Good day and welcome to this Host Hotels & Resorts Incorporated fourth quarter and full year 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 Executive Vice President, Mr. Greg Larson. Please go ahead, sir.
Gregory J. Larson
Thank you. Welcome to the Host Hotels & Resorts fourth quarter earnings call. Before we begin, I’d like to remind everyone that many of the comments made today are considered to be forward-looking statements under federal securities laws.
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. 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 reconciliations to the most directly comparable GAAP information in today’s earnings press release and our 8-K file with the SEC and on our web site at HostHotels.com.
This morning, Ed Walter, our President and Chief Executive Officer, will provide a brief overview of our fourth quarter and year end results and then will describe the current operating environment as well as the company’s outlook for 2008. Larry Harvey, our Chief Financial Officer, will then provide greater detail on our fourth quarter and year end results including regional and market performance. Following their remarks, we will be available to respond to your questions.
Now here’s Ed.
Thanks, Greg. Good morning, everyone. 2007 was another year of positive growth in the lodging industry and a very productive year for our company. In addition to continued growth in operations through increases in revPAR and margins, we were also able to achieve a number of important goals this year. On the domestic front, we continued to focus on our extensive CapEx program that include maintenance CapEx, ROI repositioning and value enhancement projects, investing approximately $610 million in 2007, including $250 million in the fourth quarter.
Major projects included comprehensive room redos at the Minneapolis City Center Marriott, the Harbor Beach Marriott, and San Antonio Riverwalk Marriott Hotels plus an additional 4,000 rooms in 15 other hotels. We renovated more than 625,000 square feet of meeting space including major renovations at the San Antonio River Center Marriott, the Weston LAX and the Tampa Waterside Marriott. We also complete construction on our 105,000 square foot exhibit hall at the Orlando World Center Marriott and major spa renovations at the Desert Springs Marriott and the Amelia Island Ritz-Carlton.
Other major projects included lobby and public space renovations at the J.W. Marriott in D.C., the Coronado Island Marriott Resort and the Toronto Eaton Centre Marriott as well as several food and beverage facility projects. We continue to believe that these investments are higher returning investments that favorably position our hotels in their respective markets while enhancing the future value of our entire portfolio.
In July, our European joint venture acquired three assets in Brussels, including the 262-room Renaissance Brussels Hotel, the 218-room Brussels Marriott Hotel and the Marriott Executive Apartments. These acquisitions bring the joint venture’s total investment to over EUR 1 billion, with a portfolio comprised of ten properties in five countries.
We continued to execute on our strategy of selling non-core assets in 2007 with over $400 million of asset sales for the year, including two assets totaling $70 million in the fourth quarter. We improved our leverage and coverage ratios through a combination of debt refinancing and repayments that lowered our overall debt balance and significantly reduced our average interest rate by nearly 1 percentage point to approximately 6%. We amended and extended our credit facility and have full capacity of $600 million. Additionally, we reduced the facility’s interest rate and based on our current leverage ratio, can borrow at a LIBOR plus 65 basis points, or 3.75%.
We recorded FFO per diluted share growth in excess of 20% for the third consecutive year and finally, we paid a dividend of $1 per common share this year, an increase of over 31% versus 2006. Overall, we believe the actions we took in 2007 materially improved the strength of our balance sheet and the quality of our portfolio, and position us well for 2008.
Before I get into our outlook for the year, let’s talk more specifically about our fourth quarter and full year results. Fourth quarter RevPAR for our comparable hotels plus the Starwood portfolio increased 5.6%, driven by a 6.4% increase in average rate with a slight decrease of occupancy of a 0.5 percentage point. For the full year, comparable RevPAR including the Starwood portfolio increased 6.5% driven by a 5.9% increase in average rates and a 0.4 increase in occupancy.
