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

Q2 2007 Earnings Call

July 18, 2007, 10:00 AM ET

Executives

Gregory J. Larson - Sr. VP, Treasurer and IR

Christopher J. Nassetta - President and CEO

W. Edward Walter - EVP and CFO

Analysts

William Truelove - UBS

Jeffrey Donnelly - Wachovia Securities

Celeste Brown - Morgan Stanley

William Crow - Raymond James

Harry Curtis - J. P. Morgan

Presentation

Operator

Please standby, we are about to begin. Good day and welcome to the Host Hotels & Resorts Inc. Second Quarter 2007 Earnings Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Senior Vice President, Mr. Greg Larson. Please go ahead, sir.

Gregory J. Larson - Senior Vice President, Treasurer and Investor Relations

Thanks. Welcome to the Host Hotels & Resorts second quarter earnings call. Before we begin, I'd like to remind everyone that many of the comments made today are considered to be forward-looking statements under federal securities laws. 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, as we are not obligated to publicly update or revise these forward-looking statements.

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

This morning, Chris Nassetta, our President and Chief Executive Officer will provide a brief overview of our second quarter results and then will describe the current operating environment as well as the company's outlook for the remainder of 2007. Ed Walter, our Chief Financial Officer will then provide greater detail on our second quarter results, including regional market performance. Following their remarks, we will be available to respond to your questions.

And now, here's Chris.

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Christopher J. Nassetta - President and Chief Executive Officer

Thanks Greg and good morning everyone. We're pleased to report another quarter of strong results for the company. Very solid revenue and flow-through combined with savings in a number of areas led to earnings results that significantly exceeded our guidance. We continue to feel good about the fundamentals in the business and our outlook for the remainder of the year, which I'll discuss in more detail in a few minutes.

First let's talk more specifically about our second quarter results. Our FFO per diluted share for the quarter was $0.48 including adjustments of $0.08 per share related to costs associated with the refinancing of debt. Excluding those adjustments, our diluted FFO per share exceeded the consensus estimate by $0.04 resulting in FFO growth of over 30% compared to the second quarter of last year. Our pro forma comp hotels which include our parent comp hotels plus the hotels we acquired in the Starwood transaction, our RevPAR increase for the quarter of 6.7%, driven by a 6% increase in average rate and a 0.5 percentage point increase in occupancy.

The adjusted EBITDA of Host Hotels & Resorts LP for the quarter was $414 million, an increase of more than 19% over the second quarter 2006. On a year-to-date basis, our pro forma comp RevPAR increased 6.8%, as a result of a 6.1% increase in average rate and a 0.5 percentage point increase in occupancy. Year-to-date adjusted EBITDA was $677 million, an increase of over 21%.

Food and beverage revenues at our comp hotels grew 3.4% with strong flow-through resulting in a significant increase in departmental profit margin. The strong margin performance is due to continued growth in highly profitable F&B areas including meeting room rental and banquet. Although group room nights softened slightly for the quarter, revenue per group room night increased approximately 5.5%. We expect to continue to see strong food and beverage profits, as our group booking pace is strong for the fourth quarter of this year. In addition, comp hotel other revenues increased over 6% with strong flow-through that resulted in a substantial increase in profit margins.

Turning to demand, transient business was very strong during the quarter as room nights were about nearly 3% with a positive shift to the highest rated premium business. This increase in overall transient demand combined with an average rate increase of approximately 7.5% led to double-digit increase in transient revenues for the second quarter. Group average rates increased nearly 5% as a result of a shift in group room night from lower rated business to higher rated association groups combined with an average rate increase in association business. However, group room nights were somewhat lower than forecast for the quarter due to few related anticipated group bookings in the quarter for the quarter as well as some cancellations. This was primarily isolated to specific markets including Boston, South Florida and Atlanta, and in addition related to renovation disruption of many of our hotels.

