Host Hotels & Resort's (HST) CEO Edward Walter on Q4 2015 Results - Earnings Call Transcript

| About: Host Hotels (HST)

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

Q4 2015 Earnings Conference Call

February 17, 2016 10:00 ET

Executives

Gee Lingberg - IR

Edward Walter - President & CEO

Gregory Larson - CFO

Analysts

Smedes Rose - Citi

Harry Curtis - Nomura

Robin Farley - UBS

Shaun Kelly - Bank of America

Anthony Powell - Barclays Capital

Steven Kent - Goldman Sachs

Rich Hightower - Evercore ISI

Jim Sullivan - Cowen Group

Thomas Allen - Morgan Stanley

Operator

Please standby, we're about to begin. Good day and welcome to the Host Hotels & Resorts Incorporated Fourth Quarter and Full Year 2015 Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Ms. Gee Lingberg, Vice President. Please go ahead, ma'am.

Gee Lingberg

Thanks, Anna. Good morning, everyone. Welcome to the Host Hotels & Resorts fourth quarter 2015 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 Law. 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're 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, and 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, Greg will provide a brief -- Ed will provide a brief overview of our fourth quarter and full year results, and then we'll discuss our disposition and redevelopment activity, as well as our company's outlook for 2016. Greg will then provide greater detail on our fourth quarter performance by markets.

Following their remarks, we will be available to respond to your questions. To ensure we speak to as many of you as possible, please limit yourself to one question and one follow-up.

And now I'd like to turn the call over to Ed.

Edward Walter

Thanks, Gee. Good morning, everyone. Looking back on our performance in 2015, we had an active year and undertook a number of initiatives to capitalize on value enhancing opportunities to better position our company for continued growth and success. We sold more than $1 billion worth of hotels including five of our nine hotels in Asia as we make good progress on our plan to exit the Asia Pacific markets.

We returned $1.3 billion to shareholders in the form of dividends and share repurchases. We invested more than $1 billion in new assets and capital improvement including the acquisition of the iconic Phoenician resort as a completion of the major redevelopment of four hotel and finally we refinanced more than $1.4 billion of debt reducing our average interest rate by 110 basis points to 3.7%, extending our maturity schedule and further solidifying our industry leading balance sheet.

Looking ahead to 2016, we will continue to support a disciplined approach to actively managing our portfolio and additionally allocating capital. We've remained focused on continuing to improving operational and financial performance to better drive results for our shareholders.

Now let's review our results for the quarter and the year. Comparable hotel RevPAR for the quarter increased 3.6% with rate growth of 1.7% and an increase in occupancy of 1.4 percentage points. For the full year, our portfolio achieved an average occupancy of more than 77% allowing the hotels to drive average rate increase of 3.3% resulting in an improvement in Comparable hotel RevPAR of 3.8% which equals 4% when adjusted for the impact of the USALI accounting changes.

Adjusted EBITDA was $344 million for the quarter and $1.409 billion for the full year exceeding consensus estimates and our prior forecast. Our adjusted FFO per diluted share was $0.39 for the fourth quarter and $1.54 for the full year, also exceeding consensus estimates and reflecting a 2.7% increase over 2014. Even though we were below our RevPAR forecast for the year, adjusted EBITDA was positively affected by the higher than expected profits from food and beverage and from our Maui time share project, as well as $5 million associated with the write-off of deferred IMF relating to a hotel that converted to a franchise and a reduction in our restricted stock expense.

The quarterly results were driven by an increasing group room nights of more than 2.5%. As association business grew by more than 6%, group rate improved by nearly 1.5% as corporate rate growth was up by 4% which was significantly higher than our year-to-date results. In total, group revenues grew 4%.

Transient demand increased by 1.5%, although it was primarily in the discount segments as corporate demand was weaker than anticipated which may reflect the weaker GDP growth the U.S. economy experienced in Q4. While rate growth in the discount segments was fairly solid, the negative mixed shift resulted in average rate increasing just 1% and transient revenue grew just 2.5%. Some of the transient weakness was likely due to reduced international travel while labels into the U.S. continued to grow at a healthy pace in the fourth quarter, spending decline slightly which suggests that our customers still made the trip but stayed for fewer days and likely shop less. Our sense is that international business declined by 5% to 10% at our hotels in the quarter.

The strong group performance translated into strong banquet and catering activity as banquet and catering revenues grew by 6.8% or 5.4% after adjusting for USALI. We experienced above expected catering activity in our Florida hotel and in our larger San Diego and San Francisco assets. Our outlets were also busy as revenues at our restaurants and lounge improved by more than 4.5%. Overall, F&B revenues increased 6.1% or 4.7% after adjusting for USALI which was one of our best quarters of the year. The higher revenues drove improved margins and our profits exceeded our expectations.

Total revenues for the quarter increased 3.6% and EBITDA margins improved by 55 basis points as a 9% reduction in utility expense and a 15% reduction in insurance cost, partially offset by a 7% increase in property taxes and an increase in ground run in one of our LA assets.

Transient demand represented 58% of our total room nights for the full year, and increased just slightly from last year. Transient rate increased 2.8% for the full year as most segments experienced strong rate growth other than our OTA business. For the full year, transient revenues grew 2.9%. Despite starting the year with no additional room nights on the books compared to 2014, bookings during the year were solid and group demand improved 1.1% for the year led by a 3% increase in association business.

Overall, group demand represented 37% of our sold rooms and group revenues grew 3.1%. F&B revenues grew 5.2% for the full year or 2.5% after adjusting for USALI, the increase resulted from banquet revenue growth of 5.9% for the year and outlook revenue improvement of 3.8%. Reduced construction in our meeting space helped spark a 4.2% USALI adjusted F&B growth in the second half of the year. Total revenue growth for the year improved by 3.3% and full year EBITDA margins improved 35 basis points after adjusting for USALI.

