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Host Hotels & Resorts (NYSE: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

Operator

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 results and then will 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 level bonuses, significant increases in state-assessed payroll taxes, and a reduction in cancellation fees. Larry will give you more insight into each of those 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 to 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 continued 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 a 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 level, we are still expecting to see increasing Group business drive our recovery.

Looking at the remainder of the year, our booking pace outlook improved over the course of the quarter, especially in March, and exceeds 2010 and our booking pace from last quarter. We expect overall Group revenues to increase meaningfully this year as the increased booking pace is complemented by progressively increasing average rate growth throughout the remainder of the year.

On the investment front, we are pleased to announce on this call that we literally just signed an agreement to acquire a 75% interest that includes a 12% return on the 364-room Hilton Melbourne South Wharf Hotel. The total purchase price for the hotel is approximately $150 million, including an $86 million mortgage loan, which leads to a Host equity investment of $49 million. The hotel is a newly built high-quality asset managed by Hilton. It's located in the South Wharf section of Melbourne, one of Australia's most important commercial and tourism centers. The property is an integral part of the broader complex of the Melbourne Convention and Exhibition Centre, which provides direct access over 484,000 square feet of meeting space, and which is located in a very rapidly developing area of the city. Australia's natural resource economy benefits from the tremendous growth in the Asia-Pacific region, and Melbourne is its most dynamic convention market. As a result, we are very excited about the acquisition and for the potential for outperformance by this hotel.

In addition, as we announced this morning, we signed an agreement with our partners in the existing European venture to form a second fund with a total equity commitment of EUR 450 million. Host will own a 1/3 interest in this second fund and will serve as its general partner and asset manager. Assuming roughly 55% leverage, the new fund will be party to acquire approximately EUR 1 billion worth of hotels. As part of the formation of the new venture, Host is contributing the Le Meridien Piccadilly for a transfer price of GBP 64 million, which reflects our costs related to the acquisition of the hotel, including the purchase price transaction costs and other costs related to the acquisition. In addition, the second fund will assume the debt encumbering the hotel.

We are pleased with our acquisition activity so far this year which, including the acquisitions we announced in February, total more than $1 billion. And we continue to believe that we are in a great position to take advantage of additional investment opportunities as they arrive. We have a strong pipeline of acquisition opportunities and do expect that we will purchase additional hotels during 2011.

With that being said, recognizing the unpredictability of the timing of completing acquisitions, our guidance does not assume any additional acquisitions beyond those we announced. So the $150 million acquisition that you see in our forecast is essentially the deal that we just talked about this morning.

During the quarter, we invested approximately $46 million in redevelopment and return on investment projects. As a result of the completion of the majority of the extensive renovations at our San Diego Marriott Marquis & Marina hotel, the property earned the premier Marriott Marquis distinction. The renovations included completely remodeled guestrooms, an updated lobby, a state-of-the-art fitness center which overlooks the vibrant and recently expanded and remodeled pool area. We are extremely pleased with the result of this renovation and expect the hotel to benefit from this investment over the next several years.

We are also in the midst of a comprehensive renovation at the Sheraton New York Hotel & Towers, including a complete rooms renovation and major mechanical and HVAC upgrade. This is the first step in the redevelopment of this hotel, which will also include renovating the meeting space plus the food and beverage outlets. For the full year, we expect to spend approximately $230 million to $250 million on these types of projects.

In terms of the maintenance capital expenditures, we spent $48 million in the first quarter. The most significant project is the $56 million comprehensive room, bathroom and meeting space renovation at the Philadelphia Marriott Convention Center Hotel which will be completed in May, and which will position the property to take full advantage of a strong convention calendar in 2012. Other important projects that were completed this quarter include ballroom renovations at the Sheraton Boston and the Hyatt Regency Washington on Capitol Hill, as well as the rooms renovation at the San Antonio Marriot Rivercenter Hotel. For the full year, we expect to spend $300 million to $325 million on maintenance capital expenditures.

On the disposition front, we anticipate that activity will begin to expand beyond just the major market, and we are reviewing our portfolio for likely sale candidates. We expect that our disposition activity will pick up in the second half of 2011 and become even more active in '12 and '13. With that being said, our guidance currently does not assume any dispositions.