Looking forward, our group booking pace for the fourth quarter of this year is very strong and for the full year of 2008 and now even 2009 with some of the strongest bookings we have seen in years with meaningful increases in both rooms on the book as well as average rate. We continue to focus on our largest CapEx programs in our company's history. This program consists of maintenance CapEx, ROI and repositioning and value enhancement projects. We expect to invest approximately $650 million in 2007. These projects are focused on lobbies, public spaces, food and beverage facilities, spas, retail outlets, energy conservation, back of the house meeting space and rooms. In fact, this year we are renovating over 10,000 rooms and approximately 800,000 square feet or over 18 acres of meeting space.

We have made great progress on a number of large projects including the construction of the 105,000 square foot exhibit hall at the Orlando World Centre Marriott, which is expected to be completed in the third quarter and will accommodate a large group event, already booked for October.

At the Atlanta Marquis, construction of the new re-concepted food and beverage facility and renovation of all the existing breakout space was recently completed, and the new 26,000 square foot ballroom is scheduled to be completed by the third quarter of 2008. We have also just opened a spectacular new spa at the JW Marriott in Desert Springs.

As you might imagine, our substantial capital investment program is causing significant disruption, resulting in a meaningful reduction in RevPAR growth for the year. However, from a capital allocation perspective, we believe these investments are the highest returning investments we can make and favorably position our hotel and enhance the future value of our properties. In fact, by the end of next year, we will have the youngest portfolio in the best condition in our history with rooms and meeting space averaging slightly more than two years old.

On the external growth front, we remain cautious on acquisitions in North America, due to the current asset pricing environment. As such, we did not make any acquisitions during the quarter. While we continue to be active in evaluating potential transactions, given that we are past the midpoint of the year, for modeling purposes, we would guide you to not include any acquisitions for the remainder of the year.

On the disposition front, we continue to focus on taking advantage of the current strength of the after transaction market to recycle capital out of lower growth assets at attractive pricing. We are increasing our guidance on dispositions to $200 million to $400 million for the remainder of the year. Obviously, the impact of increasing our disposition guidance combined with no projected acquisitions for the remainder of the year will have a slight negative impact on our estimated adjusted EBITDA for 2007.

In Europe, the hotels we purchased in our joint venture are performing very well and we have a strong pipeline of deals we are actively evaluating. In fact, we expect to announce the completion of a transaction in our European joint venture shortly.

Now let me update you on the outlook for the remainder of 2007. As I previously mentioned, pro forma comparable hotel RevPAR grew 6.8% in the first half of the year. Our forecast is that the second half of the year will be modestly stronger, with third quarter results expected to be slightly below the second quarter, followed by a much stronger fourth quarter, due to the very solid advance group bookings.

For the year, we expect our pro forma comparable RevPAR to increase 6.5% to 7.5%. Based on these operating assumptions and our year-to-date results, our guidance for diluted FFO per share for the year will be between $1.78 and $1.84 including $0.08 per share of expenses related to costs associated with refinancing.

Our guidance for adjusted EBITDA for Host LP is $1.450 billion to $1.480 billion. As we'd mentioned before we've instituted our new dividend policy under which we expect to declare a fixed $0.20 per share common dividend each quarter, as well as a special common dividend in the fourth quarter of each year, the amount which will be based on our level of taxable income. Based on our continued strong operating performance, we expect the amount of our special common dividend for 2007 to be in a range of $0.10 to $0.20 per share.

In summary, we are pleased with the results of the quarter, and remain confident about the outlook for the remainder of 2007 and for 2008. Based on our booking pace for 2008 and 2009, which look very strong, as well as our expectations for fundamentals in the business including as the progress forecast have remained below historical averages, we continue to believe that the current growth cycle in lodging will be sustained. Our portfolio will be as well positioned as it ever has been to benefit from these strong fundamentals, particularly given the significant investments for making in our assets. Thank you and now let me turn the call over to Ed Walter, our Chief Financial Officer, who will discuss the quarter's financial performance in a little bit more detail.

W. Edward Walter - Executive Vice President and Chief Financial Officer

Thank you, Chris. Let me start by giving you some detail on our pro forma comp hotel RevPAR results for the quarter.