In 2016 we continue to execute on our strategic plan of reallocating capital out of markets where we expect lower growth or higher capital expenditure requirements. This approach has also enabled us to benefit from the arbitrage between private and public market valuations in the current environment. We had a very active fourth quarter disposition [ph] with approximately $630 million in sales completed. These included the Sheraton Four Points in Perth, the eight property European portfolio, the Novotel and ibis in Auckland and the Novotel Queenstown.

In addition, as we announced this morning, we closed the sales of San Diego Mission Valley Marriott, a suburban hotel with 350 rooms, and the Novotel Wellington, a 139 room hotel located in New Zealand for a combined sales price of almost a $100 million. The average RevPAR for these two hotels was approximately $116 which is consistent with our primary focus of selling lower RevPAR hotels.

The disposition of non-core assets continues to be a priority, we have an additional $117 million in assets under binding contracts with closing slated over the next three months. We are currently marketing an additional $800 million of assets with more than one-third of those fairly follow-on in the process. We have been pleased with the response to our marketing efforts and remain optimistic that we will continue to complete sales, although there can be no assurance as if that will occur.

As we mentioned last call, the sales we are targeting to complete will generate a significant amount of taxable income which will likely result in a special dividend paid at the end of the year.

Last year we suffered significant disruption from a number of comprehensive renovations that closed parts of several hotel for significant portions of the year. Each of the most impactful renovations; the Logan in Philadelphia, the Camby in Phoenix, the Axiom in San Francisco, and the Houston Airport Marriott has been or is about to be completed. All the hotels are now open for business and the initial customer reaction has been quite positive. The new rooms products has been well received and the F&B outlook, especially the Urban Farmer to Logan and the Artisan [ph] at the Camby have generated significant favorably publicity.

Last year these four hotels generated a loss of approximately $4 million, this year we expect them to contribute between $28 million to $30 million in EBITDA with additional above average growth expected in 2017. This year we're also completing major redevelopments of the Denver Tech Marriott, the Hyatt San Francisco Airport, and the exhibit hall of the San Diego Marriott Marquis. While we expect there will be disruptive impact of the first two assets by referenced, we currently anticipate that the San Diego exhibit hall project will be completed in mid-year and the additional income it will generate will offset the negative impact from the other two assets on a full year basis when compared to 2015. All three hotels should generate above trend improvement in 2017.

This morning, based on our closing price from last night, we are trading at a value of $260,000 a key, compared to an estimated replacement cost that exceeds $500,000. Based on the midpoint of our guidance range which I will discuss shortly, we are trading at 10.5 EBITDA multiple and 8.5% cap rate. Both measures reflect valuations that are significantly lower than our historical averages and we believe our stock represents an excellent value opportunity.

As we generate cash flow from operations in asset sales, we believe the best way to deliver the most value per shareholders is to repurchase our undervalued stock. In line with this approach, we purchased a total of $325 million of stock in the fourth quarter bringing our total for the year to $675 million. When combined with almost $650 million in dividends we paid over the last 12 months, we have returned approximately $1.3 billion in capital to our shareholders. Assuming 2016 plays out consistently with our expectations, we would continue to execute on our existing share repurchase program and revisit the sites of the program later in the year.

The guidance we announced this morning reflects the following; nation-wide supply growth when netted for likely closures is now approaching the long term average of 2% for the next couple of years. However, supply growth in the top 20 major markets has accelerated more quickly, and is now likely to exceed 3%. While upper-upscale supply in these markets which is most directly competitive with our portfolio should not exceed 1.5%, strong supply growth in the upscale and mid-scale segments is driving the overall supply levels higher. Our portfolio will not be immune to impact from this new supply.

Over the last three years, demand growth has averaged more than 3% in the Top 20 market but consensus forecast suggest that may moderate slightly in 2016 given the weak economic growth in the fourth quarter and the general low-end GDP forecast for 2016. We are also watching international travel carefully as it impacts the gateway markets. The combined effect of these two factors which likely influence the weaker than expected fourth quarter room revenue growth in the industry suggests that demand may not match supply growth of 2016 progressive.

On the positive side, we had very strong group bookings in the fourth quarter, with the bookings up more than 4.5%. We are starting 2016 with group revenues up more than 6% compared to 2015 which positions us to maintain strong occupancies and drive higher rated transient business. In addition, our negotiated rates in most markets have increased more in 2016 than they did in 2015, providing support for transient rate growth.

Finally, we have had a solid start in January, reversing the trend we experienced in the fourth quarter as our preliminary RevPAR growth estimate for the month is approximately 3.8%, and that is after the negative impact of about 1% of lost RevPAR driven by cancellations in Washington and New York due to the severe snowstorm.

As we indicated last year, we also expect to benefit from less construction disruption in 2016 as our maintenance capital spending should decline by more than 18%. And the hotels we invested in last year, not only facing new year-over-year cost but also have an improved product to sell. Given all these factors, we projected in 2016 solo Comparable hotel RevPAR will increase by 3% to 4% in constant currency, and EBITDA margins will increase zero to 40 basis points. This will translate to adjusted EBITDA of $1.450 billion to $1.480 billion, and adjusted FFO per share of $1.65 to $1.69.

It is worth noting that our EBITDA and FFO estimates have been reduced by $14 million to reflect the impact of the $215 million of 2016 assets sales we have identified. However, our balance sheet does not reflect the receipt of the proceeds that these sales will generate.

Overall, I'm pleased to say that we are still seeing positive indicators within our portfolio with continued strong demand, especially in the group segments. The capital we have invested in our hotels ensures that our portfolio is in excellent condition, and our industry-leading balance sheet remains strong. We also remain focused on generating cash from asset sales and operations that can be deployed into stock repurchases and returning value to our shareholders. We are confident the future of our business and our entire team is still focused on delivering another positive year of growth.

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

Gregory Larson

Thank you, Ed. Despite the fourth quarter headwinds as described, several of our important markets, including Florida, Los Angeles, Atlanta, San Diego and Boston experienced excellent RevPAR growth and continue to give us confidence as we look at into 2016.