F&B revenue increased 3.3% for the quarter and 3.7% for the year. Comparable hotel-adjusted operating profit margins increased by a half of a percentage point for the fourth quarter, and by 0.7 of a percentage point for the full-year, leading to adjusted EBIT of per-hotel fee for the quarter of $540 million and a full-year number of $1.52 billion. This represents an increase of 19% from 2006.
Our FFO per diluted share in the fourth quarter was $0.75, which exceeded the consensus estimate of $0.68. For the year, FFO per diluted share was $1.91, including a reduction of $0.08 per share related to costs associated with debt repayments or refinancing.
This full year performance exceeded analyst’s consensus by $0.06, although we should note that the excess is generally attributable to lower corporate expenses related to reduced executive stock compensation and the receipt of business interruption proceeds related to our insurance settlement and on the New Orleans Marriott, both of which are not expected to be replicated in 2008.
From a demand perspective, the fourth quarter was not as strong as we had anticipated. In general, we experienced slower pick-ups in short-term group bookings and some weakness in transient demand on both the corporate and leisure side. In addition, our portfolio experience disruption from our record CapEx program. As a result, group room nights in the fourth quarter were down over 1%, offset by an increase in average rate of almost 5%, which resulted in a group revenue increase of 3.4%.
We continue to see good performance in some of our major markets including Boston, New York, Los Angeles and San Francisco. However, we did experience softness in some of our resort markets such as Phoenix, south Florida and Hawaii.
Transient room nights were down approximately 1.5% for the quarter, as we saw weaker demand in both the corporate and special corporate segments. The reduced occupancy was more than offset by strong rate growth of 8.4% resulting in an overall increase in transient revenues of 6.7%. The strong rate performance occurred across all transient segments.
Now let me spend some time on our outlook for 2008. Looking at the major economic data points, most forecasts suggest weaker GDP and employment growth and a slowdown in business investment growth. These economic fundamentals traditionally impact demand in our business, leading to a slight decline in occupancy levels for the year given the projected modest increase in supply growth, and more measured average rate growth. We also expect some negative impact from business disruption generated by our CapEx program, especially in the first half of the year.
On the positive side, our group bookings for the remainder of the year remain strong, indicating revenue growth of more than 7%, compared to this point last year. With all of these factors in mind, we are lowering our 2008 RevPAR guidance to 2% to 4% for our comparable hotels, which in 2008 will now include the Starwood portfolio.
On the cost side, while we expect to see increases that are somewhat greater than inflation, we have already begun to implement contingency plans with some of our assets. As a result, we would expect our comparable hotel adjusted operating profit margin would range from 0.25% decrease to 25 basis point increase. Based on these assumptions, we expect our FFO per diluted share for the year to be between $1.88 and $1.98 and the adjusted EBITDA of Host LP to be between $1.45 billion and $1.505 billion.
Despite the potential for slower growth and operation, the current environment presents opportunities for our company this year and looking forward. Competitive supply for 2008 in our markets is still expected to be well below historical averages, as the turmoil in the credit markets appears to be impacting the growth rate in 2009 and beyond, as developers are finding it difficult to obtain financing for new projects.
Additionally, our balance sheet has never been stronger, as evidenced by our leverage ration which is calculated under our credit facility at roughly 3.5 times and our fixed charge coverage ratio, which is more than 3 times. We also have full access to our credit facility at extremely attractive rates.
This balance sheet’s strength will allow us to take advantage of evolving market conditions to continue to enhance FFO growth and appreciation in share value over the long term.
One key aspect in this effort is our board’s authorization yesterday of a program to repurchase up to 500 million of our common stock. We believe that the current market pricing of our stock is significantly undervalued. Based on the guidance we are providing today, our portfolio is valued at roughly an 8.5 cap rate, which indicates a material discount to the inherent value of our assets. At our current stock price, we are trading at a value of approximately 225,000 per key which a significant discount to our replacement cost of approximately 340,000 to 350,000 per key. Repurchasing our stock, which allows us to invest in one of the best lodging portfolios in the industry, represents a very attractive investment with a very strong IRR.
