Host Hotels & Resort's (HST) CEO Ed Walter on Q2 2016 Results - Earnings Call Transcript

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Host Hotels and Resorts Inc (NYSE:HST)

Q2 2016 Earnings Conference Call

July 29, 2016 10:00 AM ET

Executives

Gee Lingberg - Vice President

Ed Walter - President and CEO

Greg Larson - CFO

Analysts

Smedes Rose - Citigroup

Rich Hightower - Evercore ISI

Anthony Powell - Barclays

Jeff Donnelly - Wells Fargo

Ryan Meliker - Canaccord Genuity

Chris Woronka - Deutsche Bank

Harry Curtis - Nomura

Joe Greff - JPMorgan

Wes Golladay - RBC Capital Markets

Shaun Kelley - Bank of America Merrill Lynch

Operator

Good day and welcome to the Host Hotels & Resorts Incorporated Second Quarter 2016 Earnings Conference Call. Today's conference is being recorded. At this time I would like to turn the conference over to Ms. Gee Lingberg, Vice President. Please go ahead, ma'am.

Gee Lingberg

Thanks, Cody. Good morning, everyone. Welcome to the Host Hotels & Resorts second-quarter 2016 earnings call.

Before we begin, I would like to remind everyone that many of the comments made today are considered to be forward-looking statements under federal securities laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed and we are not obligated to publicly update or revise these forward-looking statements.

In addition, on today's call we will discuss certain non-GAAP financial information such as FFO, adjusted EBITDA and comparable hotel results. You can find this information together with reconciliations to the most directly comparable GAAP information in today's earnings press release, in our 8-K filed with the SEC and the supplemental financial information on our website at HostHotels.com.

With me on the call today is Ed Walter, our President and Chief Executive Officer, and Greg Larson our Chief Financial Officer. This morning Ed will provide a brief overview of our operations and then we will discuss our disposition and investment activity as well as the Company's outlook for 2016. Greg will then provide greater detail on our second-quarter performance by market and discuss our margins and our balance sheet. Following their remarks, we will be unavailable to respond to your questions. And now I would like to turn the call over to Ed.

Ed Walter

Thanks, Gee. Good morning, everyone. As you may surmise from our results, it was an interesting quarter. While the operating environment across our industry was a bit choppy, we executed as planned on the dispositions we have previously referenced and added two more planned sales. On the investment side, we acquired an irreplaceable ground lease, completed several major ROI investments and continued to repurchase our stock, all with a focus on creating value for our shareholders.

Let's start with a review of our results for the quarter. Adjusted EBITDA was 436 million for the quarter which represents an increase of 3.3% over 2015 and with 782 million for the first half of the year up 5.2%. Our adjusted FFO was $0.49 per share, an increase of 6.5% for the quarter and $0.90 per share year-to-date, an increase of 11%. Overall we are pleased with our bottom line EBITDA and FFO growth which generally met or exceeded both our expectations and consensus. But we were disappointed that our room revenue growth was not stronger. Our portfolio occupancy rate was 82.4%, an increase of 120 basis points compared to 2015. Constant currency RevPAR increased 2% for the quarter as rate growth was difficult to generate. This RevPAR result was well below what we had anticipated in April.

We expected that we would benefit from strong group bookings and that generally proved to be correct as group room nights increased 3% due to more than a 6.5% growth in our association segment and a very solid increase in corporate group. Our average group rate was up more than 2% leading to a revenue improvement in group of more than 5%. While it certainly qualifies as a strong group quarter, it is worth noting that short term group bookings declined to the three year average level falling short of last year's accelerated pace and we did experience a slight increase in cancellations.

However, our transient segment fell meaningfully short of our expectations. Overall transient room nights declined by 1% as corporate demand proved soft. This resulted in the hotels being forced to target price sensitive leisure business and government business with the latter segment up nearly 7%. The net result of this mix shift was our average transient rate fell slightly and transient revenues declined by slightly more than 1%. To help offset this transient softness, we increased our contract room nights by more than 20%.

Declining international demand was also a drag on our transient demand. While difficult to precisely calculate, our international business which represents slightly more than 10% of our total room nights decreased approximately 7% in the quarter further undermining our manager's efforts to drive transient rate. Fortunately a combination of strong group business and catering activity led to a 6.6% increase in banquet and AV revenue which enabled the portfolio to achieve food and beverage revenue growth of 4.5%.

Sales per group room night jumped more than 4% which is one of our stronger quarters during this cycle and a good indication that groups are still prepared to spend freely on events. Since nearly all of the F&B revenue growth came from the profitable catering business, the flow-through was quite strong at north of 70%. Other revenues at our comparable hotels grew 4.6% as spa revenues improved and we experienced an increase in attrition and cancellation fees which are now running slightly ahead of what we experienced in the last two years. The flow through in this area was also quite strong.

The solid flow through in all segments of our business combined with the benefits of various asset management initiatives and property investments, which Greg will discuss in more detail, led to comparable hotel EBITDA margin improvement of 65 basis points and EBITDA flow through of more than 50%. As a result, comparable hotel EBITDA improved by roughly 5%.

Year to date, our transient contract revenues have increased 3.3% and our group revenues have improved by 3.1%. Comparable F&B revenues have increased 2.8% driven by banquet and AV increase of 3.7%. Total comparable revenues have increased 2.9% and comparable EBITDA margins have increased 75 basis points leading to EBITDA improvement year to date of 5.7%.