Let me provide some specific commentary on our major markets. Florida performed very well and produced the best domestic market performance with 11.7% RevPAR growth in the fourth quarter, 310 basis points above the star upper-upscale market RevPAR. Strong group business at our Orlando World Center, Ritz-Carlton, Naples, Harbor Beach Marriott, and Camby Airport Marriott, contributed to high average rate growth at these properties. With a group revenue increase of almost 22%, our managers at our Florida hotels were able to institute more aggressive pricing strategies which increased transient rate by approximately 7%. In addition, the strong group business resulted in more than 23% growth in food and beverage revenues.

RevPAR of hotel from Los Angeles grew 9.8% in the fourth quarter as several of our properties benefited from renovations that occurred during the same time last year. Once again, strong RevPAR growth in Los Angeles was the result of robust average rate growth of more than 5% in both transient and group business. On the back of group business strength at our hotels, our managers were able to drive food and beverage revenue growth of more than 17%. Looking forward, group booking pace in Los Angeles looks very strong as the market is expected to host eight addition city-wise in 2016. As a result, we expect continued solid performance from our Los Angeles properties.

In Atlanta, RevPAR increased 8.2% for the quarter, primarily as a result of average rate growth of 6.3%. Transient average rate increased 6.6% and 5.2% respectively. Food and beverage revenues at our properties in the market grew by 8.7%, mainly due to healthy banquet and catering business at the JW Marriott and Grand Hyatt [ph] hotels. We expect our outputs in Atlanta will continue to have a solid year in 2016 based on an excellent group booking pace for the year. Atlanta is expected to add more than 8,500 room night related to two additional mega city-wide.

Our hotels in San Diego produced results that outperformed the average of our portfolio with RevPAR increasing by 7.5% in the fourth quarter. The Manchester Grand Hyatt benefited for having all of its meeting phase available for bookings after renovations last year. In addition, our managers in San Diego strategically focused on group business at the expense of transient room nights to drive the hotels overall average rate. In the quarter, group demand increased 7.3% and transient room nights fell 9.8%. As Hotels filled with group business, it enabled our managers to become more aggressive with average rates which resulted in group and transient average rate growth of 9.2% and 7.5% respectively.

Overall, group revenues increased by more than 17%, contributing to food and beverage revenue increase of nearly 18% while transient revenues declined 3%. I should point out that nearly all of the increase in food and beverage came from the more profitable banquet and catering business. We expect the trend of our San Diego hotels outperforming the portfolio to continue in 2016. Even though the city is expected to have fewer city-wide this year, total room night from the city-wide is expected to increase by more than 20%.

In Boston, our assets outperformed the portfolio average with a RevPAR increase of 6.9% driven by an occupancy gain of 3.5% coupled with an average rate increase of 1.9%. In October group room nights with properties in the market grew at 24.4% with a 3.5% increase in average rate. Again, this helps contribute to an 18% increase in food and beverage revenues this quarter. As we look forward to 2016, I would note that although the Boston market is expected to have an average number of city-wide, the high-end convention center is expected to host five additional events. This bodes well for both, our Boston Marriott and Sheraton Boston Hotels as we expect these hotels to benefit from these additional events and lead our Boston Hotels to post solid results in 2016.

Moving to some of our markets that witnessed some weakness in the quarter. RevPAR at our hotels in DC increased 0.6% with average rate growth of 1.6% and an occupancy decline of 70 basis points. The main reason for our properties in the markets underperform in the star upper-upscale market by 250 basis points was due to a combination of a lack of in-house groups and softer transient business. In 2016, the number of city-wide events is flat to 2015. However, the number of city-wide room nights is up approximately 85,000 over last year. For 2016, the group booking phase for our DC hotels looks very strong, and many of these hotels are expected to benefit from substantial renovations that were completed in 2015.

Unfortunately, RevPAR at our assets in Houston declined 1.1%. However, the good news is our properties outperformed the star upper-upscale markets by 690 basis points. The decline in the market continues to be attributable to an overall slowdown in the Houston economy as a result of severely depressed oil prices, increasing market supply, and specifically for Host, the renovation of the Houston Marriott Medical Center Hotel. Our managers continue to focus on growing group room nights to offset the transient decline caused by weaker market fundamentals. We do not expect Houston's market conditions to improve in 2016, therefore we expect these hotels to continue underperforming the portfolio. Bear in mind, that the hotels in the Houston market represent only 2% of our total EBITDA.

Likewise, our New York hotels experienced a 2.4% RevPAR decline in the fourth quarter, slightly outperforming in the star upper-upscale market RevPAR decline of 2.5%. Much of the weakness was due to average rate which decreased 2% although occupancy declined 40 basis points. These results continue to indicate that the well understood supply in the market, and a decrease in demand from international travelers due to the strength of the U.S. dollar are impacting the overall market's ability to raise rates. We expect RevPAR in New York to significantly like the portfolio in 2016 and acknowledge that the dynamics that impacted the market in 2015 will likely persist this year.

Moving to our international assets, these hotels had an impressed -- and are impressed with constant dollar RevPAR growth of 15.5% in the quarter. Latin America drove much of the international growth with a constant dollar RevPAR increase of 39%. This growth was spurred by the benefit of the renovated hotels of the JW Marriott Mexico City. Despite economic turmoil related to weakness in the global oil markets and tourism as is related to Zika virus in Brazil, the JW Marriott Rio added an outstanding quarter. As we continue to simplify the portfolio through non-core asset sales above Latin America and Asia Pacific, we expect that EBITDA impact from our international hotels to decline.

Shifting to our European joint venture. Despite the negative impact of the terrorist attacks in Paris, and the subsequent lockdown in Brussels, our assets in the region performed relatively well with a constant Euro RevPAR increase of 1.7% for the quarter as the significant decline in RevPAR at the hotels in these two markets were more than offset by the robust growth of more than 10% at the hotels in our other European markets. The RevPAR increase was due to an increase in average rate of over 6% which was offset by a decline in occupancy of about three percentage points. As occupancies for both transient and group business decline, it is encouraging to see that our managers were able to increase transient and group rates in the quarter by 6% and 10% respectively.