Now let me spend some time on our outlook for 2011. We remain optimistic that the economy will continue to pick up steam this year. As the recovery continues, we expect demand to remain strong and average rates to keep improving as our business mix shifts to higher-rated business segments. Given that our first quarter results were in line with our expectations and that booking pace is continuing to improve, we expect comparable hotel RevPAR will increase 6% to 8% for the year, with adjusted margins increasing 100 to 140 basis points.

It is worth noting that we expect the second half of the year will exhibit better relative performance than the first half on both the RevPAR and margin fronts, as we expect to be more significantly affected by renovation work in the first and second quarters, and we anticipate that pricing will be better during the latter stages of the year. This operating forecast, combined with our recent acquisition activities and improved projections for our previously announced acquisitions, will result in adjusted EBITDA of $1.01 billion to $1.045 billion, and FFO per share of $0.88 to $0.93.

Turning to our dividends, we increased our first quarter common dividend to $0.02 per share. As our operations continue to improve, we expect to modestly increase the common dividend over the next 3 quarters, with the expectation of a full year common dividend of $0.10 to $0.15 per share.

I am pleased to say that the lodging recovery is continuing to gain momentum. Our portfolio is well positioned to take advantage of these strong operating trends over the next several years and combined with low supply, we would expect strong earnings growth.

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 Harvey

Thank you, Ed. Let me start by giving you some detail on our comparable hotel RevPAR results. Our top-performing market for the first quarter was San Francisco, with a RevPAR increase of 24.3%. Strong Group and Transient business contributed to an occupancy increase of over 7 percentage points. The incremental demand and related compression led to improvement of over 12% in ADR. We expect RevPAR for our San Francisco hotels to continue to outperform our portfolio in the second quarter due to excellent group and transient demand and further ADR increases.

Our San Diego hotels had another great quarter, with a RevPAR increase of 22.6% driven by an ADR increase of nearly 9% and an occupancy improvement of 8 percentage points, as both Transient and Group performed well. For the second quarter, we expect our San Diego hotel to underperform the portfolio due to fewer citywides and overall reduced group demand, only partially offset by improvements in transient demand and rates.

RevPAR at our Hawaiian hotels increased 18.7% due to occupancy improvements of nearly 6 percentage points, primarily driven by incremental group demand and a nearly 10% increase in ADR. We expect Hawaii to have an outstanding second quarter due to further improvements in group and transient demand, as well as increases in ADR.

The New Orleans Marriott performed very well, with a 14.6% improvement in RevPAR. Even with fewer citywide events, group demand increased 15%. Occupancy increased over 4 percentage points and ADR improved over 8%, as the hotel benefited from a positive shift in our transient mix of business. We expect the New Orleans market to underperform the portfolio in the second quarter due to a decline in group demand.

Our Phoenix hotels officially turned the corner with a RevPAR increase of 7.6%, as ADR improved by over 12% while occupancy decreased roughly 3 percentage points. The improvement in ADR was driven by both rate increases and the shift in the mix of business to higher-rated segments. We expect the phoenix market to outperform our portfolio in the second quarter due to strong corporate group demand and ADR gains.

RevPAR for our Boston hotels increased 6.9%, even with the Sheraton Boston's meeting space being renovated and bad weather conditions, which affected both transient and group demand. ADR increased nearly 4%, and occupancy increased 1.5 percentage points. Our Boston hotels are expected to underperform the portfolio in the second quarter due to the reduced citywide demand and the displacement of business as we wrap up our meeting space renovation at the Sheraton Boston.

Due to a reduction in citywide events and a rooms renovation at the San Antonio Rivercenter, our San Antonio hotels struggled in the quarter with RevPAR improving only 1.3%, as rate was essentially flat and occupancy increased roughly 1 percentage point. We expect our San Antonio hotels to have a great second quarter and to outperform the portfolio because of strong group demand, which should drive a significant increase in ADR.