Turning to asset sales, as I referenced at the outset, we continue to make solid progress in our non core asset disposition program. Closing the sales of the Atlanta Perimeter, Seattle SeaTac and Manhattan Beach Marriott as well as our two hotels located in Chile. The three US assets represented older hotels located in airport or suburban locations that we felt would likely not grow cash flows over the long term at the rate of our overall portfolio. These sales, plus the two Christchurch New Zealand hotels that we noted are under binding contract bring our total sales for the year to roughly $500 million. It is worth noting that the EBITDA we are receiving in 2016 from these assets totaled $13 million which should not be included in any of your 2017 estimates.

While we continue to market several hotels, the buyer pool has declined in size and pricing is not as attractive as when we commenced our sale program a few years ago. While we do expect to complete additional sales, we are only a seller if we can achieve acceptable pricing.

During the last 3.5 years, we have sold more than $2.6 billion worth of hotels or nearly 15% of our consolidated and joint venture portfolio, which has enabled us to further refine our asset base and improve shareholder value. We are very comfortable with our overall progress on this front.

Looking at investments, we are very pleased to have acquired the ground leases that sit beneath the Key Bridge Marriott. The second Marriott Hotel to be constructed, this property is situated in Arlington, Virginia at the end of the Key Bridge which provides direct access to Georgetown and has spectacular views of Washington and all of the national monuments. We are in the midst of evaluating the various options for this site and hotel which will clearly include alternate uses, and we look forward to providing updates on this exciting project in the future.

We have also completed the redevelopment of the Hyatt San Francisco Airport and the new 152,000 square foot ballroom and exhibit hall complex at the San Diego Marquis. Both of these projects were completed on time and under budget. In addition to renovating all of the rooms and meeting spaces at the Hyatt, we also completed 9,000 square feet of new meeting space and totally transformed the atrium and F&B platform. Our group bookings for this hotel for the next two years are 35% ahead of the pre-construction levels. We also expect to have a very strong fall operating season. At the San Diego Marquis, we have created the best combination of ballroom and exhibit space in the market and customers are responding favorably as bookings through the next two years have increased 40% compared to pre-construction levels.

As the second quarter proved, it is challenging to develop guidance during interesting times for the industry. The following factors provide some insight into our thinking about the second half of 2016. Based on consensus economic forecasts and general uncertainty around the U.S. election and international events, we expect that business profit growth and investment levels will not improve, which suggests that business transient demand will remain soft. Alternatively, continued strong employment and consumer confidence numbers suggests that leisure demand will remain solid.

We expect international travel patterns will remain challenged as demand from two of our largest international markets, Canada and Latin America, are impacted by both the strong U.S. dollar and weaker domestic economic growth. Our group revenue pace for the remainder of the year is up more than 4% with the majority of the increase occurring in the third quarter. While we would expect some moderation in the overall increase in our group segment, this compares favorably to the actual improvement we experienced in the first half of the year. Q3 will benefit from the calendar shift of the Jewish holidays into October, while the fourth quarter will be hurt by both that shift and less travel expected during the week that includes Election Day.

The combination of all of these factors suggests that RevPAR growth and the second half of the year will generally match what we experienced in Q2 with the third quarter considerably stronger and the fourth quarter somewhat weaker. As a result, we anticipate full year RevPAR will range from 2% to 3%. We expect F&B and other revenue growth will moderate slightly from the first-half growth of 2.8% and still generate increased profits over 2015.

The combination of solid flow through from all revenue generating activities, continued benefit from our asset management efforts and the strong start to the year is expected to lead to comparable hotel EBITDA margin improvement of 40 to 70 basis points. The net result of these factors is an estimated range for an adjusted EBITDA of $1.435 billion to $1.465 billion which reflects a reduction at the midpoint of $7.5 million from our prior range. $1.5 million of this adjustment is tied to the sale of the two Christchurch hotels I referenced earlier and the remainder is due to the reduction in our estimated topline growth partially offset by improving margins. Our forecasted adjusted FFO range is $1.63 to $1.67. With that, let me turn the call over to Greg Larson, our Chief Financial Officer, who will discuss our operating and financial performance in more detail.

Greg Larson

Thank you, Ed. I will start with specific commentary on performance within some of our major markets. RevPAR at our properties in Los Angeles continued to outperform the portfolio with an impressive 9.1% increase in the second quarter. The results were driven by a 5% increase in ADR and a 3 percentage point increase in occupancy to 84.2%. A strong group base combined with solid transient demand at several of our hotels drove the RevPAR increase which exceeded the STAR upper upscale results by 140 basis points.

Looking forward, our booking pace in Los Angeles remains very strong as the market is expected to host additional citywides during the remainder of this year. As a result, we expect continued outperformance from our Los Angeles properties. Our two comparable hotels in Denver grew RevPAR 7.3% this quarter and outpaced the STAR upper upscale result by 260 basis points. Strong group and transient demand at the Westin primarily drove this outperformance. However, based on the softening of citywide pace and decreasing size of events, we expect our hotels in Denver to underperform the portfolio in the third quarter. In Atlanta, RevPAR increased 6.6% for the quarter as a result of average rate growth of 3.2% and occupancy increase of 2.6 percentage points. Once again a number of citywide events in the second quarter contributed to the outperformance.

Based on group revenues on the books for the remainder of the year, we expect third quarter results to be better than the fourth quarter. RevPAR growth of 5.5% at our DC hotels significantly outperformed the STAR upper upscale RevPAR increase by 230 basis points. This was driven by both occupancy and rate this quarter as occupancy increased 2.2 percentage points and average rate grew 2.9%. Several of our DC hotels benefited from planned renovations that we completed last year. Based on group booking pace for these hotels, we expect our properties in DC to achieve solid results in the third quarter.