There are some certainties surrounding 2016 in light of the 2015 Paris attacks and the economic and political recovery that is ongoing in the European Union. However, many positive market fundamentals exist, including the fact that supply remains low in Europe at approximately 1%. The weak Euro to the U.S. dollar will likely drive demand from the U.S. to Europe, and the economic environment in Europe is cautiously optimistic.

Now let's move to our forecast for 2016. With respect to the RevPAR guidance we gave today, a 3% to 4% for the portfolio, it is worth noting that we expect 13 of our top 17 domestic market to experience RevPAR growth that will exceed the high-end of our portfolio RevPAR forecast. These markets are expected to perform well based on advance group bookings, less capital disruptions, and lower supply. In fact, we expect some of our best performing markets will be Los Angeles, San Diego, Phoenix, Atlanta and New Orleans. However, the challenges in New York and Houston will continue in 2016.

Other factors to keep in mind for 2016 are the calendar shift as these will affect the overall quarterly results. Houston moves for the first quarter and the Jewish holidays move to the fourth quarter this year. This has reflected in our group bookings as they are strongest in the second and third quarters, but still positive in all four quarters. We expect approximately 22% to 22.5% of our total EBITDA for the year to be generated in the first quarter. As disclosed in our press release, during the fourth quarter we repurchased 19.6 million shares for a total purchase price of $325 million bringing the total for 2015 to 38.3 million shares of common stock with a total purchase price of approximately $675 million. We currently have $325 million of capacity under the repurchase program.

With respect to dividends, we paid a regular fourth quarter dividend at $0.20 per share which represents a yield of 5.4% on the current stock price. Further, as stated in today's press release, the Board of Directors authorized the regular first quarter dividend at $0.20 per share on its counted stock. Given our strong operating outlook and significant free cash flow generation, we are committed to sustaining a meaningful dividend. In addition, based on the robust asset sale plan we've outlined and continue to execute on, we anticipate that asset sales will likely result in taxable gain which could lead to special dividends. While these special dividends will vary at a onetime distribution, they should resolve at a meaningfully return to our stockholders.

Moving to one of our key pillars of strength and competitive advantage, our balance sheet. In 2015, we repaid or refinanced more than $1.4 billion of debt with a weighted average interest rate of 5% with proceeds from the issuance of $1.5 billion of debt with a weighted average rate of 3.1%. As a result of these transactions, we decreased our weighted average interest rate by 110 basis points or 3.7% and lowered our annualized interest expense by $24 million to $165 million, and extended our weighted average debt maturity from 5.8 years to 6 years. We have no significant maturities until 2019, and our operating position of financial strength and flexibility.

At year-end we had approximately $239 million of cash, $702 million in available capacity under our revolving credit facility and $4 billion of debt while maintaining a leverage within our stated goals of 2.5X to 3X.

In summary, we feel good about the results -- about our results and accomplishments in 2015 and look forward to a solid year of growth in 2016 as we believe the softness we witness in transient business in the fourth quarter will be offset by our aggressive asset management strategies and the tailwinds we received from our comprehensive capital program in 2015.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we'll move first to Smedes Rose with Citi.

Smedes Rose

Hi, good morning. I wanted to ask you on the asset sales as you bring your assets to market, have you seen any surprises around the level of interest or the pricing that you're getting relative to expectations?

Edward Walter

Not really Smedes but that's probably reflecting the fact that realistically since the summer it's been clear that the pool of buyers for assets, second half of '15 and into '16 is a bit smaller than where it was in 2014, primarily because the REITs [ph] are not aggressive buyers at this point in time. So I think we launched those particular sales was an understanding that we were appealing primarily to two groups; private buyers, often working with operators, and then international buyers who are probably also either using a good existing operators at hotel aligned with the new operator. And so with that I'd say that we have -- I think I've talked a little bit at the last call, interest has been solid, it's probably not as deep as it had been in the past but its still, and it's more than one person bidding on individual deals. I think we're getting very comfortable with the quality of the bids that we're getting. And we continue to feel comfortable that we'll continue to close sales than we're at the phase that we've been on.

Smedes Rose

Okay. And then the other thing I just wanted to ask you is, it's a follow-up. You talked about group trends pacing up around 6% for 2016 on revenues. Have you seen anything over the last several months since your last call in terms of the tender of corporations willing to book group or kind of, just the pace relative to the -- kind of backdrop or the issues we've seen around economic growth.

Edward Walter

All we have seen on the group side, really throughout '15 and then looking at '16 and at this time frankly, even looking further down the road into '17, it's good strong group booking. And it's carried all the way through last year, and we expect to see that continue this year.

Smedes Rose

All right, thank you.

Edward Walter

Thanks.

Operator

We'll now take our next question from Harry Curtis with Nomura.

Harry Curtis

Hi, good morning. A couple of quick questions. So it's a follow-up to Smedes question, year-to-date, to the extent that you've had any major conventions, can you talk about cancellations in attendance?

Edward Walter

Harry, I don't think -- there is always adds and flows at individuals, I think Greg might have described a little bit of that but reality is that so far in terms of what we've been seeing over last couple of months is that we haven't seen any signs of weakness in attendance.

Harry Curtis

Okay. And then my second question is, could you give us an assessment of the condition of your current portfolio, and specifically you did give us guidance as to how -- how much less you are going to be spending in 2016. As you look even further ahead, there is no budgeting done yet but do you think that your CapEx into 2017 can keep declining?

Edward Walter

Our expectation at this point would be that 2017 would be at or it should be above where we in 2016. Our goal for the last two years has been that '16 and '17 would be lower CapEx years, I think it's still little hard to anticipate beyond that but we are expecting levels at similar to where we are on the maintenance CapEx side. And then as it relates to the -- where we would describe as our redevelopment CapEx, that will depend upon what projects we might identify for '17. At this stage I don't know that there is anything specifically on the book so if I had to predict today what would happen in '17, I would expect to see that spending decline.