Looking at the portfolio based on property types, during the second quarter, our downtown hotels performed the best with RevPAR growth of 8.4%, as we benefited from strong performance in several downtown markets such as New York and Seattle. RevPAR in our suburban hotels increased by 6.8% for the quarter and our airport hotels increased by 6.6%. Our resort conference centers increased by just 0.9% and several hotels were significantly affected by major renovations, leading to a 2.0 percentage point decline in occupancy for this product type.

Turning to our regional results of the quarter, just like in the first quarter, our top performing region was the Mid-Atlantic, which experienced 15% RevPAR growth. Our New York City properties performed especially well, with RevPAR growth averaging more than 20%, driven by strong group and transient demand.

The Philadelphia market rebounded from weak group demand in the first quarter as three citywide events helped drive RevPAR growth of roughly 6%. Both Philadelphia and New York should outperform in the third quarter. The South Central region also had a great quarter as RevPAR grew by 9.5%. Performance was strong in Dallas and Houston as transient demand grew meaningfully in both markets. The third quarter should also be solid in the region with good results in both Dallas and Houston, as group and transient demands should continue to be strong. Our Mountain region also performed well with RevPAR increasing by 8.1% as the Denver market had a strong quarter, driven primarily by solid citywide event with RevPAR growth of over 11%. With group pace expected to remain strong, both Denver and the region are expected to continue to perform well in the third quarter.

Our Florida market experienced RevPAR growth of 4.6%. Performance was generally solid across the region. The group weakness and construction efforts at the Harbor Beach Marriott led to a RevPAR decline, and our Ritz-Carlton in Naples suffered from weaker transient demand dragging down results from the quarter. The third quarter looks quite weak in Florida, as group business is down significantly to last year and two of our larger events will be... extra larger hotels will be experiencing meaningful construction disruption.

Overall RevPAR growth in the Pacific region was solid at 5.9%, but results varied widely by market. Our three hotels in Seattle were up approximately 11% and San Francisco had a great quarter with RevPAR improving by over 13%, as transient demand was extremely strong. On the other hand, Hawaii struggled with RevPAR declining by more than 3% due to weakness in the leisure segment and reduced group activity.

Looking at the third quarter, we expect Seattles to continue to perform well and Los Angeles will likely accelerate. We also expect that Hawaii will improve in the third quarter and then perform quite well in fourth quarter. It is worth noting that the Hawaii market continues to exhibit strong occupancies, over 80% year-to-date and very high RevPAR level at over 330 per room and remains an attractive market in the long term.

As expected, the Atlanta region had a weak quarter, as RevPAR grew by just 1.7%. This weaker performance was experienced across the market in both group and transient segment and is generally attributable to a combination of difficult year-over-year comparables and fewer citywide events. Citywide room nights in the quarter were down roughly 50% over the prior year.

The Atlanta market was a significant beneficiary during the first half of 2006, from business which relocated to the city because of hurricane destruction in other market, leading to a drop in citywide events in 2007. Unfortunately, these trends are likely to continue as the Atlanta market is expected to have a soft third quarter and citywide events will continue to fall short on prior year levels. Fortunately, this trend is expected to reverse in the fourth quarter as citywide events are projected to strengthen considerably.

The New England region also under performed in Q2 as RevPAR grew by just 2.1%. Continuing the trend from the first quarter, our suburban Boston properties performed well, with RevPAR growth averaging approximately 8%.The real issue occurred in the downtown markets for some of our larger hotels like the Sheraton Boston and Hyatt Cambridge suffered from weak group demand. Third quarter growth will likely remain low in New England due to difficult comps, as the summer of 2006 was a record quarter for citywide events in Boston. The fourth quarter is expected to be considerably stronger in Boston and the region as a whole.

Year to-date, the Mid-Atlantic has been our best region with RevPAR growth of 14.8%, followed by the South Central where RevPAR growth was 9.6%, the Atlanta region, where growth has been just 1% and the New England region where growth is 2.5%, have been our weakest performers.

