your RevPAR increase in – using the same kind of non-comp set, just to give us a sense of how it's tracking versus the overall US number?

W. Edward Walter

Yes, I think that certainly is a question or your question is one that’s been highlighted on some of the other calls and I think that this particular last quarter, the differences between say the top markets, the top 19 or 20 markets in the country and the rest of the industry as a whole, that gap has expanded a little bit from a performance perspective. I think what you're seeing is a variety of things. I think number one is I think right now secondary markets have, in the last couple of quarters have performed better, compared to some of the leading markets.

I think that may just be a natural evolution of the lodging cycle. I think that we also are seeing that in this most recent quarter, the fact that the leisure segment was probably a bit stronger, in part because of the shift of the Easter holiday and the fact that our economy is growing at a better rate, ultimately led to some increased leisure travel, but it showed up significantly in some of the lower price points.

As we look at how we are performing compared to our comps and compared to our markets and leaving out some of the hotels that – including in our portfolio that might have had significant work done to them last year and so this year are benefiting from a big move in terms of RevPAR growth and you can see that in our results in some of our non-comp hotels had double-digit growth. The reality is that we are running – for the full year we're running slightly ahead of our comp set in terms of yield index. So we are pleased to see that we picking up share.

Robin M. Farley – UBS Investment Bank

Okay. That's helpful. Thanks. And just my other question is, in your opening remarks you mentioned your guidance does not assume any additional acquisitions between now and the end of the year. And I wonder if you could just give color on is that due to the transaction market or to kind of a change in your approach to being a net acquirer this year?

W. Edward Walter

No I think it’s just reflective of the fact that we haven’t – you know we don’t have anything to announce at this point in time. We do what I view as a reasonably active pipeline. And frankly I would be surprised if we didn't complete a few acquisitions before year end, but since the timing of those is not completely set and they are not done yet, we didn’t want to try to adjust our guidance to reflect the fact that we might be acquiring an asset.

I think in terms of how the year is going to play out, we still feel good enough about the overall length of the cycle that we would love to be an investor, but we're disciplined about this. And if we can't get the returns that we want from the acquisition then we won't be completing those acquisitions.

Robin M. Farley – UBS Investment Bank

Okay. Great. Thank you.

Operator

And we’ll take our next question from Michael Bilerman with Citi.

Kevin J. Varin – Citigroup Global Markets Inc.

Hi. This is Kevin Varin with Michael. Just carrying along with the acquisition pipeline, can you just give us a little bit more color on the pipeline and what you're kind of looking at the time? Because I know you've alluded to in the past that you've weighed international expansion. Just based on what we're seeing in the transaction market, is the pipeline skewed more U.S. or international?

W. Edward Walter

It’s still a mix, it’s still a mix and I think we are seeing decent activity in Europe. You're seeing both banks and certain funds look to begin to liquidate some assets in Europe. So we are certainly looking at a couple of opportunities there. We are also looking at a number of opportunities across both, what I call the higher end of select service segment and the full service segment in the U.S. Activity in Asia has been much quieter of late and so there is nothing – I wouldn’t say there is anything imminent in Asia today.

Kevin J. Varin – Citigroup Global Markets Inc.

Okay. And then just turning to asset sales. Can you go into more detail on the potential timing of the sales? Is it more backend loaded more in 4Q or is this something that can transpire in the next couple months?

W. Edward Walter

It’s really hard to say. I think that it’s really – the reality is we have a number of hotels that are now. So I would be expecting that we closings throughout, really the fall and into the early winter.

Kevin J. Varin – Citigroup Global Markets Inc.

Okay. Thank you.

Operator

And we’ll take our next question from Wesley Golladay from RBC Capital Markets.

Wesley K. Golladay – RBC Capital Markets, LLC

Good morning, everyone. Looking at the group business, can you give us a little more color on that? And are you starting to see the increase in lead time for booking events? And when do you think you'll get more pricing power on the rate side. It looks like you had 2.5% for the first half and I imagine some of that's due to mix shift.

W. Edward Walter

Yes, you’re right about that. We have been consistently seeing here now for the last year a pretty significant bump in corporate business and that has certainly happened throughout the second quarter and has happened throughout the year as I mentioned in my comments. So as overall as we step back and look at our group business, we were quite pleased with the level of booking activity that transpired in the second quarter.