Harry Curtis

Yes, I guess what I was specifically asking also is that, it is just your qualitative assessment of your portfolio and are there any glaring CapEx requirements that you need to address?

Edward Walter

I would think that the quality of our portfolio is quite good at this point in time. We have spent heavily on the portfolio over the course of the last several years. So when we measure the portfolio in terms of its effective age, it's that number is as attractive as it has ever been, looking at how recently have the rooms been done, how recently has the meeting space been done, how many lobbies of food and beverage outlets have been done. So I don't see that if I -- there is always going to be an App center too where we made a conscious decision not to do capital for a variety of reasons and some of those were the ones that we're intending on selling because we think that allowing the buyer to do that capital will ultimately enhance the total price that they'd be able to pay for the asset taking into account the CapEx that might be required. But outside of some, a handful of unique situations like that, our portfolio is in good shape and the fact that we're spending less this year and a little -- topmost likely next year, is not an indication of shorting the portfolio of capital that it needs, it's more of an indication of the fact that we're in good condition.

Harry Curtis

Very good, thanks.

Operator

And we'll now take our next question from Robin Farley with UBS.

Robin Farley

Great, thanks. I wonder if you could quantify in your RevPAR guidance we have 3% to 4%. How much of that is held by the renovations, you mentioned, those four properties that had significant renovations, and I think you'd initially expected Q4 RevPAR in '15 to be your best RevPAR quarter for the year because of those renovations. So I assume some of the 3% to 4% or I don't know if you have that sort of fully adjusted not including benefit of the renovations.

Edward Walter

Yeah, let me try to provide some clarity on that, because in a couple of the write ups that I saw this morning, I could tell that folks weren't exactly following the differences between some of these assets. So most specifically the four assets that I referenced when I was talking about the ones that are going to have a significant improvement on a year-over-year basis, so the Logan in Philly, the Camby in Phoenix, the Houston Airport Marriott and the Axiom in San Francisco. All of those hotels are for our RevPAR purposes and are forecast non-comparable. So the incredible increase in revenues that we will see at those hotels is not included in our RevPAR forecast.

And so that's one of the reasons why I think people -- we are getting the list from that and we are trying to describe the list that we're getting from an EBITDA perspective, but the benefits of that are not showing up in our comparable RevPAR numbers. Those numbers will not likely show up until most likely '17 when those projects have been in our portfolio, operating on – stabilized fashion, but operating as a completed hotel for a full year. So we'll see the list in '17 from those assets but we're not going to see any list in our '16 reported RevPAR from those assets.

Robin Farley

But I guess you had other renovations as well during the year last year, and your guidance for Q4 you had originally said that the RevPAR would benefit in Q4 would be the best of the four quarters because of renovation. So even if it's not those four specific sort of major, were you close the property at the time, can you talk about the benefits of renovations that other property might be included?

Edward Walter

Robin, I think we did see some -- we did expect to see some benefit in the fourth quarter from the less construction disruptions. So you're right about that. And I would say that in the end I don't know – our RevPAR came in but while we had anticipated it. And I think that was not unique to us, that was really an industry wide phenomenon. We did see pick up at a number of the properties that were under renovation. I don't know that we would necessarily view it as overly significant in the fourth quarter. A lot of those renovations had started at the very end of the quarter and frankly with December being a low occupancy month, I don't know that we necessarily saw as much as benefit in '15 as we might have anticipated. We will see some – and some positive benefits from that in the first half of the year, and I suspect that one of the reasons why our portfolio performed so much better than the industry in January, despite the fact that we had even with the winter storm that hit the northeast, it's impart due to the fact that we had -- we did not have as much renovation activity at some of those hotels.

Robin Farley

Okay. That's great. Thank you for clarifying. And then just lastly real quick, you mentioned your maintenance CapEx, renewal replacement CapEx is going to be down $60 million in '16. It looks like in Q4 it came in like close to $35 million or $40 million higher than what you had guided to for renewal replacement in Q4. So is some of that -- is that just may be a timing issue that some of the renewal replacement CapEx came in to Q4 that was originally planned for '16?

Edward Walter

Yeah, I would say that it was probably -- the short answer is yes. So I think some of that probably had more to do with the timing of when payments were made as opposed to necessarily when the work was completed. But the short answer is yes.

Robin Farley

Okay. Thank you.

Edward Walter

Thanks.

Operator

We'll now take our next question from Shaun Kelly from Bank of America

Shaun Kelly

Hey, good morning guys. Ed, in your prepared remarks you mentioned a little bit more detail on supply growth and how that sort of overlays with the demand environment that you're seeing out there, particularly in some of the urban areas. I was curious if you could just dig in on that a little bit more for us. I mean how generally do you guys seek to react or do you try and manage the portfolio in an environment where the demand may -- on the one side demand is at peak levels, but on the other side, demand may actually not keep up with the supply growth that you are seeing, at least in a handful of markets.

Edward Walter

Yeah, I'd say some of them -- there are two ways to look at this, one element of this is we look down the road and as we anticipate markets might see increased supply that does play into some of the decisions we make relative to whether that we retain the asset or we try to market it. So there is a sort of a long strategic perspective that addresses that. As we look at it from a more near term operating perspective, if we see markets that are likely to get additional supply and we think that could may have an impact on our property, so that may guide some of our strategies in those markets relative to the level of group that we would want and the level of say special corporate business that we might try to attract for that individual hotel. So in the markets where we've seen, such as in New York, there is no secret that New York's had a lot of supply. And we have consciously tried to improve the level of group activity that we do in that market as a way to offset some of the increased supply that we expect to see.

Shaun Kelly

That's really helpful. Thank you very much.

Edward Walter

Thanks.