Looking at our European JV, we had a strong second quarter as RevPAR based on local country currency increased by 6.3%. The performance is particularly strong in Barcelona, where RevPAR at our Arts Hotel increased by 13% and in London where the Sheraton Skyline increased by almost 9%.

The outlook for 2007 remains positive as the EU economy continues to grow at a solid rate. For the quarter, adjusted operating profit margins for our comp hotel improved by 50 basis points. Rooms, F&B and EBITDA flow-through were quite strong, although absolute comp margin growth was somewhat inhibited by the lower level of RevPar growth. It is worth noting that pro forma comp margins were higher primarily because pro forma comp RevPar was stronger.

F&B margins improved by 110 basis points as the banquet business continue to represent an increasing share of the overall F&B business and true costs were restrained. Also on the positive side, wage benefit increases were limited to 3%, which represented a reduction from the prior... in the growth rate from the prior two quarters.

Utility costs up were less than 2% for the quarter and real estate taxes increased by approximately 5%. Year-to-date, our comp margins has improved by 40 basis points. We expect that margin growth for the second half of the year should be stronger as RevPAR in food and beverage growth rates improve and flow-through remains very solid. Utility costs and real estate taxes are risk areas for the remainder of the year.

Given our overall perspective on full year RevPAR growth, we would guide you to full year comparable margin growth of 75 to 100 basis points.

Looking at our balance sheet, we employ the proceeds of our $600 million 25/8% exchangeable debenture offering and some available cash to repay three mortgage loans totaling approximately $650 million that carry an average interest rate of nearly 8%. As a result of these transactions, the average interest rate on our debt is now 6.1%. We also restructured the terms and increased the size of our credit facility to up to $600 million.

The key benefit of the restructuring was to reduce the cost associated with the facility to the extent we borrowed on the facility today our interest rate would be LIBOR plus 65 basis points versus the prior rate of LIBOR plus 200.

We completed the quarter with $497 million of cash. This amount will be used to maintain working capital at roughly $100 million to $125 million as well as fund additional investments in our portfolio, acquisitions by the company or our European JV, additional debt repayment or for other corporate purposes. We have full capacity on our $600 million credit facility.

With respect to the third quarter, we expect RevPAR growth for our pro forma comp hotels will be between 5.5% and 6.5%, as tough group comps in Boston and Atlanta, weaker group pace in Florida and overall construction disruption result in slightly weaker growth in Q2. A turn around in Atlanta and Boston, two of our weaker markets this year combined with stronger overall group bookings are expected to result in a considerably stronger top line growth in the fourth quarter.

For the third quarter, we forecast that FFO per diluted share will range between $0.32 and $0.33, which represents the solid 18% growth over 2006 level. As we have detailed today, we continue experiencing solid growth from the top line and very good closure at the bottom line, leading to strong EBITDA and FFO growth. Our outlook for operating trends for the remainder of the year; especially the fourth quarter remain very favorable. This completes our prepared remarks, we are now interested in answering any questions you may have.

Question And Answer

Operator

Thank you, sir. [Operator Instructions]. We'll go now to William Truelove of UBS.

William Truelove - UBS

Hi guys. Just could you talk a little about changes in the group business activities, I mean were you so much surprised that the third quarter and the fourth quarter group business activities working out this way or the way the individual markets are or did you sort of see this coming, say, at the beginning of the year. How far advance do you really have with the group booking pace; given that many of the groups do book in the quarter for the quarter? Thanks.

Christopher J. Nassetta - President and Chief Executive Officer

Well, I think you do have a pretty good sight line into the group bookings, as you start the year looking at each of the quarters. I think, obviously the second quarter was a little bit later than we had anticipated and I think it was... as we described for some unforeseen reasons in a few markets like Atlanta, Boston, South Florida and also related to some more significant construction disruption, as a result of some of our CapEx projects that then we had thought. But, the fundamental truth about second quarter and for that matter third quarter, looking forward in one quarter has been that those have been... from the beginning of the year, those have been weaker periods, weaker quarters in terms of group bookings overall. The fourth quarter throughout the year has been a lot stronger and continues to be lot stronger. And so, I think the way I view Q2 really is that they were little bit weaker than we thought, isolated to a few markets and involving a few cancellations which were not systemic; that were kind of isolated to in a particular circumstances at a particular hotel.

