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Host Hotels & Resorts (NYSE:HST)

Q4 2011 Earnings Call

February 14, 2012 10:00 am ET

Executives

Gregory J. Larson - Executive Vice President

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

Analysts

Eli Hackel - Goldman Sachs Group Inc., Research Division

Robin M. Farley - UBS Investment Bank, Research Division

Joshua Attie - Citigroup Inc, Research Division

Smedes Rose - Keefe, Bruyette, & Woods, Inc., Research Division

William A. Crow - Raymond James & Associates, Inc., Research Division

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

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

Operator

Good day, ladies and gentlemen, and welcome to the Host Hotels & Resorts, Inc. Fourth Quarter 2011 Earnings Conference Call. Please note, today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Greg Larson, Executive Vice President. Please go ahead, sir.

Gregory J. Larson

Well, thank you. Welcome to the Host Hotels & Resorts Fourth Quarter Earnings Call. Before we begin, I'd like to remind everyone that many of the comments made today are considered to be forward-looking statements under federal securities laws. 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.

Before we begin, I'd like to introduce our new Vice President of Investor Relations, Gee Lingberg, who is here with us today on the call. Gee has been with Host for 18 years, most recently in our Treasury Group.

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

And now, here's Ed.

Larry K. Harvey

Thank you, Ed. Let me start by giving you some detail on our comparable hotel RevPAR results. Our top-performing market for the quarter was Hawaii, with a RevPAR increase of 23.6%. Occupancy improved more than 11 percentage points, driven by strong group and transient demand, which lead to a 5% increase in rate. Results for the quarter benefited from the renovations of the hotels in the fourth quarter of 2010.

Food and beverage revenues for our Hawaiian hotels increased more than 18% and, as a general trend, we saw stronger F&B revenue growth throughout our portfolio. Hawaii also had an outstanding year with a RevPAR increase of 16%, the second best market in our portfolio. We expect Hawaii to be one of our top-performing markets in 2012, due to strong group demand, which should allow us to drive pricing.

As expected, our Miami and Fort Lauderdale hotels had another great quarter, with RevPAR up 16.3%. Occupancy improved 8 percentage points as group demand was very strong and ADR increased nearly 4%. The renovation of the Miami Biscayne Bay Marriott in the fourth quarter of 2010 contributed to the RevPAR growth. For the year, our Miami and Fort Lauderdale hotels had RevPAR growth of 9.7%, and we expect them to have a good year due to growth in ADR in 2012.

The Phoenix market continued to perform exceptionally well with a RevPAR increase of 15.7%. Strong group demand aided by the construction of a new ballroom and meeting space renovations at the Westin Kierland in 2010 resulted in an occupancy increase of over 5 percentage points. And ADR growth of nearly 6% was driven by increases in both group and transient rates.

Our Phoenix hotels had F&B revenue growth of nearly 29% in the quarter. They also performed very well for the full year, with a RevPAR increase of 13.3%. We expect our Phoenix hotels to perform in line with our portfolio in 2012 due to solid group demand, which will result in further ADR growth.

While our Philadelphia Downtown Marriott is no longer under renovation, our Philadelphia hotels had an outstanding fourth quarter, with RevPAR up 13.5%. ADR increased nearly 12%, and occupancy improved over 1 percentage point. Strength in group bookings drove the outperformance and lead to an F&B revenue increase of over 15%. We expect our Philadelphia hotels to excel in 2012, primarily due to strong group demand and no negative impact from the renovation.

Our San Francisco hotels continued their excellent performance as RevPAR increased 11.2% due to an ADR improvement of nearly 9% and an occupancy increase of 1.5 percentage points. The improvement in ADR was driven by both rate increases and the shift in the mix of business to higher-rated segments.

Both group and transient demand were strong. For 2011, San Francisco was our top-performing market with a RevPAR increase of 16.3%, and it will continue to perform well in 2012. RevPAR for our Chicago hotels increased by 6.3%, driven by an increase in occupancy of nearly 3 percentage points and an improvement in average rate of over 2% as both transient and group demand were good. We expect our Chicago hotels to have another good year due to strong group and citywide bookings, which should drive ADR growth.

RevPAR for our New York hotels increased 5.4% due to a rate improvement of over 3% and an occupancy increase of nearly 2 percentage points. These results were below our expectations, primarily due to lower rate growth and the effect of new supply. Even with the new supply, we expect our New York hotels to have a solid 2012.

RevPAR for our Washington, D.C. hotels was essentially flat, with occupancy increasing 1.5 points and ADR declining roughly 2%. Soft group and transient demand, along with discounted leisure rates, hurt ADR. 2012 will be a challenge due to a weaker citywide calendar, government travel cutbacks and an election year.

Lastly, our worst-performing market for the fourth quarter was Atlanta. RevPAR fell 3.9%, with a 2 percentage point drop in occupancy and a 1% drop in ADR. The poor performance was due to a decline in citywide demand and renovations at the JW Marriott Buckhead. We expect the Atlanta market to continue to underperform our portfolio in 2012.