Due to renovations at the New York Marriott Marquis and the Sheraton New York Hotel & Towers, as well as poor weather and the impact of additional supply in the city, RevPAR in New York decreased 2.5% as occupancy fell roughly 7 percentage points and rate increased nearly 8%. With the renovations continuing into the second quarter, we expect our New York hotels to continue to underperform our portfolio. However, we do believe that our New York hotels will have a great third and fourth quarter.

Lastly, our worst performing market for the first quarter was Philadelphia, as RevPAR fell 14.3%, primarily due to the disruption from the renovation of ballroom and guest rooms at the Philadelphia Marriott. The hotel experienced a RevPAR decline of nearly 23% in the quarter. The Philadelphia market will continue to struggle in the second quarter due to the renovation of the hotel, which is expected to be completed in August of this year. However, we expect our Philadelphia hotels to have a strong second half of the year.

We are also very pleased with the performance of our 2010 acquisitions, as the 4 hotels experienced average RevPAR growth in excess of 11%. For our European joint venture, RevPAR calculated in constant euros increased 9.9% for the quarter, as 5 of the 11 hotels had double-digit RevPAR increases, led by the Crowne Plaza Amsterdam, the Westin Palace Madrid and the Westin Palace Milan. Occupancy increased 2.7 percentage points and ADR increased 4.9%.

For the quarter, adjusted operating profit margins for our comparable hotels decreased 10 basis points. The decline was driven by 4 items: The first item is higher state unemployment taxes, as several states raised SUTA taxes to replenish their unemployment funds. The tax is on a fixed amount of wages and while it was anticipated in our forecast, it disproportionately affects the first half the year.

The second item is higher hotel-level bonuses. In the first quarter of 2010, minimal hotel level bonus accruals were made due to the generally poor prospects at that time. For the first quarter of 2011, bonus accruals were at normal levels. As 2010 improved, bonus expense accelerated, resulting in higher levels of expense in the second half of the year. On a full year basis for 2011, hotel-level bonuses are expected to be roughly flat to 2010.

The third item is lower cancellation and attrition fees. In the first quarter of 2010, we received cancellation and attrition fees in excess of a typical year, and for the full year 2010, we received fees reflecting a typical year. In the first quarter of 2011, cancellation and attrition fees were well below the levels -- the typical level. And that trend is expected to continue throughout 2011.

The last item is business disruption from our capital program. While we had 18 hotels under various stages of renovation, 2 of those hotels had meaningful highly disruptive renovation activity: The Sheraton New York and the Philadelphia Marriott, both of which had double-digit RevPAR declines and negative EBITDA, driving margins for our portfolio down 60 basis points for the quarter. In total, these items reduced our margins for the quarter by 145 basis points.

Even with these items, we still expect comparable hotel adjusted operating profit margins to increase 100 basis points at the low end of the RevPAR range and increase 140 basis points at the high end of the range. For the quarter, rooms flow-through was good at over 73%, given the challenges of higher payroll taxes and bonuses, as well as the impact of renovations. Unallocated cost increased 6.2%. This increase was primarily driven by expenses that are variable with revenues, including credit card commissions, reward programs and cluster and shared service allocations, while incremental bonus expense and sales office expenses also contributed to the increase. Utility costs increased 4.2%.

Looking forward to the rest of the year, we expect the RevPAR increase to continue to be driven more by rate growth in occupancy, which should lead to strong rooms flow-through, even with growth in wage and benefit cost above inflation. We expect some increase in group demand as well as higher-quality groups, which should help to drive growth in banquet and audiovisual revenues and solid F&B [food and beverage] flow-through, particularly in the second half of the year, as payroll tax and bonus expense comparisons become easier.

We expect unallocated costs to increase more than inflation, particularly for utilities, where we expect higher growth due to an increase in rates and volumes. And sales and marketing costs, where higher revenues and the implementation of new sales and marketing initiatives will increase cost. We also expect property taxes to rise in excess of inflation.

In February, shortly after we closed on the acquisition of 7 hotels in New Zealand, the city of Christchurch experienced an earthquake that caused considerable damage to the city. Two of the hotels in the acquired portfolio, a Novotel and Ibis, totaling 348 rooms, were damaged and are in the government-declared red zone that has limited access. The 2 properties represent approximately 25% of the value of the portfolio. Based on preliminary assessments, the structural damage appears limited to 39 rooms in the Novotel's historic Warner building. We are engaging structural engineers to prepare comprehensive formal assessments and are hoping that the properties could be opened later this year or by the mid-2012.