Operator

We'll now take our next question from Anthony Powell with Barclays.

Anthony Powell

Hi. Good morning. One more question on group. How did it in the quarter/for the quarter, group bookings track in 4Q and how do you expect that part of the business trend going forward?

Edward Walter

I don't know that I have that number right here in front of me. I would say that in the quarter, for the quarter was probably -- I'd rather not guess. I know the bookings in the quarter for '16 were solid and we're running north of 4.5%, so the activity that we have looking for the future was quite good. The way the fourth quarter played out, my guess is that the end of quarter/for the quarter bookings were not particularly strong, but the reason for that was the bulk of the group strength which really in the first five to six weeks in the quarter. It was -- October was filled, because you'd have the movement in the holiday, the Jewish holiday comes from October to prior year in the September. So October was a very busy month, but there wasn't really any capacity at the hotels to take a lot of additional group. And once we got beyond that period of time, you're really at a stage during the year where there is not a lot of group pick up in general. So I think that the activity in the fourth quarter was not particularly remarkable in the quarter/for the quarter, but it continued to be strong for the future.

Greg Larson

'16 as Ed mentioned, but also for '17 as well.

Anthony Powell

All right. Got it. And I think earlier you mentioned that OTA rate was down in the fourth quarter. How are you approaching your OTA kind of allocations in '16 an what are the operators doing I guess to reduce industry reliance on OTAs going forward?

Edward Walter

I'd say that in general, because the hotels are running at high occupancies and because the operators especially the major operators are refining their strategies in terms of their relationships with the OTAs, we're generally seeing that business the rate of growth there is smaller than some of the other segments. I think what we ran into the fourth quarter was because we did see what it is generally assumed to be some weakness in corporate travel, there was a little bit more use of OTA options than we had necessarily predicted and what you saw with that was slightly lower pricing in an effort to attract more of that business. So the good news is we were able to get occupancy by opening up those channels through a greater degree, but unfortunately when you watched all that broke across the country, some of that was at a lower rate than what we had done the prior year.

Anthony Powell

All right. And a small follow up to that question, as you're striding[ph] towards corporate negotiated rates, you mentioned that they're higher, how do you kind of avoid to replay them back in coming quarters? Thank you.

Edward Walter

Well, it's hard to -- it's obviously hard to stimulate demand the corporate travel and history has shown us in prior times that you don't stimulate that demand by dropping price. So I think the way our approach was to generally across the portfolio, focus on look at the different assets and take into account the market factors in individual markets. And then look to try to generate, take advantage of the high occupancies to generate better rate growth in those corporate negotiations, but also firm up in markets where you thought you wanted it some additional accounts. To put some math around that, what we're looking at on kind of a comparable basis in the beginning of the year is it our special corporate rates at least looking at things that apply in the first quarter up north of 5%, and last year we were more in the 3% range. So there's a nice opportunity there to see some better results because of improved special corporate rates.

Anthony Powell

All right. Thanks a lot for all that color.

Edward Walter

Thanks.

Operator

And we'll move next to Ryan Meliker with Canaccord Genuity.

Ryan Meliker

Hey, good morning guys. Most of my questions have been answered but first of all thanks for a lot of the color on the guidance and how the renovations are playing out. Just one quick question I had regarding Group Pace. Obviously, I think 3Q your Group Pace was up 6.5%, it held steady around that level for 2016. But what we saw in January from the STR data was Group was off dramatically only up about 1.5%. Is that indicative across your portfolio too? And is that just have to do with the timing that you talked about with some of the calendar shifts, but I know they haven't materialized yet, but you are seeing those sluggish Group out of the gate for the first quarter for your portfolio and for the broader industry?

Edward Walter

So not entirely, we actually saw – I don't have the segment results yet for January, but based on the bookings that we were anticipating and I don't have any indication to think that it turned out radically different from it. We were expecting better than what you described in terms of Group Pace in January and frankly in February, the month that is weaker for us in Group on a year-over-year is March and that's I think solely because of the change in the Easter holiday timing. So I think we commented in our prepared remarks, the first quarter and the fourth quarter are slightly weak, if you spread our group activity across the year, Q1 and Q2 are still both up, but they're not up as much as Q2 and Q2 and Q3 which are up significantly in terms of revenue pace.

Greg Larson

You said Q1 and Q4 was the two weak and Q2 and Q3 are the two strong.

Ryan Meliker

Right. So I guess the question that I would have is do you think that some of your group's outperformance in the first quarter is more driven by some of the renovations and the types of assets that you have and revenue management strategies or do you think that it's not so anomalistic in favor of your portfolio. I'm just trying to get a gage of where group business is throughout the remainder of the year, not just for you guys but for the broader industry in case we're seeing any type of pull back.

Edward Walter

I think across the industry I'm continuing from everyone that group is fairly solid, but I'm sure that we are benefiting a bit from the fact that we have less renovation activity and we have hotels that were under construction last year and now are providing either new rooms or new meeting space and it's attractive to our customers. So I'm sure again going back to our January performance, I'd say some of that is reflective of t fact that we had space available and not under construction.

Ryan Meliker

All right. That's helpful. Thanks a lot.

Edward Walter

Thanks.

Operator

We'll now take our next question from Steven Kent with Goldman Sachs.

Steven Kent

Hi, good morning. Just a quick question, it sounds like bookings, just mentioned good shape occupancy expectations and banquet. Why is the margin outlook only up a modest 0 to 40 basis points? Are we missing something on the expense side, because it sounds like you should get some better flow through? And then just as an aside, just because I think it's an interesting issue that we're starting to hear from some of the other companies, are you seeing any last minute or late bookers cancelling and rebooking other places? Are you starting to see some of that activity or more term than you've seen before?