Our Boston hotels RevPAR growth of 5% in the second quarter was driven by a rate increase of 2.2% and an occupancy improvement of 2.3 percentage points. Our manager's aggressive strategies to offer promotions and add high-end airline crews bolstered the RevPAR increase this quarter. These hotels also had an impressive increase in food and beverage revenues of 15.8% entirely from the increase in the more profitable banquet and catering sales. Overall, our Boston properties are experiencing softer special corporate demand from the financial and consulting segments. As a result, we expect RevPAR to underperform the rest of our portfolio in the third quarter.

RevPAR at San Francisco hotels grew 2.8% primarily driven by a rate increase of 2.9%. Overall transient demand softness and group room night declined due to the Moscone Center Convention construction led to demand weakness this quarter. However, strong catering business at several San Francisco hotels drove the outstanding banquet and catering revenue growth of over 33% this quarter. The expansion of the Moscone Convention Center will continue to negatively impact the San Francisco market for the remainder of 2016 and through 2017. Our San Francisco hotels will likely underperform our portfolio in the remaining quarters.

Moving to some challenged markets. New York RevPAR decreased 4.9% but outperformed the STAR upper upscale market RevPAR decline of 6%. Occupancy dropped slightly to 89.8% and rate declined 4.8% in the second quarter. Supply continues to outpace demand which is impacting our ability to drive rate. We have also witnessed European travel and tour business declining due to the strong U.S. dollar. Based on our outlook for the market, we expect our hotels in New York to continue to have negative RevPAR for the remainder of the year. As anticipated, our hotels in Florida underperformed the portfolio with a RevPAR decrease of 2.2% in the second quarter. Occupancy declined 2 percentage points and rate increased 0.4%. The decline in RevPAR was due to softer leisure transient demand as well as increased group attrition and cancellations.

On a positive note, group customers increased their food and beverage spent in the more profitable banquet and catering business by 15.8%. In addition, based on a strong group revenue pace for the third quarter, we expect RevPAR in Florida to outperform the portfolio in the third quarter. RevPAR at our assets in San Diego grew slightly this quarter. Occupancy declined 2.9 percentage points and rate increased 3.6%. Our hotels were negatively impacted by and an 8.6% decline in transient revenues resulting from fewer citywide compression nights from downtown. Despite the slow start in San Diego, we expect the hotels in this market to improve in the second half of 2016 as the city should benefit from an increase in citywide room nights for the remainder of the year especially in the third quarter. In addition, the new 152,000 square foot Marriott Hall opened in June 2016 at the San Diego Marquis.

Moving to our international assets, these hotels had a constant dollar RevPAR growth of 2.3% in the quarter. Latin America drove much of the international growth with a constant dollar RevPAR increase of 5% primarily from continued pre-Olympic business in Rio. Due to the upcoming Olympics this summer, we expect Latin America to have a spectacular third quarter.

Shifting to our European joint venture, the portfolio was negatively impacted by a number of macro factors including the lingering effects of the Paris attacks in Paris and Brussels and the political and economic uncertainty pre and post-Brexit. All this led to a RevPAR decline of 1.3% in constant euros this quarter. As expected, our hotels in Paris, London and Brussels significantly underperformed the portfolio while our hotels in Spain, Stockholm and Amsterdam outperformed. We expect the challenges that I described for our hotels in Paris, London and Brussels will continue into the third quarter.

Moving to our profitability, our comparable EBITDA margin expansion of 65 basis points in an environment with 2% RevPAR growth is very impressive. This notable EBITDA margin growth is the result of decreases in our utility and insurance expenses as well as our continued cost savings initiatives. Utility costs decreased almost 6% and insurance expense decreased 5.5% in the quarter. Utility costs continued to decline in the second quarter due to favorable gas and electric prices as well as the benefits from our cost saving energy ROI initiatives.

As we have said previously, we have invested in numerous energy projects over the last year ranging from small to major projects which are favorably impacting our utility costs.

Further in June, we completed our annual negotiation of our insurance contracts and lowered rates for another year. Therefore, we expect our insurance expense to continue to decrease for the remainder of the year and through the first half of 2017.

Over the last two years, we have focused on improving productivity at our hotels by initiating time and motion studies at our largest hotel. These studies resulted in hotel managers establishing tighter labor model standards and the use of improved and expanded forecasting tools allowing managers to effectively schedule to demand and minimize excess staffing. For example, many of our housekeeping departments are now using an automated system integrated with a property management system to prioritize housekeeping room assignments using a Wi-Fi enabled device. These systems save on time and labor expense while getting guests into rooms faster.

Total hourly productivity at our hotels that have implemented the recommendations improved over 400 basis points more than those hotels that have not yet conducted a time and motion study. For all the discussion of technology as a disruptor in the lodging space, we are seeing real cost saving benefits of technology in our industry and at our properties. In addition, sustainability initiatives that provide guests with the option to forgo housekeeping services in exchange for reward points, like Marriott's Your Room Your Choice, and Starwood's Make a Green Choice program are also positively impacting expenses.

Given the positive margin results in the first half of 2016, we now expect full-year comparable EBITDA margins to increase 40 to 70 basis points. We also expect approximately 22.5% to 23% of our total and adjusted EBITDA to be generated in the third quarter.

As disclosed in our press release, during the second quarter we repurchased 5.2 million shares at an average price of $15.39 for a total purchase price of $81 million. Since the inception of our share repurchase program in April of 2015, we have bought back 48.6 million main shares of common stock for a total purchase price of approximately $838 million. We currently have $162 million of capacity remaining under the repurchase program.

In addition, we paid a regular second-quarter cash dividend of $0.20 per share which represents a yield over 4.5% on the current stock price. We continue to operate from a position of financial strength and flexibility and believe we have one of the best balance sheets in the lodging REIT and overall REIT space. Importantly, we view this as a key competitive and strategic advantage and expect to continue benefiting from it going forward. We ended the second quarter with approximately $266 million of cash, $739 million of available capacity under our revolving credit facility and $3.7 billion of debt. We improved our leverage ratio as calculated under our credit facility to 2.6 times.