For our European joint venture, RevPAR calculated in constant euros increased 1% for the quarter as ADR increased 5.3%, while occupancy fell 3.2 percentage points. In particular, the Sheraton Roma had a significant negative impact on RevPAR growth due to its major renovation. Excluding the Sheraton Roma, RevPAR would have increased 3% in the quarter in constant euros. The Westin Europa & Regina in Venice and the Sheraton Warsaw performed the best in the quarter. For the full year, RevPAR calculated in constant euros improved 5.5%, solely due to growth in ADR. Excluding the Sheraton Roma, RevPAR would have increased over 8% in 2011 in constant euros.

For 2012, the European joint venture properties have projected RevPAR growth of 3% to 5%. However, at the corporate level, we are more conservative in using lower RevPAR assumptions. Our portion of the Euro JV EBITDA represents only 3% of our adjusted EBITDA.

For the quarter, adjusted operating profit margins for our comparable hotels increased 100 basis points, despite the recognition of $1.6 million in bad debt expense from the American Airlines bankruptcy. Margins for the quarter benefited from better productivity as wages and benefits on a per occupied room basis increased less than 2%. Rooms flow through was roughly 73%.

As previously discussed, food and beverage revenues increased significantly with a 6.8% revenue increase. F&B flow through was nearly 51%, a substantial improvement over the first 3 quarters of the year and significantly above our expectations. We saw improvements in catering, meeting room rental and audio-visual revenues.

Unallocated cost which include general and administrative, sales and marketing, repairs and maintenance and utilities, increased 4%, primarily driven by expenses at our variable revenues, including credit card commissions, reward programs and cluster and shared service allocations. Utility cost declined slightly. Property taxes increased in the fourth quarter after declining for the first 3 quarters of the year, resulting in an overall decrease in property taxes for 2011. For the full year, comparable hotel adjusted operating profit margins increased 90 basis points.

Looking forward to 2012, we expect that RevPAR will continue to be driven by both occupancy and rate growth. The additional rate growth should lead the solid rooms flow through, even with growth in wage and benefit cost. We expect an increase in group demand and higher quality groups, which should help drive growth in banquet and audio-visual revenues and good F&B flow through.

We expect unallocated cost to increase more than inflation, particularly for rewards and sales and marketing, where higher revenues will increase cost. We expect property taxes to increase roughly 9% and property insurance to increase due to higher replacement cost and rates. Together, these 2 items reduce our margins by more than 40 basis points for 2012. As a result, we expect comparable hotel adjusted operating profit margins to increase 25 basis points, the low end of the range, and increase 75 basis points at the high end of the range for 2012.

During the quarter, we issued $300 million of 10-year senior notes at a 6% rate. The proceeds will be used, along with available cash, to repay our only meaningful debt maturity in 2012, the $388 million and 2 5/8% exchangeable debentures, which we expect to be put to us in April. We also closed on a new $1 billion revolving credit facility, which is $400 million larger than our old facility. The new facility matures in November of 2015, with an option to extend for 1 additional year subject to certain conditions. Based on our current leverage level, U.S. dollar base borrowings would have a spread of 200 basis points. We currently have over $880 million of capacity on the credit facility, and ended the quarter with over $800 million in cash and cash equivalents.

I wanted to mention 2 more items prior to starting the question-and-answer session. In 2011, our taxable REIT subsidiary incurred a book loss, primarily due to negative lease leakage which resulted in our recording a tax benefit in 2011. The anticipated improvement in operating results in 2012 should lead to an increase in lease leakage and, as a result, we are projecting tax expense for 2012. This translates to roughly a 2% -- $0.02 per share reduction in adjusted FFO for 2012. In addition, the mortgage note that we purchased in 2010 that has collateralized by 6 hotels in Europe, matures in October, and we expect to get repaid at that time. Accordingly, we will only have 9 months of interest in 2012, which results in a reduction in adjusted EBITDA of approximately $6 million or $0.01 per share in FFO when compared to 2011.

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

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Eli Hackel with Goldman Sachs.

Eli Hackel - Goldman Sachs Group Inc., Research Division

Just 2 questions. First, could you just talk further about your views of the Atlanta and D.C. market? Have your views of those markets changed over the last couple of years? And just building upon that, you said you were going to increase your dispositions. What markets are you looking to decrease your exposure to? Then second, what's your current view on the next peak in margins? While it seems that some permanent costs have come out of the market via staffing and other means, maybe there's some higher costs, whether it's taxes or insurance. Do you think that the next peak in margins will be higher than the previous peak?

Operator

We'll move on to our next question in the queue from Robin Farley with UBS.