In terms of activity changes, I think the thing that frankly we feel best about is that the fourth quarter really is hanging in there and in fact as we said a couple of times between Ed and I in our prepared comments, is looking quite good. So our expectations of a big pickup from Q3 to Q4 is by no means a pique miss based on some very significant solid group bookings and so, we have a very good feeling about that. And frankly, the other change that I'd say on the positive side, we feel very good about it is as we continue to look out in '08, now it's starting to get some sight lines into '07 where basically in '08 50% of our group bookings that approximately are on the books and about 25% in '09 are on the books. We are way ahead of pace in both those years and have much stronger rates.

So, I think those shouldn't be underestimated in terms of being very good solid indicators of strength in that particular part of our business, which is obviously a very important year makes up more than 40% of our overall business and it's a very important indicator in the sense that it provides the platform to then manage our transient business offer. I mean, obviously the transient business in the second quarter, for that matter, we expect for the rest of the year is showing very good strength as well. So, as we get into the third, particularly the fourth quarter, strong group bookings with what has been very strong transient business, we think it's a very good sign and a very good indicator as we move into the next year.

William Truelove - UBS

Thanks so much.

Christopher J. Nassetta - President and Chief Executive Officer

Yes.

Operator

Thank you. We will go next to Jeff Donnelly, Wachovia Securities.

Jeffrey Donnelly - Wachovia Securities

Good morning guys. Chris, if I was to try to benchmark your performance to the metro and segment data that we get from some travel, it looks like Host beat the national averages for the quarter but, suspect... we suspect and it's difficult to do the analysis so I suspect you might have lost a little share in the urban and resort categories. Is that correct and if so, is that the result of the renovation activity?

Christopher J. Nassetta - President and Chief Executive Officer

Yes, I think maybe in resort conference, we did and it probably had to do with the fact that a disproportionate share of that is in Hawaii, and Hawaii while we think is a great long-term market was particularly hard hit. I've got all the stats right in front of me Jeff, but I don't think we really lost share in the urban and in fact, if we look at our entire portfolio for the quarter, we gained market share. When we look at the Star data, we didn't lose market share. So I think, we feel fine about what's going on in the core of the portfolio. Obviously, the resort conference was weak for the reasons that I described.

Jeffrey Donnelly - Wachovia Securities

Okay. Ask a follow-up and I know you have a significant volume renovation activity. I am trying to understand what impact that has on overall results. Are you able to quantify for us the rooms out of service in Q2 and maybe the remaining quarter of the year to the extent that their activity is not focused on the rooms but common areas? Can you guesstimate the revenue impact that were --?

Christopher J. Nassetta - President and Chief Executive Officer

We can't guesstimate. The easiest so I made... it's hard to do in the particular quarter and think that's directional, not perfect science. But as we look at the full year and we look at kind of what we have given you as guidance 6.5 to 7.5, there is probably a point to two points of RevPAR impact associated with the $650 million we are spending in the portfolio. And that and we have looked that pretty carefully, looking at the kind of the assumptions on how much displacement we've already had as a result of our renovation activity and what we expect that in the third and fourth quarter. So really, largely, kind of occupancy-driven, kind of room nights that we think we are losing as a result of that activity. So as I said in my prepared comments, we think that there is a significant impact as a result of these renovations that are far beyond kind of typical renovations. And obviously at a point to two point, when if you added that back in, if you had a much lower level of activity in that arena, the numbers would be a lot better. We are very pleased with what we are doing. We think long-term we are making the right decisions, allocating capital well. These are very high returning investment opportunities and as well as opportunities just to make sure that our portfolio is extraordinarily well positioned for the future and frankly, we think the future is quite good over the next few years in terms of where we are in the cycle. So we... we are very excited about the fact that our portfolio is going to be in the best shape it's ever been and the youngest in terms of rooms, public spaces and meeting space than it's been in our history, at a time where we think we've got a half a cycle left and that we are going to really reap the reward of that.