During the quarter, we repaid the $100 million mortgage loan secured by the Hyatt Regency Reston Hotel. We also think it is important to note that 95 of our hotels, which represent 99% of our revenues, are unencumbered by mortgage debt. In summary, we are pleased with our results this quarter as the profitability of our assets continues to improve, as a result of our aggressive asset management strategies in what continues to be a competitive market environment.

This concludes our prepared remarks. We are now interested in answering any questions you may have. To ensure we have time to address questions from as many as you as possible, please limit yourself to one question and one follow up.

Question-and-Answer Session

Operator

[Operator Instructions] We will now take our first question from Smedes Rose with Citi.

Smedes Rose

Hey Good morning, Ed, I wanted to ask you maybe a little bit more if you could share a little more color on the cancellations that you saw in the quarter and maybe through the balance of the year. It sounds like it was a little bit elevated in Florida. Do you see this as economic concerns, is it Zika concerns, if it Florida related? Maybe just a little more color around that would be good. Thanks.

Ed Walter

Yes, Smedes, that is a great question because we spent a fair amount of time talking to the operators to get a feeling for that. As best as we can tell, it seems like most of the cancellations were what I would describe as situational. So they were -- some cases there might have been a change around a product and so there was -- around the timing of her product launch. But in other cases it sounded as if certain companies were just trying to be thoughtful about the level of expense that they were incurring in 2016. And I attribute that in part to the weaker corporate profit numbers that we have seen.

So it didn't feel as if it was thematic. It seemed like it was specific to the individual companies that had cancellations. What I took some comfort from was the fact that the cancellations that we are seeing were generally focused on 2016. We are not necessarily seeing any increase in cancellations related to 2017. So that tells me that it is a little bit more of a short term orientation and people are not necessarily backing away from their plans to have events down the road.

Greg Larson

And, Smedes, as I mentioned in my comments, we actually expect Q3 to be pretty strong for our Florida hotels.

Smedes Rose

Okay, thanks. And I mean can you share the group pace revenue pace for 2017 at this point?

Ed Walter

I would say it is up low single digits.

Smedes Rose

Great, okay, thank you.

Operator

Thank you. We will now move to our next question from Rich Hightower, Evercore ISI.

Rich Hightower

A couple of questions. The first one I went to touch on the ground lease purchase. So was that something that was just opportunistic when the lease was expiring or what was -- just give us a little more color about the origin of that opportunity? And I know you said you would give details later on as to what you actually do with the property. But could you give us a hint -- any hints ahead of time there?

Ed Walter

Yes, I guess obviously this is a hotel that has been in our Company for a long period of time. And for those of you that know Washington DC, you probably know the hotel because you have driven by it a number of times on the GW Parkway. It really is a great location on the edge of Georgetown. And the views from the rooms are spectacular because you are looking right down the mall at all of the monuments. This was a land lease situation from the time the hotel was built.

We have spent off and on the last 10 years negotiating with the owners of the foundation that owned the property in an effort to try to get complete control of the property. So I guess I would say it was opportunistic in the sense that we finally had -- they were finally motivated to sell and we finally had the opportunity to buy. We had a right of first refusal, which is essentially what we exercised on. So it was sort of if we were going to buy it, we needed to do it now.

And I think as it relates to the opportunities for the property, there is, we believe, we haven't had extensive conversations with local officials yet. But we are fairly comfortable in believing that there is excess density associated with the site. So we are in the process now that we know we have control of the property, we are looking at a range of options that would include a complete scraping of the asset and a complete redevelopment of the entire parcel, which would involve for us probably selling off a number of those parcels to other parties. We are also potentially redeveloping a part of the hotel and then selling off portions of the hotel to third parties to develop either residential or office. So we are really in the midst of the effort right now to understand how to maximize the value. There is a lot of local interest in the site, local and national interest for that matter because of just the superb positioning of the property. So we will provide more of an update going forward as we have a clearer idea about how to maximize value for this property.

Rich Hightower

Okay. I mean generally what sort of a return would you expect on some, on a big project like this with multiple options?

Ed Walter

Yes, I guess what I would say is it should, some of that depends upon how we pursue it. I think it is early to try to quote what the value of the underlying land might be. A lot of that is going to relate to what approach do we ultimately take.

Rich Hightower

Okay. All right, I will move to the next question. So my last question here is just in terms of the non-same-store pool of assets, one of the big selling points I guess for Host in 2016 was that it is a renovation tailwind story, which is in opposition to what happened last year. So I am curious, are the renovated projects that have opened, are they performing in line with underwriting? Are you generating the ADR lift and the overall returns you were expecting? Just as we sort of compare it to the same store 2% RevPAR number for the quarter for instance?

Ed Walter

Yes, here is what I would say with this. I think overall we are still expecting that the four assets that we talked about earlier in the year are going to generate the improvement in EBITDA that we had forecasted. I would also tell you that in terms of looking at how we are going to get to that number, the ramp up in the first quarter, call it the first four or five months of the year was probably a bit slower than what we expected. But at this point we are generally in line with our expectation for where we expected to be with the properties. And I think we feel fairly confident about how that is going to play out for this year. And then we also expect that there will be an opportunity for incremental lift in 2017 simply because we are, in each instance for three of the four properties, the one in San Francisco, Camby in Phoenix and the Logan in Philadelphia, all of those because they were closed were essentially new hotels opening up in the beginning of this year and so they did not immediately jump to stabilized operating levels in the beginning of the year.