Our room nights that were booked in the quarter for the quarter were up about 9% and as I mentioned in my comments, our room nights for the rest of 2014 – our room nights were up about 5% for the rest of 2014 and our revenues were up 14%. The rate growth for the rooms that were booked during the second quarter for the rest of the year in 2014 was up 18.5%. So the bookings that we’re getting done now are considerably higher rates than the business that we would have booked last year.

Now, obviously our rate in itself in our group business is not going to go up anywhere near 8% because we obviously have a number of – the bulk of our rooms are already on the books. But I have to say we have been quite encouraged by the booking pace that we have been seeing.

Wesley K. Golladay – RBC Capital Markets, LLC

Okay. Can you give us an update on what you have for 2015 on the books? How much of those higher ADR group might flow into next year?

W. Edward Walter

I think that the answer is it still a little unclear as to how – exactly how that's going to play out for 2015 – first half of 2015 looks quite good on both the rate and the occupancy side. I think as you look at the second half of 2015 which his obviously much further out. We are not showing is bigger than increase in room nights yet. And that also the rate growth there is still a little lower too.

Wesley K. Golladay – RBC Capital Markets, LLC

Okay thanks for taking the question.

Operator

And we’ll take our next question from Andrew Didora with Bank of America.

Andrew G. Didora – Bank of America Merrill Lynch

Hi. Good morning, everyone. Ed, I guess I'll follow-up on your potential acquisitions. We've been noticing a nice pickup over the last several quarters just in terms of overall pricing out there in the transaction market. Can you maybe give us a sense of, in terms of the opportunities you are looking at, what kinds of discounts to replacement cost you're seeing now? And maybe how this could compare to what you guys were seeing at the last cycle, say I kind of the 2005, 2006 timeframe?

W. Edward Walter

You really want me to open up my memory banks to try to remember exactly where it was back then. I think the answer on that varies so widely by market that it would be hard to really give you a realistic number, in terms of where things are trading compared to replacement costs. I would generally say that in most markets, if you're looking at full-service product, it is still better to be a buyer than a developer, which would generally tell you that you're at a point where assets are still trading at discounts to replacement cost.

Certain of the markets that have had stronger recoveries, some of the West Coast markets and probably – and maybe Miami – have started to show pricing that's beginning to approach replacement cost. But I'd still say it falls shy – or falls short of actually getting to that. If I were trying to compare more generally the market today versus 2006 and 2007, I would agree with the general sentiment that pricing has gotten stronger in 2014.

I think it's following a normal pattern, which is the further you work your way into the cycle the strong pricing tends to become. I would not say that we are yet at the levels of 2006 and early 2007. Where, at that point in time, we were finding that as we would evaluate acquisitions, the prices that others were prepared to pay routinely 15% to 20% ahead of what we saw was reasonable. And certainly there are occasions where that happens right now, but I'd say the market today – it's certainly more rational than it was back then.

Andrew G. Didora – Bank of America Merrill Lynch

Great. That's helpful. And then my second question just relates to, in your prepared remarks you talked about how your occupancy levels are now at, or slightly above, prior peak. Could you maybe just remind us what your prior peak EBITDA was on your portfolio as it stands right now? And do you see any impediments to maybe getting back to those levels this cycle?

W. Edward Walter

Greg you have that number?

Gregory J. Larson

Yeah, if you go back 2007, our peak EBITDA was – call it $1.48 billion, so it was close to $1.5 billion and obviously Andrew we’ve acquired – quite a few hotels since then and we sold some hotels as well. So I would that’s not really a comparable number. But that's where our peak EBITDA was back then.

Andrew G. Didora – Bank of America Merrill Lynch

Right. I guess I was asking what peak EBITDA was on your current portfolio. If you had owned your current assets back in 2007.

W. Edward Walter

Andrew I think we are going to need to get back to you on that number. I just don’t think we have right now.

Andrew G. Didora – Bank of America Merrill Lynch

Okay. That’s it for me. Thanks.

Operator

And we’ll take our next question from Anthony Powell with Barclays.

Anthony F. Powell – Barclays Capital, Inc.

Hi. Good morning. Could you update us on our your F&B spend per group night trended in the second quarter versus the first quarter? And how do you expect that to trend for the rest of the year?

W. Edward Walter

It was up strongly in the first quarter. It was about flat in the second quarter. I think as we look at the second half of the year, we are expecting it to be up reasonably well in the third quarter. It’s hard to tell on the fourth quarter right now because the lot of the F&B spending doesn’t get pen down until relatively shortly before the events going to happen.