We believe we have adequate insurance as part of Accor's New Zealand insurance program to cover the property damage. Our deductible is 3% of the loss up to USD $14.4 million, or 5% of replacement value of that property if the claim is over the $14.4 million level, which does cap the deductible at USD $3.2 million. The coverage period for business interruption is 36 months for the Novotel and 24 months for the Ibis. Now that some access has been granted, we should have a much better assessment of the situation by the second quarter earnings call.

We ended the quarter with over $150 million in cash and cash equivalents and roughly $440 million of capacity on our credit facility. During the quarter, we raised approximately $100 million under our continuous equity offering program. We also repaid our only 2011 debt maturity, the $132 million in mortgage loans on our 4 Canadian properties with $29 million of cash and a $103 million draw on the credit facility. After paying off those mortgage loans, 108 of our 122 consolidated hotels do not have mortgage debt. Our credit facility matures in September this year, but we have the right to extend the facility to September of 2012 as long as our leverage level is below 6.75x, a standard we are more than comfortable that we will achieve.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Chris Woronka with Deutsche Bank.

Chris Woronka - Deutsche Bank AG

Just a quick question on -- do you have an estimate of what percentage of your room nights have a airline reservation attached to them?

W. Edward Walter

Yes, I would say a very high percentage of them do. We've always felt that with the fact that the bulk of the portfolio is located in gateway markets, that we are probably more of a fly-in hotel company than a drive-in hotel company. But to give you a specific percentage would just be a pretty rough guess.

Chris Woronka - Deutsche Bank AG

Okay, fair enough. And, I guess, are you talking with your operators, or they talking with some of their larger clients about potential impact of higher airfares and things like that?

W. Edward Walter

Yes, Chris, I think that's clearly one of those myriad of concerns that sits out there right now. In fact, we were talking with them a little bit about that before. What we have found in the past, and of course some of this always comes down to the degree of the increase in airfare, is that typically while the increase in airfare starts may -- even at this point, I don't know that it's necessarily significant in the cost of the airline portion of the trip, the increase in the fare compared to the overall business trip, which is what's driving most of our activity, tends to be relatively low, just because you've got a myriad of different elements to any business trip. So that in and of itself has not been -- we've not found in the past that increasing fares are that impactful to us. Where we did see a bigger change before when airline prices went up is that we did start to see that as airlines had to rationalize higher fuel prices, they started to look a little bit more carefully at some of the longer-haul trips that they were taking and trying to understand whether or not they were getting effective pricing on those trips. So if you remember back to '08, we had some disruption in Hawaii that we really -- pre the economic downturn that we tied to what -- in our minds, was tied to what was happening with the airlines. You may remember at that point in time, 2 airlines went out of business at that stage, which accentuated the problem. As we look at what's happening right now, we've heard no signs that there's any reduction in flights into Hawaii. I think pricing is probably creeping up there a bit. But we've actually had very strong -- I think Larry reported, we've had very strong results in Hawaii in the first quarter, and the outlook for the rest of the year continues to be very positive. So I'd say it's one of these things we're watching, but at this point we're not feeling any impact.

Chris Woronka - Deutsche Bank AG

Okay, that's great color. And just another question on your potential asset sales in the second half of the year. I assume that most or all those are non-core assets, but do you see any opportunities to maybe monetize something larger? Kind of like you did in 2006? And I know that was kind of an "alternative use" situation, but are there any of those out there yet?

W. Edward Walter

I think it's probably early for those types of transactions. I mean, I think we will be opportunistic about selling some of our larger hotels, but I think the focus initially will really be as you suggested, on the non-core assets.

Chris Woronka - Deutsche Bank AG

Got you. And just finally on the dividend. Is there anything specifically that you're tying that to? Is it a specific payout ratio on CAT or something like that? Are you benchmarking the yield to some kind of index? Just getting a sense as to what might make you unable -- to enable you to raise that further as we go down the road.