Edward Walter

Steve, as -- going to your second question first, we have generally seen that problem in a variety of markets, but we have not identified that in discussions with our operators as the situations that had accelerated in the fourth quarter. We have also been actively encouraging our operators and of course this is one place where working with a lot of the major operators is probably helpful for us to push towards pricing strategies that in effect, creates some frictional cost around changing reservations at the last minute. And we will continue to encourage that they look at either non-refundable rooms or extending the time period for when you have to cancel in order to make it more difficult for people to reserve a room with us for a long period of time and then change their mind at the last minute and rebook elsewhere. But Steve to your fundamental point, we did not see an acceleration of that activity in the fourth quarter. On the margin piece of it, I'd say that some of the fact that the margins – there's no real expense that we necessarily have highlighted that would drive weaker margin performance. We still expect if values continue to increase the hotels and there's a little bit of a – that real-estate taxes will be jumping by more than inflation on a year-over-year basis. But beyond that –

Greg Larson

Steve, I guess the one other point I would look at is if you look at our results for 2015, we had 3.8% RevPAR growth and 20 basis points improvement in margins. If you adjust those two things, items or you sally we really had 4% of RevPAR with margins up 35 basis points. And so that's pretty similar to our guidance, right? If you look at the high end of our guidance, we're projecting 4% RevPAR and margins up 40 basis points.

Steven Kent

Okay, thank you.

Edward Walter

Thanks.

Operator

We'll now take our next question from Rich Hightower with Evercore ISI.

Rich Hightower

Hey, good morning guys.

Edward Walter

Good morning.

Rich Hightower

Just wanted to head back on the guidance for a second here, so I'm curious for what the 3% to 4% range implies for the transient side of the business if Group Pace is up around 6%, I know that includes some of the renovation, so it's not a true same store number. But just sort of what the bridge is between that and the transient implied figure would be very helpful.

Edward Walter

I guess what I would say was that is that it wouldn't surprise us if we're up north of 6% right now in terms of group. As we -- because we've sold so many rooms already to potential group customers, it wouldn't surprise us that as we work our way through the year, that the actual increase in group revenue that we experienced by the end of the year would be a smaller number than that. In other words, not have normal, see some follow up in that area especially with an extended booking cycle. So my guess is that as we report group revenues through the course of the year, the actual detail will be a little bit less than that. So that probably addresses the sum of what you're looking at.

I would say more probably as may be as a more broad commentary on our guidance in general, our properties are more often -- than our guidance would necessarily reflect. And we do see some benefits whether it's the special corporate rates that I talked about before, the fact that our government rates are up, meaning year-over-year, while that's not a huge chunk of our business, it's one more place where you see some rate increases. I have a number of factors like that that will help with transient pricing. We're not expecting a lot of transient occupancy increase, we think it will be primarily a rate game this year. If we -- I think you're right in your sort of fundamental assumption that as if we hit our numbers, here is the projections that we've identified. We'd probably see a bit slightly more weighted towards group and slightly less weighted towards transient in terms of revenue growth.

Rich Hightower

Okay, so the group number should still outpace the transient revenue number in any case?

Edward Walter

That would be our expectation for now, yes.

Rich Hightower

Okay. I mean I guess just as a follow up to that, the range of 3% to 4% in this stage in the year is pretty tight, only a 100 basis, you just have enough business on the book. You think at this point too to peg such a tight range at this point in the calendar?

Edward Walter

There are as many people in the room with that many theories on how to approach guidance. I guess what I'd say is the way we look at it, we're trying to give you our best insight into how we think the year is going to play out, based on the information that we have available to us. And in the context of this year, we thought that we'd probably moved us to be on a hair on the conservative side. So that's why you see the range that we have.

Rich Hightower

All right. Thank you, Ed.

Operator

We'll now move next to Jim Sullivan with Cowen Group.

Jim Sullivan

Thank you. Ed, just to kind of follow on from that last question as well as some of the comments you made in the prepared commentary part of the call. Your – supply and demand suggest that the negative impact of supply growth will increase over the course of the year. Now we've heard what you've said about the group outlook in Q2 and Q3, but does that mean overall given the supply growth will increase over the course of the year that you expect RevPAR growth overall to be weaker in the second half than the first half?

Edward Walter

Not necessarily, Jim because at least as we look at group, the strongest quarter for group booking is in actually Q3. And so I don't necessarily expect that that's what's going to happen. I don't know that in a lot of these markets, the supply necessarily accelerates through the second half of the year, but that's one of the things that we'll need to see how that actually plays out. What we've been noticing in a number of markets is that the outlook for supply, in each of t last few years what's expected to be delivered at the beginning of the year and what's actually delivered by the end of the year turns out to be a lower number because the deliveries don't happen at the same pace as originally forecasted. So that might help mitigate that. But I'd say, at this stage as we look at the year, the only reason why I might anticipate that the first half could be a little stronger than the second half that it relate to construction disruption because we had more in the first half than we had in the second half. But based on the discussions we've been having so far, it feels like it's a fairly balanced year.

Jim Sullivan

Okay. And then in your prepared comments on the markets and I may have missed this -- I don't recall your commenting on the outlook for San Francisco and Denver?

Edward Walter

I think San Francisco, we're generally expecting to be roughly in line with the rest of the portfolio, so maybe not the outperformer that it has been for the last few years but sort of certainly not in a level where it's going to be a significant underperformer either, there is no doubt that there is some challenges in that market due to the fact of the convention centers been closed. The booking pace at our hotels is still up compared to last year, it's not up as much as the overall portfolio but we're fortunate that the big hotel there, the San Francisco Marquis is essentially just doing a lot of in-house grew business to deal with the fact that the convention center will have more closings.

Gregory Larson

And Jim, as I said, 13 of our 17 markets based on the group booking and the supply, and some of the other metrics that we mentioned, I said in my prepared remarks it would actually exceed the high-end of our guidance. So San Francisco certainly would be one of those hotels that are included in those 13 markets. Denver as you know in the fourth quarter for us has actually experienced a decline in RevPAR. We think it will turn positive in '16 but I would think Denver would be sort of close -- closer to call the midpoint to the high-end of our guidance.