Most of the growth we are seeing right now is in corporate F&B and the pattern that we are hearing is the top to the hotels about how the F&B part of the booking occurs, is that they typically booked sign the contracted one level, but then as they get closer to when the event actually occur, they then finalize exactly how big of F&B program we are going to see.

So we have generally been seeing corporations making the decision to spend a bit more on food and beverage once they’re having the event. And so we’ll have – that’s I feel relatively confident to spending in the third quarter should be fairly strong. A little harder to predict what’s going to happen in the fourth quarter.

Anthony F. Powell – Barclays Capital, Inc.

Great. Thank you. My second question is, you mentioned that there were some upscale full-service hotels in your pipeline. Given some of the RevPAR strength was on the second quarter, how much of a priority is it for you to increase your exposure there? Thank you.

W. Edward Walter

I don’t know that for us right now investing is really just assumption of expanding our presence in our target markets if we find investments that achieve reasonable premium to our cost of capital. And I think as we look at the various opportunities that we reviewed where comfortable buying full service hotel – upper upscale hotels and upscale hotels.

I think just by virtue of the fact that upscale hotels tend to be smaller that as you look out over our – look at the way our portfolio was structure over the next couple of years. You are not going to see a meaningful increase in an overall context in terms of the representation of upscale hotel, but we’ve had good success with ones that we’ve acquired so far. And we certainly are open within our designated markets to acquiring more.

Operator

And we’ll take our next question from Steven Kent with Goldman Sachs.

Anto M. Savarirajan – Goldman Sachs & Co

Hi. Good morning. This is Anto Savarirajan on for Steve Kent. First question on the European JV portfolio. RevPAR of 60 basis points for those 18 hotels. Can you provide us some color as to what you're seeing there? And how that 60 basis points compares to what others are seeing there in the market? And if there is any major topic that we need to be aware of? And again, when you say the second half should outperform the first half, what are the factors driving that?

W. Edward Walter

Yes. I think what we have seen in Europe, for the first half of the year is somewhat similar to what we have seen in the U.S. Where we've noticed, especially in Spain and in the United Kingdom that the major urban centers that under performed some of the regional and the resort markets. I think they're for different reasons. I think a number of Europeans have been traveling inside of Europe instead of outside of Europe this spring. In part because some of the turmoil in the world. And so as a result, the Spanish resorts did quite well and the Spanish resort markets outperformed the Spanish urban centers.

In the UK, I just think you saw an increase in regional activity, but some of that is a function of that in comparison to London that had a much bigger opportunity to grow. I think the fact that we were – our numbers were weaker in Europe is somewhat of a combination of both of those factors as well as some – sort of just the ebbs and flows of our business. There were a number of big events, whether it's the celebrations that happened in Venice or the air show that moved Paris, I think to London, this year.

A couple of big group events that had happened in Amsterdam in 2013. They did not repeat on a year-over-year basis, and so unfortunately what that meant was that RevPAR growth in Europe and our portfolio was weaker. As Greg mentioned, we did have good solid food and beverage growth. And we were very pleased with the level of flow-through that we are able to achieve given our revenue increase. So all in all, we were happy with where the EBITDA came out, but a little disappointed with what the top line growth was.

I think the second half of the year, some of those trends reverse. There are some markets that are picking up some group business, so that should be a favorable plus. And all in all, the sense that the hotels have – of Americans and others traveling to U.S. given some of the challenges and some of the other source locations around the world, they felt that their bookings for the summer and into the early fall are quite solid. Hence the sense that we have that RevPAR growth and revenue growth in general would be quite strong – but quite a bit stronger in the second half.

Anto M. Savarirajan – Goldman Sachs & Co

Got it. Thank you. The second question is, some of your key markets are already running occupancies in the high 70s to low 80s. And we get the reference when you say most of the gains in RevPAR should come from rate. If there is any occupancy gain to be had, how should that look and where can that come from?

W. Edward Walter

I think that there certainly is still room for additional occupancy gain. But I think you're right in your general sense that most of RevPAR growth will come from rate increases as opposed to further occupancy increases. If you look across our portfolio, there's still room – the middle of the week we are running at very high 80%, almost 90% occupancy. So, the middle of the week is really about driving rate, which is great, because as we all know that flows through to the bottom line better. There's still room to drive occupancy on a Friday night or on a Sunday night to the extent that you can move group activity to those nights.