W. Edward Walter

At this point, we've not changed the philosophy that's been in place, really, since we became a REIT, which is to pay out our taxable income. So it's in over lower level now, but given that -- I think we all expect that we will be seeing healthy EBITDA growth for the next several years. And that should likely result in significant taxable income growth, and also -- which will then translate into a much higher dividend.

Operator

And now we'll hear from Joshua Attie with Citi.

Joshua Attie - Citigroup Inc

Can you talk about your outlook for the Washington D.C. market the next year or so? And do you think the federal government shrinking at all will have an impact on the hotel market in trends?

W. Edward Walter

Josh, the first quarter for Washington was relatively weak. And I think as we talked with some of the individual properties, our sense was that they were -- this was a market that was affected by the potential government shutdown. I think it didn't necessarily show itself because people weren't coming in to see the government, but what we were hearing is that some of the agencies that were looking at having group events were sort of in a position where they couldn't sign a contract and they couldn't commit in February and March because they didn't know they had the authority. I am hopeful that, that business wasn't lost, but was simply postponed. But I think as we look at Washington for the next year or so, I think in general the way I'd respond to that is that Washington was one of the markets that held up the best in the downturn, so it declined the least. As all these different markets start to work their way back to where they were before and then move beyond that, we generally assumed that Washington growth would be fine in a historical context, but in the short term would likely be lower than, certainly, markets like New York, Boston and San Francisco. But not because it's not a healthy market, but because the overall level of decline there was just lower.

Joshua Attie - Citigroup Inc

So you think it's more just a comparison issue than that demand is actually going to be weak over the next 12 or 18 months because of lower federal activity.

W. Edward Walter

Yes. I mean, frankly, the best thing that could happen to the hotel business in Washington is a big tax bill. Because as you can guess, just about everybody would be in town trying to work their various perspectives on that. So we don't necessarily see the market being -- we certainly don't see the market being weak here. I do think you've also seen a little bit of an impact this year from the Republicans changing the calendar for the Congress. This new system, which I think has them in session for 3 weeks and then off for a week so that they can go back and visit their constituents, has forced a little bit of a revamping of the meetings calendar in Washington. And so I think the city is probably working through a little bit of that, too. But overall, we don't see a lot of -- as we look into '12, we're not necessarily thinking that the Washington market's going to be particularly weak. And for the full year this year, we're generally expecting it to be in line with the rest of the portfolio.

Operator

And now we'll open up the floor to David Loeb with Baird.

David Loeb - Robert W. Baird & Co. Incorporated

I have a couple. Maybe you can give us a little insight on this: When you look at hotels in the same market over the same period x disruption, are you seeing any differences in trends by brand? Are you seeing any differences in group? Clearly what I'm getting at is Marriott's comments versus much more upbeat comments from Starwood this morning. And you are owners of hotels in both of those brands. Can you give us any insight?

W. Edward Walter

I would say that we haven't seen big differences by brand that aren't explainable by the differences in which markets the hotels are located in. So in other words -- as you look at our portfolio, you saw differences in performance between the different major brands that we're associated with, but I would -- and so some are always underperforming or outperforming others, but I don't attribute that to any broader brand question or strategy or program. I think what that really is attributable to is what markets you're in. When New York was falling, everybody was affected by that. As New York has come back, everyone has been benefited by that.

David Loeb - Robert W. Baird & Co. Incorporated

I see. So in markets with -- I mean, you've obviously had a lot of disruptions: Boston, New York, Philadelphia. But in markets where you didn't have disruption, where you have convention hotels with both brands, you're really seeing similar trends in the same periods.

W. Edward Walter

Yes.

David Loeb - Robert W. Baird & Co. Incorporated

Okay. Second and last question, your guidance on corporate expense is $99 million versus last year's $108 million. How do you account for that being down? We like that, by the way, but how do you account for that?

W. Edward Walter

You may like that, but since I think the major reason for that is currently projected lower compensation, I'm probably not as happy about it as you are. Some of that just has to do with the fact that as you -- there are probably a variety of factors that feed into that, but one of the bigger factors is just the way that our compensation program works. The amount of shares that we earn depends upon primarily on our relative performance compared to the rest of the market. And at this point in the year, we tend to just use target for a number and then we refine that number as we get later into the year. Last year, because we performed so well against NAREIT and so well against the lodging companies that are in our index, our compensation was higher and that's why you saw the number being higher.