In addition to purchasing our stock, we intend to invest between $640 million and $650 million in our portfolio in the form of ROI repositioning and maintenance capital expenditures. Major projects in 2008 will include the completion of our new ballroom at the Atlanta Marquis and the near completion of the 62,000 square foot ballroom and meeting space addition we are making at the Chicago Swissotel.
We are also completing lobby and public space renovations at the San Francisco Marriott, the San Antonio River Center Marriott and the Philadelphia Convention Center. In addition, we will be completing major room renovations at the Chicago Swissotel, the New York Financial Center Marriott, the W in New York, the Sheraton in San Diego and the Ritz-Carlton in Buckhead.
Looking at acquisitions through 2008, we are not anticipating an active year on the domestic front, so we would guide you to not include any acquisitions in your analysis although we intend to be opportunistic as the marketplace evolves throughout 2008. We intend to be very active in Europe as the financing turmoil has improved our competitive positioning and we will be exploring joint venture opportunities in Asia and Latin America.
On the disposition front, we will continue to recycle capital out of our lower growth assets at prices that exceed our hold value. Despite the challenges in the credit market for buyers seeking financing, we are making good progress on a number of deals and guide you to $200 million to $300 million of dispositions primarily in the first half of the year.
In summary, we are pleased with our results for the fourth quarter and full year 2007 but remain cautious for 2008. We continue to be very excited about the ROI repositioning and value enhancement opportunities we are working on to create value in our portfolio, as well as for the prospect for continued success in future growths of our efforts in Europe and other markets such as Asia.
Thank you and now let me turn the call over to Larry Harvey, our Chief Financial Officer, who will discuss our operating and performance for the quarter in year in more detail.
Larry K. Harvey
Thank you, Ed. Let me start by giving you some detail on our comp hotels plus the Starwood portfolio revPAR results. Reflecting a trend in place all year, our urban hotels performed the best during the fourth quarter with revPAR growth of 7.4% as we benefited from strong results in several downtown markets such as Boston, New York and San Francisco. RevPAR at suburban hotels increased by 5.4% for the quarter and our airport hotels increased by 4.8%. RevPAR for our resort conference centers decreased by 1.9% as two hotels were significantly affected by major renovations. For the full year, our urban hotels performed the best with revPAR increasing by 8.1%. RevPAR for our suburban hotels increased 6.2%. Our airport hotels had revPAR growth of 5.7% and our resort hotels had revPAR growth of 1.4% for the year, primarily the result of significant displacement from renovations.
Turning to our regional results, the New England region was the top performer with revPAR growth of 16.8%, as our Boston hotels performed exceptionally well due to very strong group bookings citywide. We expect the Boston market to have a good first half of the year and a weaker second half in 2008.
The Mid-Atlantic region enjoyed another great quarter with revPAR growth averaging 8.9%. Our New York City properties performed particularly well with revPAR growth of 11.4%, driven by strong business and leisure transient demand and rate increases. We expect New York City to have a very good 2008 because of strong group bookings during these times, strong leisure transient business, and limited supply growth although the W New York and the New York Marriott Downtown have renovations scheduled in 2008. The Philadelphia market will be affected by [fewer citywide] and a slower group booking pace in 2008.
Our DC metro region also performed well with RevPAR increasing by 6.2% as our downtown hotels led the strong performance. We expect our downtown hotels to continue to perform well in 2008 due to transient demand driven by the election while our suburban hotels will have moderate growth because of weak transient demand.
RevPAR for the Atlanta region increased 4.3% for the quarter, a significant improvement over the third quarter performance. The growth was driven by strong group bookings in midtown but overall RevPAR growth was slightly below expectations as the anticipated short-term transient pickup didn’t materialize, particularly in Buckhead. Overall we expect Atlanta to perform in line with our overall portfolio at 2008.