Edward Walter

And Denver is one of those markets where we do have some construction going on, it's not a big market for us but we built one hotel, it's a redevelopment hotel and the other has some meeting space being worked on.

Jim Sullivan

Okay then finally for me, in terms of the dispositions that you've have under letter of intent. It would be helpful to know if those that are out of the wholly-owned segment of the portfolio or if they are the joint ventures?

Edward Walter

All of the assets that were described there were consolidated assets. In one instance there is a partner with a minority ownership piece but they are all consolidated assets.

Jim Sullivan

Okay, very good. Thank you.

Edward Walter

Great. Thanks Jim.

Operator

We'll now take our next question from Thomas Allen with Morgan Stanley.

Thomas Allen

Hi, quick question on Houston. I know it's a small part, I think you said EBITDA but if you look at the rate of growth, it improved meaningfully in the fourth quarter, it was off of a bit, much tougher comp in the fourth quarter of '15 and what you saw in the first three quarters? But can you just help us think about 2016 as we sit to lap, at least initial drop in our oil prices? Thanks.

Edward Walter

Yes, I'd say we still expect where Houston is one of the markets that we think is going to be challenged in 2016 and I think it's the toss up, it's the weather RevPAR there is slightly negative or flat.

Gregory Larson

I agree with that. I mean, look, the one interesting thing about Houston, not compared to group markets but the group bookings page in Houston '16 is actually quite strong.

Thomas Allen

Helpful, thank you. And then just, in terms of your current dividend, you've been paying $0.20 for seven quarters now. You talked a little bit about potential onetime dividends but how are you thinking about the recurring dividend as we sit here today?

Edward Walter

Yes, I would say in the long run that our goal is to distribute our taxable income and so when we -- from operations, of course, also from sales. And as we work our way through this year and see both how operating results materialize, as well as what's the level of sales that we complete, we will continue to assess whether we should be doing increasing the raise over dividend or handling things through special dividend. Some of that decision will be tied into our outlook for '17 too as we try to confront that question. We ultimately are certainly interested in being able to increase the dividend when operations -- when the operating results for the company is supported because we'd love to return capital to shareholders in any way that we can.

Thomas Allen

Thank you.

Edward Walter

Thanks.

Operator

And we'll now take our next question from David Lowe [ph] with Baird.

Unidentified Analyst

Good morning. Ed, you've talked a lot about group and how strong it looks. Can you just give a little background on what you think is driving that? Is it tight employment for white collar workers? And do you have any concerns about weakness in certain industries like energy or emerging weakness in financials or technology?

Edward Walter

We're happy to do that David, let me just look at one back here. The wildcard in group over the years has tended to be what I think you're directing your question at, which is what's happening on the corporate side. And what we saw this past year was fairly good, we saw some improvement on the -- in terms of association but as I mentioned in my prepared comments, it's also really good corporate rate improvement as well as some improvement in corporate demand in the fourth quarter. And I think what we're looking at in terms of why we've seen an improvement in group page this year is the combination of slight -- probably a slightly better convention calendar which is -- will reflect itself and is slight increase in association business across all of our hotels.

But more importantly, more activity coming out of the corporate side and companies recognizing that they are going to have events and they are now of the mind that they are convinced enough that they are going to have them, that they are making the decisions to book those events in advance and not wait till the last minute because what they've realized is if they wait till the last minute, they are not going to end up with the time or the hotel that they want. So I just -- we work our way through this year while it's fair to assume that there will be some pick up in association business, I'm hopeful that we're going to see good strong corporate growth. That also tends to tying with the fact that we're -- it could reflect itself in terms of better F&B growth too.

So I think ultimately, because the corporate group is that adds inflows the most based upon the overall economy, the fact that we're seeing that strong growth is likely, primarily due to strong corporate growth. I'm sure that the oil industry picking a point about different businesses, I'm sure the oil industry with all the challenges that they have is not necessarily booking as many group events as they might have in the past. So it is sort of interesting to see, as Greg just referenced, how strong our group booking pace is in Houston, I suspect that has more to do with a smaller overall group profile for this hotel.

But I don't know that we've heard of any other industry besides the energy industry that's cutting back at this point. If anything our numbers would again as we suggest that, they are not only strong for '16, they are strong for '17. That suggest that there is a bit of meaningful level of confidence in companies that are making commitments.

Unidentified Analyst

Very helpful, thank you. One more, can you give an update on the W Union Square, you acquired your partner's interest for the beginning of the year. Are you now looking to sell that asset?

Edward Walter

That would certainly be one of the assets in New York that we would be open for selling, yes.

Unidentified Analyst

Okay. And another one of those is the WNLX [ph]?

Edward Walter

If that would be an asset that we would be interested in selling, I would say that that's not on the market at the moment but that is another asset in New York that we would certainly be open to selling. The opportunity in New York in order to get this sort of pricing that tends to make the headlines is to take advantage of assets where there is either an opportunity for a brand change, where there is an opportunity for redevelopment, that's where it seems you could -- that's where you can best take advantage of the property that you own. And so those are the sorts of opportunities that we're trying to explore. We -- it is certainly in that $800 million of assets that we're currently marketing that does include the New York asset, and completing a sale in New York continues to be a very high priority for the company provided we can attract pricing that we think is appropriate.

Unidentified Analyst

So on the W-Union Square, is that -- are you able to rebrand that on-sale?

Edward Walter

There is flexibility on that asset with respect to management and branding.

Unidentified Analyst

Great, helpful. Thank you.

Edward Walter

Thanks.

Operator

And that does conclude today's question-and-answer session. I'd like to turn the conference back over to Mr. Walter for any additional or closing remarks.

Edward Walter

Great. Well, thank you for joining us on the call today. We appreciate the opportunity to discuss our year-end results and outlook with you. And we look forward to talking with you in the spring to discuss our first quarter results and provide you more insights into how 2016 is playing out. Thank you.

Operator

And once again, that does conclude today's conference. We thank you all for your participation.

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