David Loeb - Robert W. Baird & Co. Incorporated

Got it. Okay. That makes perfect sense. Thank you very much.

Operator

Jeffrey Donnelly with Wells Fargo has our next question.

Jeffrey Donnelly - Wells Fargo Securities, LLC

Just a follow-up, actually, on the question David just asked concerning the brand performance. Looking ahead, Marriott has been rolling out a new sales force initiative it's been chain-wide. I think Hilton's been looking at doing something with the customer loyalty system. Some of these systems are fairly expensive and probably only possible because of the scale of their distribution system. How do you view these initiatives? Do you think brands with these large distribution systems are going to be developing a competitive advantage that could translate into tangible incremental earnings for you as an owner of both hotels? Is it too early say? Or do you just think this is, I guess I'll call it the cost of being a large chain?

W. Edward Walter

Jeff, that's a great question. And I don't know that anybody really knows the answer to that yet. What I would say is that I do think if you look back over time, a number of these initiatives have ultimately led to -- when it's revenue management and things like that, they've come up with programs that I think, more than on the margins, have made a difference in profitability at the hotel. And I think we're comfortable as the larger brands try to look for ways to become more efficient in how they handle marketing or how they handle customer relations. And I think we're more comfortable in trying to work through those different programs with them, to both look for ways that we can save, but more importantly look for ways where we can drive more revenue. None of those programs proceeds without a few bumps along the road. And I think that's probably a bit what's happening with Marriott with the Sales Force One program. I would tell you that as we look more specifically at that program, we think the fundamental goal of [Audio Gap] through midsized and smaller customers and in a more rational and organized way is something that does make sense. And we've been working closely with them as they've been implementing that program to make certain that we see both the revenue and its benefits and the cost savings that we're supposed to get. As I sort of alluded in my earlier comments, none of these things proceeds without a few bumps along the road, and so we've seen a difference in benefit from the program. Net-net, as we look at our Marriott hotels over the last 3 years, we've seen an improvement in share. So we don't believe that the program, that Sales Force One or other initiatives is dragging down our performance. What we have noticed is that we have done much better at our larger hotels than we necessarily have with some of our smaller hotels. I think some others have commented on that same phenomenon. And one of the things that we're working with them on is to consider how to refine the program in order to make certain that our smaller hotels also start to do better. But I would caution everybody that market share is a great statistic in the sense of summarizing activity, there's a lot of different factors that go into that. And we all have to be careful about attributing what's going on with market share to any one program.

Jeffrey Donnelly - Wells Fargo Securities, LLC

You touched it in your response, but a lot of those programs -- I mean, my sense is they tend to be designed for the larger, more urban flagship properties in mind, for the brands. Do you think, given your experience, your expectations for the future, that generally speaking you guys tend to be disproportionate beneficiaries of these types of initiatives? Vis-à-vis, say, other Marriott products within the same system subject to Sales Force One or help in the Starwood product?

W. Edward Walter

It's certainly not hurting us own those types of hotels, that's for sure.

Operator

And now we'll open the floor up to Ryan Meliker with Morgan Stanley.

Ryan Meliker - Morgan Stanley

Just a couple of things. First, just for clarification purposes, the guidance that you issued this morning in the press release, that does include the Hilton Melbourne acquisition or does not?

W. Edward Walter

Yes, it does. As you look through the full press release, you'll see back in the section where we sort of provide this support for our guidance that there is a $150 million acquisition that's referenced. We were not -- as you can tell from the fact that this wasn't in the press release, we were just not certain what the timing on the transaction was going to be. So the net of it is that, that $150 million is the deal that I discussed in my comments.

Ryan Meliker - Morgan Stanley

Okay, great. I just wanted to make sure that it was in there. And then the other question I had was I look at your market types with the RevPAR growth, and I was looking at urban lag this quarter. It looks like over the past -- certainly all through 2010, urban was one of the better performers within your market types and certainly was the case within the STR data for the first quarter. I'm wondering what happened. Obviously, you had a 150 bps impact from the renovation of the Sheraton and the Marriott in Philadelphia, but was there something else that you've seen? And is that starting to be a trend going forward or not?