Jeffrey Donnelly - Wachovia Securities

Is it fair to say that 1 to 2 point impact is more behind you than ahead of year?

Christopher J. Nassetta - President and Chief Executive Officer

No, no, I think it's throughout the year. I mean when I talk about the impact, it's probably... probably not so much first quarter, somewhat second and... and then third and fourth obviously we have tried in our third and fourth quarter and full year guidance to bake that in as best we can. We were frankly a little bit off in the second quarter. We may be had a little bit more disruption in the second quarter than we thought, obviously we've tried to compensate for that in the guidance we have given you in the third and fourth quarter.

Jeffrey Donnelly - Wachovia Securities

Okay, thanks guys.

Christopher J. Nassetta - President and Chief Executive Officer

Yes.

Operator

Thank you. We'll go to Celeste Brown of Morgan Stanley.

Celeste Brown - Morgan Stanley

Hi guys, Good morning.

Christopher J. Nassetta - President and Chief Executive Officer

Hey, Celeste.

Celeste Brown - Morgan Stanley

With the construction disruption and it's sounding like a pretty significant impact in your RevPAR plus too many issues of group bookings this year, is it possible that we can see a higher RevPAR growth rate in 2008 than 2007? I am not asking for guidance, but just given everything that you are seeing in...and the disruption this year?

Christopher J. Nassetta - President and Chief Executive Officer

That's a great question and deserves a great answer. The short answer would be, if possible, yes. It's awfully early and I know you are not asking for guidance and you will be happy to know I could have give you guidance, because its so early and we really have a lot of work to do, to understand on a granular basis with all of our GMs in all of our hotels where we think we will end up next year. So it's premature to do that, but there is a possibility. I think, as one would being conservative right now you probably wouldn't guide to a better result next year than this year, but let us get a little bit further in the year and see how group bookings, which are already strong continue to develop and must see as this year finishes out and we will give you a sense of that. And obviously we feel good about next year. We just have to do a lot more work to figure out to exactly where we think it will be.

Celeste Brown - Morgan Stanley

Okay, great. Thank you.

Operator

Thank you. We will go to Bill Crow of Raymond James.

William Crow - Raymond James

Good morning guys. Two or three questions; Chris, what's your CapEx outlook for 2008 look like at this point? Do you think you are going to be as aggressive on the renovation program?

Christopher J. Nassetta - President and Chief Executive Officer

I think it's a bit less, I think this...of course part of it will depend on ROI repositioning project that we are working on right now and how many of those need to smell that in terms of bidding our yield requirements. But based on what I see right now, I think it would be modestly less than where we are in '07 and then '09 obviously would drop off pretty materially from there.

William Crow - Raymond James

So the disruption that were experienced in this year will continue, but at a lesser degree again next year?

Christopher J. Nassetta - President and Chief Executive Officer

Yes, I think that is the right way to look at it Bill.

William Crow - Raymond James

Okay. Could you just give us an update on cap rates? I know you have not buying anything, you continue to bid but not win, but is it your sense that the cap rates are backed up 25, 50 basis points or where are we from the private market perspective?

Christopher J. Nassetta - President and Chief Executive Officer

I have to say, my sense is that they haven't really moved much at all, you would think that the cap rates would start to move up if debt rates, given debt rates have been moving up. If the mortgage markets spread has been little bit right [ph] on spreads have widened. Treasuries had been of course increasing, now treasuries will see what they do today they are probably going up to there... seen with the inflation report. But generally had move back down, spreads have become... have actually comeback in little bit. So the debt markets are pretty... they got a little bit out of act, they seem to be getting a little bit better kind of more inline. We will see what happens with all subprime worries and whether that continues to ripple through or not. But as I sit here today and as Jim Risoleo, our Chief Investment Officer and our team look at deals, I had to say, as much as you might... kind of intellectually argue there should be some change, I haven't seen it. There is still an awful lot of money that is out there particularly in U.S. but really around the world chasing hotel assets. There is far more supply of money then there is supply of product. And as a result, I... you just haven't seem much movement.