Greg Larson

And, Rich, the only thing I would add is if you are looking at our press release you can see our non-comp hotels actually had a decline in RevPAR for the quarter and that was primarily due to two big hotels. As you know, Denver Tech is under renovation right now and that is a fairly large hotel with over 600 rooms. And the RevPAR for that hotel is down over 30%. And then the Hyatt San Francisco, again another big hotel, 789 rooms, that hotel also had a RevPAR decline of 18%. So those two hotels are really driving the negative RevPAR in the non comp hotel set right now.

Rich Hightower

Okay, I appreciate that, guys. Thanks.

Operator

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

Anthony Powell

I had a question on pricing in the leisure transient side. Have you seen any impact, the downside from some of the member discounts we are seeing from the brand companies on your ability to drive rate?

Ed Walter

I think that the discounts that the brands are offering to reward members is having a slight negative impact on RevPAR. My guess is that I think Arne was quoted yesterday in saying it was about 30 basis points to 40 basis points. And based on our conversations with them and others that seems to be about right.

This certainly initially right now we are bearing some hit for the implementation of those programs. And I think the expectation in the long run though is that they will accomplish share shift. And obviously the cost of a reservation through the brand website is considerably less than what we might book through other third-party alternatives.

Anthony Powell

All right, thanks. And moving onto asset sales, I think at the beginning of the year you were targeting $1 billion in sales. You are at $500 million now. Is it the case that you are essentially done with the asset sales or just being opportunistic? And how does that outlook impact your share repurchase activity for the rest of the year?

Ed Walter

Yes, I would say that one, we are not done with asset sales. We are still working on a number of transactions and would hope to complete some more. My also would probably say right now that at this stage I wouldn't necessarily be expecting to complete a $1 billion number within calendar year 2016 because I think some of the one of the sales that I think ultimately may prove to be more likely would be the sale of the Melbourne Hilton. But I have a feeling at this point that that sale is likely to be drag into 2017 as opposed to be completed this year.

I think as I said in our prepared remarks, we are very happy with the overall sale program that we have implemented over the last 3.5 years. We would like to continue to sell assets in part because we would love to use the proceeds in the context of our stock buyback program. But we do want to make certain that we are getting pricing that we think makes sense. If you look at the sales that we have announced so far this year without even taking into account the capital spending that might have been required as part of the transition of that property, I would say to a franchise status, we were in the mid 7s in terms of a cap rate on those sales which frankly compares very favorably to where we are trading as a Company. And if I looked at the relative quality of what we were selling compared to what we are retaining, that relationship looks even more attractive.

Anthony Powell

Got it. And just following up on that, so if there aren't materially more asset sales, do stock buybacks stop this year or would you just use cash proceeds or cash flow to fund share buybacks?

Ed Walter

I think we have with the sales that we have completed, we do have I would say some extra cash that could be invested in the stock buyback. Some of that will obviously get tied into what our ultimate dividend requirement is going to be. And I think we are still interested in buying back stock. Obviously as you look at the price that we have paid in this most recent quarter, part of what governs our activity in the stock is where the stock price is. But I think we are still open to additional stock repurchase.

Anthony Powell

All right, that is it for me. Thank you.

Operator

Thank you. And will take our next question from Jeff Donnelly with Wells Fargo.

Jeff Donnelly

If I maybe could just stick with the question on dispositions for a moment, Ed, I am just curious. I mean if assuming markets are cooperative, is there a particular goal that you have in mind? I mean where you would like to be with the portfolio looking beyond just the sales you are contemplating for 2016? I wasn't sure if you had a number of assets, a number of markets or other sort of metrics that shapes how you are thinking about where you would like to bring the portfolio?

Ed Walter

Jeff, it is a good question. I would tell you that with maybe just a few exceptions, I would say that we have sold the bulk of the hotels that we would have started, when we looked at the, started to look at commencing a sale program three or four years ago, we sold the bulk of the hotels that we felt we were either quality reasons, capital reasons or likely underperformance of the market reasons. We sold the bulk of the hotels that we would like to do.

There are a couple more that I think we would like to sell where we would view them as perhaps detractors in the long run from our likely performance. But not that many. I mean I am really talking about a small handful of hotels. So I would say that it ultimately moving past perhaps selling that handful of hotels, it really just comes down to a function of pricing and in a market that seems to be a little less robust than where it had been, I would probably say at this moment I am not as optimistic that we are necessarily going to be selling a lot of additional hotels unless we see pricing start to improve.

Jeff Donnelly

So in other words it is not $500 million down and $3 billion to go or something like that?

Ed Walter

No, I think that, no, definitely, definitely not. At least not on our current perspective.

Jeff Donnelly

And just sticking on the sales question, can you maybe just give us a little more color about what you have learned from the marketplace with dispositions in terms of how buyers are underwriting? Are they kind of looking at on a per key basis, is it sort of cash flow yields or is it an IRR driven buyer? And I guess if I could I just had one other question on just group trends.

Ed Walter

Yes, I think it is a little bit dependent on the type of buyer that you are dealing with. So the international buyers tend to be looking more at long-term storage of value and tend to, what we have found in our conversations with them trends toward the higher quality assets. The financial buyers that are probably, are using more leverage than what we might necessarily use seems to me that they are primarily focused on a cash flow stream that will generate a fairly attractive rate of return and provide some cushioning against what might happen later in the cycle and trying to rely less on a growth in the value of the asset in terms of either certainly cap rate compression or just a significant increase in value down the road. So it seems to be it is much more around current cash flow in terms of a driver for them.