W. Edward Walter

We would not look at it as a trend. It's 2 things: It's the way our quarter works first of all, and then it's -- the best example is the Philadelphia Marriott, the Downtown you have a major urban hotel under renovation down 23%, while the market, the Philadelphia market as a whole, is up almost 10%. So we also had the Marriott Marquis under renovation, didn't talk too much about that. So it's -- we had a lot of our bigger boxes -- Sheraton Boston under renovation. You go down the list, and that's what you'll see.

Ryan Meliker - Morgan Stanley

So it's really just the renovations, then?

W. Edward Walter

And the timing of the quarter, that would -- the best part of the quarter was March. So if you look at our 8 4 [ph], that would show you the difference. And that's excluding Philly, the Sheraton, New York properties.

Operator

Bank of America's Shaun Kelley has our next question.

Shaun Kelley - BofA Merrill Lynch

Just wanted to kind of go back to the Group business for a quick second. I mean Marriott specifically called out the "in the quarter for the quarter" Group as being one of the changes that they saw. Could you give us just a little bit more granularity? I mean I caught your comments up front, but just how you saw maybe some of that business materialize over the course of the quarter? And I know you don't provide quarterly guidance, but kind of maybe what you're seeing? Because the looking windows aren't fairly sure, but maybe what you're seeing in the next couple of months for that segment of business?

W. Edward Walter

Sure. Shaun, it's a good question, because there was one thing that happened in the first quarter that was a little different from what we have seen in some of the prior quarters. It'll be interesting to see how this plays out as we work our way through the rest of the year. And the thing that was a little bit different is that we did see that our "in the quarter for the quarter" bookings were just a little bit lower than what they had been in the prior year. Now that's not necessarily surprising because last year we started to set records for "in the quarter for the quarter" booking. But the pace of those bookings in Q1 was moderated compared to what we had seen. I do think that the governmental shutdown comments that I had before may have had some effect on that, but I don't know that that's a big enough an effect to actually change the answer there. Conversely, what was encouraging was that our bookings for the next 3 quarters, so that would be Q2, Q3 and Q4, we're actually far stronger than what we had experienced in 2010. So while I don't know is -- we talked to the operators, I don't know that they would sit down and say, "yes, the booking cycle is lengthening," which would be a good thing for us, certainly for us. But I think what they are finding at least is that more people are willing to book a little bit further out than where they were before. And so as a result, we're looking -- whereas last year, we continued to -- each quarter, we tended to be -- at 90 days out, we tended to be showing negative room nights compared to the prior year. At this point for this year, we're showing solid room night growth in Q2 and Q3. And the negative that we started the year in Q4 has declined materially, although we're still showing a shortfall. I think that -- well, I want to reiterate a point, though, that was in my comments, because I think we also think this is important is that the rate growth that we're seeing in Q2, Q3 and Q4 is continuing to grow as you work your way through the year and at this point, on booking pace, is better than the rate of growth that we experienced in Q1. So I think that's a good sign. The real driver of this for us, and I would suspect for the industry, is going to be what's happening on the Corporate Group side. The Association business tends to book longer out. There's an attendance issue there, but there's not that much of an event issue around Association business. Corporate Group has clearly been improving. The pricing has been improving. It fell so far that it has a long way to go to recover, but the trends in that area are pretty good right now.

Shaun Kelley - BofA Merrill Lynch

That's helpful. And then maybe as we think about the pieces then, I guess the question is looking out in kind of more for your outlook. It doesn't sound like you're really thinking that the mix between Group and Transient changes for the remainder of the year. Is that a fair comment? Or kind of how would you think about that mix? Is Transient now a little bit stronger, and that kind of Group piece gives you a little bit more pause? Or do you think it's more just the timing-related, like you talked about?