Robin M. Farley - UBS Investment Bank, Research Division

Two questions. One is can you give us a little bit of color on what your company guidance assumes for Europe -- European RevPAR from your JV? And then also, I wanted to ask about flow through. You mentioned a couple of the items, insurance and things that I think you said combined really like a 40-basis-point burden on 2012 margins. But I guess, is there anything else that's keeping more flow through, given that you expect rate to be more of a driver of that 4% to 6% than occupancy, that we might have expected to see more flow through than just the 25 to 75 basis points, even with the little items you mentioned?

Operator

We'll move on to our next question in the queue from Josh Attie with Citi.

Joshua Attie - Citigroup Inc, Research Division

What do you expect in terms of the quarterly progression of RevPAR? Or even just if you look at the first half or the second half, do you feel like it's going to be spread evenly? Or is the growth weighted toward a particular half or quarter?

Joshua Attie - Citigroup Inc, Research Division

And how does your RevPAR growth guidance of 4% to 6% compare to maybe what your view of the industry is? Or how do you think -- do you think the portfolio is going to outperform or underperform, what you think the industry will do? And what are the different headwinds and tailwinds affecting that?

Joshua Attie - Citigroup Inc, Research Division

And it sounds like that based on the way your group bookings have accelerated, do you feel like the performance gap between your portfolio in upper upscale versus the total industry could start to narrow in 2012 or close completely?

Operator

Next we'll hear from Smedes Rose with KBW.

Smedes Rose - Keefe, Bruyette, & Woods, Inc., Research Division

It's Smedes. I just had a couple of questions. I wanted to ask you on your disposition activity, if you could just talk about maybe some of the buyers you're seeing and how are they thinking about financing on the assets that they want to buy. And then for you guys specifically, are you thinking more towards international opportunities or domestic as you think about acquisition activity? And then also, just in your guidance, are you -- does it assume any issuance on your ATM Program and the share count that you've provided?

Smedes Rose - Keefe, Bruyette, & Woods, Inc., Research Division

Just wondering if you had issued on your ATM during the quarter and if your guidance assumes any continued issuance?

Gregory J. Larson

Smedes, this is Greg. If you look at page 12 in our press release, our total shares in OP Units outstanding right now, they're about $716 million. If you look at the back of our press release where we show the total shares for the year, it's basically taking that $716 million and adding in the convert -- the $38 million of converts. And so the answer is, no. There are no additional shares in our guidance.

Operator

We'll move on to our next question from Bill Crow with Raymond James.

William A. Crow - Raymond James & Associates, Inc., Research Division

A couple of detailed questions on the guidance. I know some markets you were more specific on your outlook than others. Do you have any sort of specific RevPAR growth goals for New York and D.C. in particular?

William A. Crow - Raymond James & Associates, Inc., Research Division

Right, right. Okay. And then you talked about the renovations and lapping some of the renovation disruptions from last year. Do you think that net-net, you'll benefit from the, as far as 2012 goes, renovations relative to last year? Or is it a wash? Do have any disruptions this year? How do we think about the impact?

William A. Crow - Raymond James & Associates, Inc., Research Division

And one final question from me, which is as you look at this building group stretch and you start to dissect it a little bit by type of group, are you seeing any change in demand by financial services? Or are you seeing any reduced demand or sensitivity to, for example, Ritz-Carlton's or other high-end brands versus Marriott or Starwood, typical brands? Anything you can give us there that would help us kind of look out and see if there are any negative or positive trends we need to be aware of?

Operator

Our next question comes from Harry Curtis with Nomura.

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

Ed, I wanted to quickly follow up on some comments you made earlier about the group booking pace. You said that's for 2012. I think demand was up about 5%. That's slightly higher rate. Going back to your earlier comment, when is it appropriate to begin pushing that rate? And is it really the -- in the quarter-for-the-quarter demand that should lift that? And how much could it lift it?

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

The second question that I had is going back to redevelopment and renewal expense, which in 2011 and expect for 2012 will be plus $500 million. That represents over 10% of your revenues, and so just a couple of questions there. Now how much of that is really catch up on deferred maintenance from the recession period? What percentage of your portfolio has been renovated versus is targeted for renovations? And then when do you expect to get to the more traditional 5% to 6% of revenues as a kind of a total spend number?

Operator

Our next question comes from Jim Sullivan with Cowen and Company.

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

Two quick questions from me, Ed. As you think about demand growth in 2012 and beyond, to what extent is the international inward-bound demand a positive or a negative variable? We hear talk about some weakness from some of the European -- some of the major European sources of U.S. travel, but that's being offset apparently by the emerging economy. So I'm curious what your operators are telling you about that? And then, secondly, in the general area of cost, maybe you could help us think about perspective wage and benefit cost pressures. Should we be thinking about that in connection with an overall employment rate? Or is there some other variable that we should be factoring into that kind -- in the projected increases on those cost?

Operator

Thank you, and that does conclude our question-and-answer session today. I'll turn the conference back over to Mr. Walter for any additional or closing remarks.

Operator

Thank you. And that does conclude our conference for today. We thank you for your participation. You may now disconnect.

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