And in general, as long as we continue to have the situation we have, which is demand is growing quicker than supply, ultimately that means occupancies countrywide have to go up. And I suspect it will be a benefit of that. But as consistent with what we've described, we generally think the bulk of our RevPAR growth going forward is going to happen generally through rate growth and not occupancy growth.

Anto M. Savarirajan – Goldman Sachs & Co

Got it. Thank you very much.

Operator

And, we’ll take our next question from Thomas Allen with Morgan Stanley.

Thomas G. Allen – Morgan Stanley & Co. LLC

Good morning. With the operations there has been a lot of focus on incentive management fees, and so I guess it's relevant for you on the other side of things. How do you expect management fees to trend in the coming quarters and years? And I think at peak around 60 to 65 of your hotels were paying incentive fees. And I think about a year ago now, you were in kind of the low to mid 40% range. How do you expect that – where are you now and how do expect that to trend? Thanks.

W. Edward Walter

Yes. It looks like this year we will probably end up in the low 50% range in terms of the number of hotels that pay incentive management fees. Our expected increase in incentive management fees this year is actually not particularly great. I think were generally looking at flat. A lot of that really stems from the fact that we have renegotiated a few of our contracts with our operators and achieved, for particular hotels, the meaningful reductions in incentive management fees. So the others are going up and there some more hotels that are paying it, but that's than offset by our negotiations.

As we look out past that, I think we generally would expect that we would see historical levels of increases in IMF in 2015 and 2016. But nothing – I don't know that we'll continue to see that 50% grow. And I don’t know that I necessarily have a sense as to what that looks like in say 2015 or 2016. But I suspect we'll start to approach the prior peak again in terms of the number of hotels that are paying incentive management fees.

Thomas G. Allen – Morgan Stanley & Co. LLC

Helpful. Thank you. And then just, the high end of your RevPAR guidance, at least for the domestic hotels, is below that of Merritt's and Starwood's. Maybe I'm getting a bit cute, but any reason you're being more conservative?

W. Edward Walter

I don’t know that there's any particular reason for why – to be honest I haven't looked at our guidance in comparison to theirs, so it's hard for me to be articulate about that type of comparison. I think that we are very happy with the way the first half of the year came out. Our RevPAR results, both domestically and internationally, have come in better than what we expected at the beginning of the year. When we look at the second half of the year, we feel fairly encouraged by the trends that we're looking at. And are essentially comfortable in really taking our RevPAR guidance from what – to the high end – the midpoint today is the high end of where we were at the last quarter.

So I think you should view that as a general endorsement of the fact that we think things are going quite well. We feel encouraged on both the group and the transient side. We're looking forward to the second half of the year.

Gregory J. Larson

I agree. And I think if you just look at the quarter results. I know some people, some analysts talked about Marriott producing 6% of RevPAR. But, if you look at their upper upscale luxury properties, I think they reported 4.4% growth in RevPAR, which was comparable to our RevPAR growth for our domestic hotels at 4.5%. And if you include are non-comp hotels – our growth was closer to 5%.

Thomas G. Allen – Morgan Stanley & Co. LLC

Helpful. Thank you.

Operator

And, we’ll go next to Joe Greff with JPMorgan.

Joseph Greff – JP Morgan Chase & Co.

Good morning, guys. Most of my questions have been asked and answered. And it's been a busy earnings morning. So if you have already talked about – answered my questions I apologize. But Ed, with regard to your assumption of selling an asset for $200 million in the fall, which I think you referenced, how much EBITDA is coming out in the fourth quarter or in the back half of the year related to that asset sale? And then how much EBITDA have you recognized year to date and through the date of close of that asset as well?

W. Edward Walter

Joe, I think that in round numbers, we've assumed about $4 million of EBITDA for that asset. We're thinking of it as an asset, but again I want to sort of caution everyone that we are marketing a number of hotels. So what we've essentially done is put about a $4 million deduction in our numbers to reflect the fact that we expect a number of sales to occur. In round numbers, probably the EBITDA benefit from that for the first part of the year is probably in that 10% to 12% range. Whether it's an individual hotels or it's a combination of hotels.

Joseph Greff – JP Morgan Chase & Co.

Great. And then you referenced in the press release, explaining the year-over-year performance in adjusted EBITDA. Among those things you talked about cost, primarily selling expenses, associated with the timeshare in Maui. Can you quantify that for us? And do we expect that going forward?