W. Edward Walter

I think the Transient in the first quarter was probably more affected by weather than the Group was. And so I think we certainly heard that, say, in New York that the business Transient, because the people were leery of getting caught in the city due to the frequency of the winter storms, that there was a lag effect or an impact because of that. I think there's a couple of other markets that probably felt some impact from that, too. So I'm not certain that as you look -- as you look out for the rest of the year, I would expect to see continued improvement in Group occupancy. Maybe not at the rate that we enjoyed in the first quarter, but continue to see growth on that segment, and as I mentioned, continue to see growth in rates. On the Transient side, I think it's probably more likely as you look over the full year, that rather than seeing a slight decline in room nights, we'll probably start to see a slight increase. But the bulk of the Transient revenue recovery will be rate-driven, not occupancy-driven. So the net of all of that is that we would -- I would say, as you look at our overall business mix, that business mix should start to see an increase in contribution from the Group side versus the Transient side. And that's -- I think as we've commented now for probably over a year, we sort of are expecting that and frankly want that because for our portfolio, that would be a plus.

Shaun Kelley - BofA Merrill Lynch

That's helpful. And then my last question is just on New York. You called out, obviously, the renovation disruptions. But we heard a lot from operators in the market about supply issues as well. And I know not all of that is in midtown, but I just kind of wanted to get your thoughts, particularly as you think about the back half rebound that you guys are thinking about. Kind of how much is supply an issue in New York? And how much do you think that, that supply gets absorbed over the next few months here?

W. Edward Walter

I think -- my guess is that there was some supply impact in the first quarter, in part because the first quarter tends to be a weaker time in New York anyway. So because you're running at slightly lower occupancies in the city during the first quarter when you have several new hotels open, that probably accentuates the impact. As we look more broadly through New York through the rest of the year, certainly all of our properties are pretty optimistic about how the rest of the year plays out. Now we will still have some construction impact at the Marquis and the Sheraton New York in the second quarter, so I'm not necessarily expecting that we're going to have big RevPAR growth in New York for the half because those properties are so important to us in Q2. But as we look to the second half of the year, the outlook is pretty optimistic. And I suspect that as New York starts to work its way back to its stronger period, that you'll find that there's less impact from the supply given a high occupancy rate that New York traditionally runs at.

Operator

And now we'll go to Robin Farley with UBS.

Robin Farley - UBS Investment Bank

[Technical Difficulty]

Operator

Due to no response, we'll move the on to Joseph Greff with JPMorgan.

Joseph Greff - JP Morgan Chase & Co

When you look back of the first 4 months of the year at your urban and, say, resort conference hotels, and you look at midweek or Sunday-through occupancy, Sunday through Thursday occupancy levels, where is that relative to peak? I mean how close are you to midweek occupancy levels at some of the business-centric travel markets?

W. Edward Walter

To give you a truly accurate answer, we'd probably need to look at least 1 or 2 reports. Let me -- I guess what I'd tell you though is across the board, we're still fairly short. I mean, if you look at us compared to '07 right now, in this quarter, we're down about 6% in room nights and about 9% in rates and so overall, I think what that works out to is about 14% to 15% in terms of revenues. I would say that, that is generally probably pretty evenly distributed over both the weekdays and weekends. Now I think that the weekends fell a little bit less during the downturn, and then the weekdays fell more, but the recovery's been a little bit of the reverse. So I suspect in general across the portfolio is we're feeling that impact fairly evenly. Certainly in some of the markets like New York that run very high occupancies, my guess is that it's still more of a rate question than an occupancy question. But other than that, it's fairly evenly distributed.

Joseph Greff - JP Morgan Chase & Co

And when you look at the back of the year, would you expect New York City to outperform your portfolio? Or how would it perform within your portfolio?

W. Edward Walter

Well, certainly over the course of the next few years, we would expect New York to meaningfully outperform. And the second half of this year, as I said before, we assume it's going to outperform.

Operator

And ladies and gentlemen, that is all the time we have today for the question-and-answer session. At this time, it is my pleasure to turn the call back over to Mr. Walter for any closing remarks.

W. Edward Walter

Well, thank you folks for joining us on this call today. We appreciate the opportunity to discuss our first quarter results and outlook with you. We look forward to providing you with some more insight into how 2011 is playing out in our second quarter call in mid-July. Have a great day. Thank you.

Operator

Ladies and gentlemen, that does conclude our conference call for today. Again, thank you for your participation.

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