William Crow - Raymond James

Alright. And then finally, Chris either you or Ed mentioned the delay or the deferral of acquisitions plus increased disposition activity will have a dilutive impact on your EBITDA guidance. Can you just quantify that, if you go back to last quarter where you were and how much of that is reflected in your guidance?

Christopher J. Nassetta - President and Chief Executive Officer

Well, we brought the top end of our guidance down by $10 million. So, you know, I think that's a pretty good indicator what we think --.

William Crow - Raymond James

And you think that's essentially all attributable to the external growth/sales?

Christopher J. Nassetta - President and Chief Executive Officer

There is a meaningful component of that in it.

William Crow - Raymond James

Okay, terrific. Thank you.

Operator

Thank you. We'll go next to Joe Greff of Bear Stearns.

Unidentified Analyst

This is Kim Howard [ph] for Joe Greff. Just was wondering... hoping you guys could comment on what sort of renovation impact you guys are expecting for '08?

Christopher J. Nassetta - President and Chief Executive Officer

I think the short answer is, a little bit less than what we are experiencing in '07 just as a result of ultimately spending less money and having less overall disruptions. And obviously as we get into '09, well '08 will still be a pretty big program, little less than '07. We get into '09, you will see significantly less disruption and you will really both in '08 and particularly in '09 start to get the real benefits of all the capital that we have been putting to work in our ROI repositioning projects which obviously takes some time to execute on and get stabilize. So, it's only... it only gets better in the sense of less disruption and more benefit in terms of getting significant... we starting to get significant returns on all these investments we were making.

Unidentified Analyst

Okay. Thanks a lot.

Christopher J. Nassetta - President and Chief Executive Officer

Yes.

Operator

Thank you. We'll go to Harry Curtis of J. P. Morgan.

Harry Curtis - J. P. Morgan

Good morning. Chris, I wonder if you could comment on the other revenue strengths. What was its source and if you could comment on its sustainability?

Christopher J. Nassetta - President and Chief Executive Officer

Yes. Harry, it was in a few different areas, some of which is sustainable, some of which is not. I would say, the most significant areas were garage, kind of parking garage revenues. We had a particularly good quarter in that regard, whether we can continue to sustain the levels we have seen an increase in that. But, long-term, I don't know. But we do... we have been generally getting better revenue growth in that category frankly for the last five years. We expect the bill to continue to get better than normal kind of growth in parking and garage. It was in internet telephone, largely driven by the internet side of things. We are obviously getting greater usage and having great success, both in the guest rooms as well as in the meeting space in selling internet connectivity and so, how long it's sustainable? I don't know, but I think, we will continue to get reasonably good revenue growth there. And then the last, which is probably not sustainable of the major components of other were attrition, cancellation fees. As I mentioned, we had a couple of isolated cancellations throughout the portfolio, not something we studied carefully, that was a systemic problem, but isolated for specific reasons like a pharmaceutical cancellation. Because the drug that the FDA didn't approve the drug or something of that kind, so very isolated. Those come and go, they are sporadic and it will be hard to say that we can continue to sustain that. We don't expect to, we think this was little bit higher cancellation activity than we normally have and it will probably drop back there.

Harry Curtis - J. P. Morgan

Thanks.

Operator

Thank you. And with no further questions, I'd like to turn the conference back over for any additional or closing remark.

Christopher J. Nassetta - President and Chief Executive Officer

Well, we appreciate you spending the time with us today. I think we had a good solid quarter in the second quarter. Obviously, as you can tell from our comments, we expect to finish the year with really strong results. We feel really good about '08 and frankly '09 and where we are generally in the cycle. We will be back with you after the third quarter to give you an update on our results for the third quarter and I look for things going forward. Hope everybody enjoys the rest of your summer; get some time to have a little bit of fun before we are back to the fall. Thanks and again, we appreciate your time today.

Operator

Thank you for your participation. That does conclude today's conference. You may disconnect at this time.

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Source: Host Hotels & Resorts Q2 2007 Earnings Call Transcript
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