Gregory J. Larson

Yes. Joe, I talked about it before, we are expecting to have expenses each quarter leading up to the fourth quarter. And then when we open the timeshare in the fourth quarter, we'll actually be able to recognize the revenues. And so when we think about the full year, we are looking for around $11 million or so of EBITDA from the timeshare. But I guess our point here is that, when we look at expenses for the second quarter of this year, we had timeshare expenses this year, but if you looked at our second quarter and the prior year we didn't have timeshare expenses.

So that was one delta, sort of comparing our adjusted EBITDA in the second quarter this year to the second quarter of last year. Obviously the other two big differences – one was the sale of some of our assets, including the Philadelphia Convention Center. Obviously, a lot of EBITDA in the second quarter of last year are not in our results this year. And then last in the second quarter of last year we also sold some tennis courts at the Newport Beach Marriott for approximately $21 million. So that was in our EBITDA last year and not this year.

Joseph Greff – JP Morgan Chase & Co.

Okay.

Operator

And, we’ll take our next question from Ryan Meliker with MLV & Co.

Ryan Meliker – MLV & Co LLC

Hey. Good morning, guys. Most of my questions have been answered, as well. But I was just hoping you could give us some color with regards to the acquisition environment. Obviously, we keep hearing that private equity is very active, leverage levels, seem to be back – kind of approaching where they were in 2006, 2007 when you guys were net sellers, more than net buyers. You've been pretty disciplined with your capital in terms of acquisitions over the past, call it, two years or so. How are you able to find opportunities that might be appealing in the back half of the year, as you mentioned? Is there something different? Are these repositionings, renovations? Help me understand what is going on there. Thanks.

W. Edward Walter

Yes. I don't – I think it's – what you generally described is correct and there's no doubt that the environment as, net capital has become more available, there’s no doubt that the overall environment has become more competitive. We are certainly trying to take advantage of that on the sales side, especially trying to sell assets that are in markets that are not core, from our perspective, for our future, as a way of really benefiting from the strengths and the liquidity in the market. Obviously, as you correctly analyzed, when you have those sorts of conditions, it's much more difficult to be an acquirer. I think what it just comes down to is, we're looking for opportunities where we can create value at this point.

And so some of these transactions – you look at the Powell Street transaction that we did in San Francisco the Powell Hotel and that's an opportunity where we are going to invest meaningful capital in the building to try and create something new and different that we expect will be quite successful at a very attractive price. Some of the opportunities that we are looking at other places involve a change in operator or a change in brand. And so with that, with that new approach to a hotel there's an opportunity to generate better returns, than where the hotel is current – what the hotel is currently providing. And that allows it to satisfy our yield requirements.

Ryan Meliker – MLV & Co LLC

Ed, that makes a ton of sense. I guess when you think about whether it be a repositioning or some type of alteration. Are you looking at anything that's going to be materially lengthy, where it might take two years to get the massive renovation? Or it may take two years before you get the returns that you are looking for? Or are you more focused on things like you just mentioned were it's a simple rebranding or change in operator where you think things are being left on the table?

W. Edward Walter

If I were to look at today's pipeline, I would say that we're probably focused – the couple that would fall into that category are probably more near-term than long-term conversion opportunities. But that doesn't mean we wouldn't look at things that would take longer, I would just say that what we happen to be looking at today tends to be more near-term. And then of course we have a few opportunities within our portfolio, like the Four Seasons in Philadelphia where there's going to be an opportunity to reposition that asset. That will probably by its nature take a bit longer.

Ryan Meliker – MLV & Co LLC

That make sense. And then lastly, the economy, albeit slowly, seems to be improving in Europe. Are you guys getting more acquisitive overseas with your joint venture partner? It certainly seems like there's a lot more hotels hitting the market that might be of institutional quality today than there were a year ago.

W. Edward Walter

I think you're right in that assessment. We’ve certainly seen a pickup in activity in Europe. And both we and our partners are certainly interested in looking at everything and then trying to decide which ones make the most sense. But we have – I think you're right in your assessment that there has a pickup in activity there and I will be disappointed if we don't get some transactions done in Europe in the second half of the year.

Ryan Meliker – MLV & Co LLC

All right. That's helpful. That's all for me. Thanks a lot, Ed.

Operator

(Operator Instructions) And, we’ll take our next question from Patrick Scholes with SunTrust.

C. Patrick Scholes – SunTrust Robinson Humphrey

Hi. Good morning. Just two questions here. You briefly touched on your Hawaii project. I'm wondering what are your full EBITDA expectations from that project?

W. Edward Walter

Well, I think as Greg noted, we are expecting this year to generate about $11 million in EBITDA at the end – by the end of the year. All of which will ultimately show itself in our fourth-quarter numbers.