Jeff Donnelly

Thinks. And the question I just had on group and I will yield the floor is that just earlier in the year I think you guys had shared measures on group attrition and cancellations and just in the year bookings that maybe they weren't necessarily moving in the right direction. Can you just talk about how those trends have moved from Q1 and into Q2 and maybe how that shapes your thinking for next year as we roll forward? And I think you gave a metric earlier on the call about your group pace being up single digits in 2017. Do you recall what that same metric was last year looking at 2016?

Ed Walter

Yes, let me try to address the first part of your question then come back to that. So I think what we indicated earlier in the year was that we certainly had very strong group bookings. And I think at the end of the first quarter as we look through the rest of the year, we thought we were up I think it was around 5% to 6%.

And what we said at the time was because we were running so far ahead in terms of the prior year in terms of group bookings that to some degree there was just not as many nights in rooms that were still capable of being sold in a lot of those hotels for group. And so we were expecting that what would happen over the course of the year is that group would still be very strong but that it would generally fall to a level of production or from a revenue perspective that was consistent with the overall range of RevPAR guidance that we were providing at that point in time. So we were suggesting that yes, we might be up 5% to 6% right now but given at that point in time, we were talking 3% to 4% in terms of RevPAR. We expected the group revenues would ultimately moderate and be more in line with that level.

If I were to look out today looking out for the rest of the year, I would say that what we generally were expecting was going to happen with group which was that the lead that we had over the prior year would probably condense a bit and that has happened. I think we still feel pretty confident about group for the second half of the year. I might on the margin say because we have seen a little bit of incremental weakness in short term group bookings that we are a hair less confident in terms of how group compares to what we thought in April. But by and large when we look at our booking pace through the remainder of the year and calibrate that with expectations of what we actually expect to generate, we still feel pretty good about our group business.

When we look into next year, I would say that we are probably running a little bit behind. Our growth for '17 is not as strong as our growth for 2'16. Our growth for '16 thinking back to calendar '15 was sort of mid single digits for most of 2015. So we are behind in terms of a rate of growth but of course remember, we have been saying for a while, including a lot of last year, that the group bookings for 2016 were quite strong. We are still saying that our group bookings for 2017 are better than our group bookings for 2016. So we are slated to have a better year for group in terms of absolute amount of group nights and absolute group revenues in 2017. But that rate of improvement right now would be slightly lower than what we were forecasting a year ago for 2016.

Jeff Donnelly

Thanks, that was very helpful.

Operator

Thank you. We will take our next question from Ryan Meliker with Canaccord Genuity.

Ryan Meliker

I just wanted to talk a little bit about the guidance reduction for the back half of the year. You gave some good color on group pace and the idea that you are expecting transient trends to slow, or not slow but remain soft I guess. Can you give us some color on what type of macro outlook -- I am assuming you have some type of macro model that you use to help drive kind of transient RevPAR demand trends for the back half of the year?

Ed Walter

Sure. I would say that what we have found over the years was the best indicator for what was going to happen to corporate transient is generally tied to what is happening in terms of business investment. If investment activity is higher, travel seems to be -- business transient seems to be stronger. And while I didn't have much time to absorb the GDP report that came out early this morning, I did note that business investment was off in the second quarter and I think it might have even been off more than 2%. So, I wouldn't say that our approach to this is so scientific that we calibrated with our expectations for business investment would be for the second half of the year. I think that would presume too much. But we did assume, based on the data that we have been seeing and the outlook that we will see from people that spend their time forecasting that, is it generally was expected to be weaker.

So, until that changes, we assume that corporate travel will probably, it will still be there but the growth and the demand from that side will not be as strong as it might have been in the past. And that is one of the reasons why, as we look at the transient side of our business, and I think it is clear from my comments that that is the part of our business that disappointed us in Q2, that is the part of our business that we think is weaker in the second half of the year. We are assuming that we will see weakness in corporate demand consequently push us more toward some of the more price sensitive segments of leisure discount business. And that is what underlies the fact that we are adjusting our RevPAR guidance down for the second half of the year and obviously for the full year.

Ryan Meliker

I think that make sense. So, just to make sure I understand it correctly, it sounds like you are assuming that the soft business investment spend dynamic that we have seen in the first half of the year really persists through the back half of the year. Is that correct?

Ed Walter

That is correct, that is correct.

Ryan Meliker

Okay, so no acceleration or deceleration necessarily?

Ed Walter

Correct. I would say that if you were trying to look at what might change this dynamic a little bit and lead to stronger growth, it would be improvement in corporate investment which could then turn around, and you know corporate travel reacts very quickly both down and up. So, to the extent that the investment side of their business starts to their perspective changes, they get more optimistic, that is the one place for upside too.

Ryan Meliker

Okay, that is helpful. And then just one quick follow up. Greg, you had mentioned that you are expecting San Francisco to be a little softer in the back half of the year. I am wondering if you guys have tried to quantify the impact of the Moscone Center renovation, what you think that is going to do in 4Q and then next year?

Greg Larson

I mean look, it is certainly going to impact the second half of this year and certainly next year. But I don't have an exact number for you. But we are within our guidance that we gave today for our portfolio, 2% to 3% RevPAR growth, we are actually modeling San Francisco to have a slight to be slightly negative in the second half of the year.

Ryan Meliker

Okay. And is it reasonable for us to assume that it will be slightly negative again next year?

Ed Walter

Expect it to be negative? I think it is awfully early right now to try to provide an outlook relative to 2017. But what I can tell you that at least as a concern is that when we were looking at our bookings for next year, one of the markets that was has been weakest in terms of bookings for 2017 was San Francisco. So, there is clearly going to be some impact from the closing of the the construction activity around the convention center.

Operator

Thank you. Will now take our next question from Chris Woronka with Deutsche Bank.