The South Central region performed poorly in the fourth quarter with RevPAR declining 4.1% primarily due to renovations at both of our San Antonio properties where RevPAR fell by over 15% for the quarter. At this point we expect the South Central region to get off to a slow start as the San Antonio renovations won’t be complete until the end of the first quarter and then strengthen in the second half of the year.
Overall RevPAR growth for our Pacific region was 5.3% for the quarter. The Los Angeles market built on its strong third quarter with RevPAR up 14.8% as the hotels were able to drive rates with transient business due to a strong group base. The San Francisco market also had a very strong quarter with RevPAR up 10.5% driven by strong [citywide compression]. We expect the San Francisco and Los Angeles markets to have very good years in 2008.
Our two hotels in Hawaii had a weak fourth quarter with RevPAR up 1.4% due to reduced group demand at one hotel and an overall softening in leisure demand. Hawaii is likely to continue to be soft in 2008.
Finally as we discussed on the third quarter call, the Florida market continue to under perform in the fourth quarter as group activity was lower due to renovation displacement and hurricane concerns. RevPAR for our Florida market declined 2.9% for the quarter due to construction disruption at the Harbor Beach Marriott and the Singer Island Hilton [ph].
Looking into 2008 we expect RevPAR for the Florida region to rebound particularly at the Orlando World Center Marriott where we’ll get the full year of the new exhibit hall. For the full year, the mid-Atlantic has been our best region with RevPAR growth of 12.7% followed by the New England region where RevPAR growth was 8.4%. The Atlanta region where growth has been just 1.6% and the North Central region where growth was 2.1% had been our weakest performers.
Looking at our European joint venture, RevPAR calculated in euros increased by 4.1% for the quarter as several properties were under going renovations. Performance was partially strong at hotels in Brussels, Venice and Madrid. If calculated in US dollars, RevPAR was up by 16.1%. For the full year, RevPAR was up 7.3% in euros, led by the hotels in Barcelona and Venice. In US dollars RevPAR was up by 17% for the full year.
For the quarter, adjusted operating profit margins for our comp hotels improved by 50 basis points. Profit flow through the rooms department remained strong while the fourth quarter had our lowest at the F&B revenue growth of the year at 3.3%, flow through with excellence due to growth in catering and banquet business as well as meeting room rentals which resulted in a 60 basis point improvement in food and beverage margin. On the cost side, wages and benefits increased by roughly 3.4% and unallocated costs grew by roughly 4% for the quarter.
As anticipated real estate taxes increased by 5.7% as assessed evaluations continue to catch up with increases in property value. On the positive side, utility costs increased less than 2% for the quarter and insurance costs decreased 5%.
For the year we have strong profit flowthrough at the departmental level leading to adjusted comp margin movement of approximately 70 basis points. Full year wage and benefit increases were approximately 3.6% and support cost increases, excluding utility costs, were up 4.3%. Utility costs increased 1.2%, while property taxes increased 5.9% and property insurance increased 5.5%.
Looking forward to 2008, we expect that wage and benefit cost will increase slightly more than inflation; we believe that support utility costs should increase with inflation although we expect to receive some savings in our property insurance renewal. We also expect some benefit as our managers and operators further refine and implement cost-reducing contingency plans given the low revPAR environment. As a result we expect comparable hotel adjusted operating profit margins to decrease 25 basis points at the low end of the range and increase 25 basis points at the high end of the range.
Effective with this earning release, we have changed our methodology for calculating adjusted EBITDA for entities where we don’t have 100% of the equity. EBITDA for these entities, both consolidated and unconsolidated, will now reflect our pro rata ownership. Previously adjusted EBITDA was reduced by the amount of cash distributed to the minority owners of entities consolidated and EBITDA was increased by the amount of cash we received by unconsolidated equity investments.
The primarily reason for the change in methodology is that including only the cash distributed in adjusted EBITDA is not representative of the performance of these subsidiaries because it is retained by the entities for future investment in the properties or for other purposes, particularly in international entities where it is more cost-effective to maintain cash in a foreign jurisdiction. The new methodology is also consistent with many companies in the lodging industry.