C. Patrick Scholes – SunTrust Robinson Humphrey

Okay. But how – I mean over the life of the project, what are your ballpark expectations for EBITDA?

W. Edward Walter

I don't think that we have disclosed anything on that. And so I'd rather differ on trying to give an overall sense of that project.

C. Patrick Scholes – SunTrust Robinson Humphrey

Okay. And then just a quick modeling question. From $200 million of asset sales, ballpark how many rooms?

W. Edward Walter

You know what, I can't really give you a good number on that, because the reality is –think about it – if it's a more expensive hotels, then it's not going to be as many rooms. If it's a combination of some older hotels that are at lower RevPAR levels, it'll be a lot more rooms. So unfortunately I don't think I can give you a really useful number for that.

C. Patrick Scholes – SunTrust Robinson Humphrey

Okay. No problem. Thank you anyway.

W. Edward Walter

All right, thanks.

Operator

And, we’ll take our next question from Smedes Rose with Evercore.

Smedes Rose – Evercore Partners Inc.

Hi. Thanks. I was wondering if you could talk about any of sort of large redevelopment or ROI projects that you have in your pipeline now, I guess, into next year? And as you think about spending $65 million to $75 million this year, would you expect that to kind of move up or down meaningfully next year in either direction due to those projects?

W. Edward Walter

Smedes I would guess I mean we're looking at a number of projects. We talked about. We talked about the Houston Airport total renovation or redevelopment or before. We have the ballroom in San Diego, so that which is a considerable project that probably we’ll run in the $90 million to $95 million. And that starts construction at the end of this year.

We have a couple of other hotels that we are expecting to invest a fair amount of capital in, because they are appear to be some opportunities to redevelop those too, both out in the western part of the country. So I would guess today we are about to go – your question about a week early because we are about to review our entire capital budget next week – our capital budget for 2015 – next week. But I'm guessing our ROI expenditures for next year will probably go up slightly.

Smedes Rose – Evercore Partners Inc.

Okay. Thanks. And then just curious about your view on the DC market over the next couple of years, what you guys are seeing? And is the new hotel and convention center, kind of doing – I guess – what the convention center had hoped?

W. Edward Walter

I think the answer is so far, when you look at the bookings – the bookings for 2015 are modestly better. The bookings for 2016 are considerably better. The last time I looked the bookings for 2017 were looking quite good. And so I think the answer is the conventions – the new hotel is helping Washington to grow its convention center business. I have been quite encouraged by some of the more recent employment data that I have seen, which has suggested that job growth has started to return to the Washington area.

And I'm generally very encouraged by just watching how the city is transforming itself over the course of the last, call it, 10 to 15 years. Where it really – Washington has become quite a different city from – the city that I remember when I first came down here in the late 70s. So, I think that the one negative, and it's a big one for Washington, continues to be what's been happening with the government. The combination both on the political side, the lack of activity on the Hill has to some degree stunted some business transient travel that we might normally have seen.

And then with the combination of government cutbacks, sequesters, and everything else has meant that instead of government travel and government groups being at least a modest contributor to growth, it has been a detractor. We are getting to the point here, where there is not a lot more to lose, so I think that the drag that that represents this year – second half of this year and into next year will probably be relatively modest. At least that's our hope. And so, I think we do still – Washington still is the city, it has high rate, it has high occupancy, it’s highly attractive to investors, for both national and international.

So as an opportunity to create value and generate value, we still are pretty optimistic about Washington. But it will certainly – we're looking forward to getting that period of time our convention business starts to pick up again. And then hopefully at some stage here, we start to see – we’re seeing a little bit more broader growth than what we've experienced the last couple of years.

Smedes Rose – Evercore Partners Inc.

Okay. Thanks.

Operator

And, that does conclude our question-and-answer session. At this time, I’ll like to turn the call back to Mr. Walter for any closing or additional remarks.

W. Edward Walter

Well, thank you for joining us on this call today. We appreciate the opportunity to discuss our second quarter results and outlook with you. We look forward to providing you with more insight into the remainder of 2004 on our third quarter call in the fall. Have a great day. Enjoy the rest to your summer. Thanks.

Operator

And again, that does conclude today’s conference. We do thank you for your participation.

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Host Hotels & Resorts (NYSE:HST): Q2 FFO of $0.43 in-line. Revenue of $1.43B (+2.9% Y/Y) misses by $10M.