Chris Woronka

I was hoping that maybe we could drill down a little bit on the rates. And I know that in 2Q and I think even in 1Q your mix shifting had a lot to do with it. And so I am trying to get a sense for how much of the rate under performance may be relative to your expectations is just mix and how much of it is real time softening on the transient side?

Ed Walter

I would say it is a combination of both. So if I look across our different segments, I would say that in the lower price segments, government or in some of our discount segments, we actually had fairly strong rate growth. So for instance, our government business from a rate perspective was up 4.4%. And our discount business was up about 3%.

So we saw a good jump in those segments. Where we saw ,if we did see, as our highest price business in retail and some of the, that segment, we did see some rate decline. So I would tell you at the end of the day it is a combination of both. The good news is the segments we did more we had growth in also had higher rate. So that is positive. The downside is that the actual rates of business, the rate that we charge those customers tends to be lower than the rate that we would charge our most expensive retail customer. So it was a combination of at the top level some weakness, some negative rate growth combined with a lot of rate shift, mix shift.

Chris Woronka

Okay, great. And then also wanted to ask you, it seems to be with all of the uncertainty out there the trend is kind of lower shorter booking windows. Are you guys working with the brands? Do you think there, could this be more of a longer term trend and do you think the brands are kind of on top of it and are you working with them to maybe look at changes in policies or things like that?

Ed Walter

I don't know that we are necessarily seeing right now that the booking window is shorter. I mean I, we are, as we have reached higher occupancy levels, we have generally seen the booking window extended. And we are still seeing even looking out to 2018, we are still seeing good growth in our group business. So I don't know that we would necessarily sit here and say that we think the window has shortened so far this year.

Chris Woronka

Okay, very good. Thanks, Ed.

Operator

Thank you. We will take our next question from Harry Curtis, Nomura.

Harry Curtis

Ed, you have seen a couple of lodging cycles and certainly Greg is no spring chicken, right, Greg?

Greg Larson

That is the pot calling the kettle black.

Harry Curtis

All right, let's get on with it. I did stir the pot. So the question is, if you have seen the deceleration in corporate investment, through these cycles have you ever seen it reaccelerate once you see these trends in group bookings begin to soften?

Ed Walter

Harry, that is a good question. And I am trying to think back. Certainly the last two downturns, my guess is is that your general assumption is that once it rolled over, it continued to head down. Now what is different though is that in both of those last two cycles in 2001, it had started to go negative in the beginning of the year and then obviously we had the attack on 9/11 followed by SARS followed by the war. So we sort of had, once things went a little south, I don't know that we necessarily got a chance to see how the economic environment was going to play out in kind of in this context. There was a lot of other events that intervened to create a problem. And of course the financial recession had somewhat of a similar tempo to it.

So coming back to what we might expect this time, I do think that if you look at what the Fed just said in what they came out with earlier this week, I don't know that they are necessarily acting or speaking in the context of thinking that the economy is about to roll over. I have a feeling just sort of if looking at this through my own lens is that part of what Corporate America is trying to figure out is what does Brexit mean, what does this unsettled -- these attacks that have happened across the world, who in the world is going to be the next President of the United States and what exactly -- what policies are they going to pursue?

So I can't -- the last thing I am going to try to do is predict the future in terms of economics. But I could look at this and say that if the Fed is right that the underlying economy is actually fairly healthy, then if companies had a different perspective about some of these issues that I think do affect people's willingness to invest, I think there is an opportunity to see corporate investment improve. I believe that the consensus forecast for next year does call for some slight improvement in business investment, not robust but some slight improvement. So not that they have necessarily been right at all through this cycle, but if they were right, then that might offer an opportunity to see some improvement.

Harry Curtis

Okay, and then.

Ed Walter

Checking my data on that. The most recent blue-chip consensus talks about corporate investment next year at 3.1%. So that was down a little bit from where it had been the prior quarter but still pretty positive. So I think that will be -- in our mind based on given that we see that being a fairly influential indicator for us, we will have to see how that plays out.

Harry Curtis

Thank you for that. And then my second question is, what do you need to see to take the base dividend up?

Ed Walter

Generally what we have done is tie our dividend to our taxable income. So one of the biggest drivers there would be we would need to see our taxable income continue to increase. We have generated incremental taxable income as a result of our asset sales. And so one of the things we will provide more clarity on I would expect at our next conference call is the degree to which we would have a special dividend. I would say that certainly in terms of thinking about the dividend long term, we are certainly focused on having a dividend set at a level that we are comfortable in maintaining even to the extent we might go through a period of weakness. And we are certainly comfortable at the level we are at today that we could do that.

Harry Curtis

Okay, that is it for me. Thank you.

Operator

Thank you. We will now take our next question from Joe Greff with JPMorgan.

Joe Greff

Ed, earlier in the call you talked about that the third quarter would be considerably better than the fourth quarter in terms of RevPAR growth. Are you anticipating that your third-quarter RevPAR growth will accelerate from Q2 levels?

Ed Walter

Yes.

Joe Greff

Okay. And your explanation for that would be September group, presumably and the timing of the Jewish holidays?

Ed Walter

Yes, I think we were not necessarily expecting that July would be any stronger than what we had seen in Q2 but we do have very strong group bookings in August. And we have strong group bookings in September. I think as you were I think alluding to there a part of that is due to the fact that the Jewish holidays have shifted into October. So we are not necessarily expecting acceleration in July but we do expect a strong August and September.

Joe Greff

Thank you.

Operator

Thank you. Will take our next question from Wes Golladay with RBC Capital Markets.

Wes Golladay

When you look at prior election cycles, how do I guess transient and group react going into an election? Is it normal to see this type of pause?