We finished the year with the strongest balance sheet in our history as well as with exceptional liquidity, coverage and fixed-charge ratios. At year end we had $488 million of cash of which $212 million was used for our January dividend payment. The remaining balance of approximately $275 million will be used to maintain working capital of roughly $100 million to $125 million, as well as fund additional investments in our portfolio, our European joint venture, for stock buybacks, and for other corporate purposes.
We have less than $250 million of debt maturities in 2008 which primarily consists of the mortgage for the Orlando World Center Marriott. We have excellent relationships with a number of lenders and to the extent that the high yield debt market is too expensive, we are very comfortable in our ability to obtain favorable secured financing terms from insurance companies on the refinancing of its $210 million mortgage.
Our first quarter guidance is affected by several items, including a lower group booking pace in the first quarter relative to the rest of the year, the level of our capital expenditure activity is much more significant in the first quarter of ‘08 versus the first quarter of ‘07, and the bulk of the Easter vacation holiday will be in our first quarter this year versus the second quarter in 2007 for our Marriott properties.
All of that leads to our expectations that revPAR growth for our comparable hotels for the first quarter will be near the low end of our full year guidance and that first quarter diluted FFO per share will be in the range of $0.29 to $0.30.
This completes our prepared remarks. We are now interested in answering any questions you may have.
Your first question comes from Chris Woronka - Deutsche Bank.
Chris Woronka - Deutsche Bank
Maybe you can share with us a little bit more color on the guidance. You mentioned the slower group pick up in the fourth quarter. What are the chances that happens throughout 2008? Where I’m going with that is if you can share with us what percentage of your group nights are already on the books, and what needs to go right to get the 4% and what needs to go wrong to get the 2%? Any color on that would be great, thanks.
I guess the way I’d look at it is if you look at the booking so far for this year and really even through the end of last year for 2008, have been trending very well. As we indicated on the call if you look at how 2008 plays out for the rest of the year from a group perspective, we’re up in a room night perspective, we’re up in a rate perspective and overall we think we’ll be north of the 7% increase for the business that’s on the books. That business represents roughly 75% of the group room nights that we would expect to see this year, so it obviously represents a significant chunk of the business that we should ultimately end up with for the full year.
I would say in trying to speculate what actually happens on the group side, we have not seen significant attrition yet in any of our hotels, we are not seeing more than isolated cancellations so far and so the only trend that we have seen that did cause some concern is the one we mentioned which is the fact that we have been noticing that as you get closer to the particular month when the group events would happen or a particular month of operations we are finding that the short-term pickup is not matched up with prior levels.
Some of the explanation for that of course is due to the fact that we have been running ahead generally in terms of our group activities, so there have been less group rooms available. But I think at the end of the day we are seeing that the events that are being scheduled in the near term have not been occurring at the same pace and we saw that throughout almost the entire fourth quarter and I think that we’re still seeing it as we work our way into the beginning part of 2008.
I think what that’s reflective of is what you would expect: as the economy gets to be a bit weaker and businesses and corporations tend to be a little bit more conservative in how they spend their money this unfortunately, the short-term group events tend to be the things that are the first casualty.
I’d still say overall that I think our group business for the year will be up and I think that one of the keys will be to what extent and how strongly it’s up and how quickly we start to see the economy recover. If the weakness that we’re seeing right now begins to dissipate and we get back on a more normal growth pattern by the second half of the year then I think you’ll see that short-term activity pick up, and you’ll see us towards the high end of the revPAR guidance that we’ve provided.
We’ll go next to [Penford Scholes] – JP Morgan
[Penford Scholes] – JP Morgan
With your announcement this morning of some potential or possibility for share repurchases, what is your new comfort level with where debt should be on your debt to EBITDA? On your balance sheet right now your about 3.5 times trailing. What’s your comfort level with that ratio?