Ed Walter

I don't know that we have necessarily identified a trend. I mean the two trends that we have seen is that sometimes a market like Washington will end up with a little bit softer business in the fourth quarter because when you are having a nationwide election, most of the elected officials tend to be out of the city. And since that they draw for business in Washington, we've sometimes seen some softening of business in DC related to that.

We have generally seen that the election week ends up being relatively slow on the group side because at least larger groups are reluctant to schedule an event that would overlap Election Day. And so that is one of the reasons why we have indicated really for the last couple of quarters now we have highlighted the fact that we were not overly confident about the fourth quarter. One reason is the holiday shift but the other was the fact that we felt that this Election Day would be one that groups would be reluctant to book in.

So, I think what we are going to find when we get to the fourth quarter, not to get too far ahead of ourselves here, is that you are going to see some incredibly strong weeks because group is going to be very compacted into the sort of the open weeks of that quarter and then those weeks that are affected either by the election or by the holiday will probably be fairly weak.

Wes Golladay

Okay and then going back to the San Francisco Convention Center next year, Marriott Marquis is obviously a headquarter hotel. It appears they are trying to put in as much in house group for you at the hotel. How much of the overall group in house and from the convention center do you think you can recapture just by their push the San Francisco travels push to help you fill up the hotel?

Ed Walter

Well, I don't know that that we don't have a precise forecast right now. But you've correctly identified exactly what we are trying to do. We do have a very good meeting platform there. We are trying to take full advantage of it to offset the loss of business that we might otherwise have gotten if the convention center had been not under construction and fully available.

Wes Golladay

Okay, so qualitatively maybe are you more encouraged maybe than at the beginning of the year?

Ed Walter

I am not certain that, I think we are still going to end up finding that we have a weaker year in San Francisco and that group bookings are going to probably at the Marquis will probably be down for the full year. I just think that we do enough business that is associated with the convention center that we have we do have a great meeting platform but I don't know that it is big enough to completely replace all of the citywide business.

The one thing I would say though is that while the convention business will be off in San Francisco, we do think we have a very attractive hotel or hotels that are in great locations in that market. So, we are going to have a it is going to be a struggle to overcome some of the weakness on the group side but we are in good locations from a transient perspective too.

Greg Larson

Wes, you really picked the most two extreme markets; DC has a very, very strong group booking pace for next year but then as Ed just mentioned, San Francisco is fairly weak for next year.

Wes Golladay

And to follow up with that comment, I guess San Diego is probably going to do quite well with the complete renovation of the ballroom? Is that going to start being a big lift next year?

Ed Walter

Yes, we are seeing San Francisco as being -- or San Diego, rather, being quite strong the second half of the year and I think we believe that carries into next year too. I mean San Diego should be one of our best markets in the second half of the year.

Wes Golladay

Okay, thanks a lot.

Operator

We have a final question from Shaun Kelley, Bank of America.

Shaun Kelley

Good morning. Thanks for taking my question. So I was just wondering if we could get a quick update on your outlook for supply. We talked a lot about 2016 maybe last quarter and before but as you are looking out to 2017, any shift in some of your largest markets as we think about New York, San Francisco, LA, Boston and DC?

Ed Walter

Yes, I think in general what we are -- the pattern that we have seen the last few years is that there is of course estimates from the experts in terms of what is going to happen with supply growth for the beginning of the year. And then normally what seems to happen is by the time we get to this point in the year or a little bit later, we begin to realize that the supply growth that is actually going to materialize is slightly less just because projects have a tendency to be delayed.

And so this year I think we started off the year thinking that nationwide supply was probably going to be just under 2 and now it feels like it might be more in that 1.6, 1.7 range, which is not a huge difference. But still on the margin, a little bit better. So that is sort of 2016.

We are expecting that supply next year will increase somewhat. I think we see that both across the industry and we also see that in the upper price points in the top 20 markets. So again I would say we are probably expecting the industry supply to be a little bit over 2 and probably expect that the supply in the top 20 markets is a little bit higher than that. I would also guess though that at some point we are going to see the same sort of lengthening of the delivery time for that supply which will hopefully maybe pull back down a little bit.

New York continues, New York and Houston and Miami tend to be the markets that continue to see the strongest supply. Seattle might be one more that falls into that category. We are seeing while supply for New York will continue to be robust and a lot of it is under construction, my sense in looking at the data was we were seeing fewer projects that were projected to start in the next 12 months and fewer projects in planning. So we are hoping that that may signal a return to some level of rationality around New York supply. But we are not going to see the benefits of that in 2017.

Shaun Kelley

Great, that is helpful. And just one follow up or [nit] was I think you mentioned early on in the prepared remarks that international demand was down about 7% for the quarter. Could you just give us a sense of where that came in for, where that was trending in Q1?

Ed Walter

I think it was right around that same level, maybe a percent or so higher. Again as I have said in the past, this is a little bit of an imprecise science. But I think in looking back at our comments for the prior quarter, we were probably, we might have been just a hair higher in terms of Q1. And some of that would be reflective of the fact that the relationship between the US dollar in some of those other currencies is you are starting to lap over when we had an impact last year.

Operator

Thank you. And that concludes today's question and answer session. I would now like to turn the conference back over to Mr. Walter for any additional or closing remarks.

Ed Walter

Great, well thank you for joining us on the call today. We appreciated the opportunity to review our second-quarter results and our outlook for the remainder of the year. We look forward to providing a further update during our third-quarter call in November. Have a great weekend. And travel often for the remainder of the summer. If you haven't looked at our website lately, it has got some great suggestions on places to stay. Bye.

Operator

Thank you. That does conclude today's conference. Thank you for your participation and you may now disconnect.

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