We certainly feel that with a debt to EBITDA at 3.5 times that we have a significant amount of capacity. We could easily move back towards a level where we were at 5 times and we would still feel that we were in a very safe position. Now I wouldn’t want you to read that to say that we’re going to be aggressively investing over the near term to try to move our debt to EBITDA from where we are right now to a level like that.
I think maybe to speak more broadly to the whole stock repurchase question, we certainly feel that looking at where the stock price is today, it’s a compelling value. Having said that, we also recognize that there’s a fair amount of uncertainty around the economic outlook for this year, which obviously translates into uncertainty in our business and we’re also interested to see what sort of opportunities might evolve on the acquisition front.
So I think what you’re going to see from us here is that we certainly do intend to buy stock back. We will probably take a measured approach, especially in the beginning of the year, comparing that option to other options that might be available from an acquisition perspective and all this needs to be balanced against the overall economic environment and what’s going on in the lodging industry.
[Penford Scholes] – JP Morgan
With your renovations for 2008, can you give me an estimate of how many basis points of margin those renovations will have an impact and how does that compare to the impact in 2007 from renovations?
It’s really tricky to try to tie renovations into the impact on margin, I think what we were indicating last year is that we thought that the renovations were costing us a point or two of revPAR growth. As I would look at ‘08, I would guess that certainly to think that our renovation activities would cost us a point or more in revPAR growth for the full year is probably a realistic assessment of the impact. That would probably guide me to think that it would cost us a quarter of a point, maybe 35 basis points of margin growth.
Your next question comes from Celeste Brown - Morgan Stanley.
Celeste Brown - Morgan Stanley
In your guidance you talk about $300 million of dispositions, mostly front end loaded. Who can fund acquisitions of that size or is it just the number of hotels are small enough that you don’t need to borrow a lot of money to do it?
You talked about being opportunistic in terms of acquisitions but there’s been a stalemate between buyers and sellers on transactions of a more significant size. When do you think that stalemate breaks? Is it the summer or is it earlier than that, later than that?
Larry K. Harvey
Let me start with who’s buying first then I’ll jump into that speculative comment. In terms of who is buying, there are still folks that are lending out there. The lending environment has moved from CNBS lenders being really the dominant source of funds to balance sheet lenders whether it is like companies or banks that tend to be balance sheet lenders providing the financing.
So what we’re finding with our buyers is our buyers tend to be lower profile companies, usually private companies, that still have good lending relationships and access to capital. The interesting thing in our world right now from an acquisition perspective or from us looking at it in this context of disposing of assets is there still a fair amount of equity capital that has been raised that has not yet been placed. So part of what you’re seeing happening here is leverage is probably going down a little bit. You’re seeing some adjustment in terms of expectations on return and you’re ultimately finding that at lower leverage levels some of these balance sheet lenders are more comfortable and consequently are providing funds.
Now having said that, there is no doubt that the disposition market from our perspective has gotten a lot more choppy and a number of the transactions that we’re working on now that we are hopeful will close over the next quarter or so are transactions that we would have felt fairly confident were going to close in the fourth quarter before the financing debacle began.
So it’s a much more difficult environment to complete sales but we do feel we have buyers that we in many cases we have a long track record with and we pre-qualify from a financing perspective in order to go into contract with them.
Now looking at how long it takes for the stalemate between buyers and sellers to evolve, that’s a real tough question to look at. I mean I think you’ve already seen some cap rate movement at the lower level of quality in the industry. We would generally think that cap rates have moved 100 basis points or slightly more on many of the types of assets that we’re selling. It still make sense for us to sell those assets because as we do the process that we go through in selling an asset, it is always to look at what we think the hold value would be, which is roughly equivalent to what we would be prepared to pay for the asset. As long as we’re able to sell the asset for a price better than that then we feel it’s a good decision to be a seller.
But clearly the delta between the sale price and the hold value has come down over the course of the last six to seven months.
I think a lot of it is going to depend upon where financing ultimately settles in and right now the markets are so illiquid, it’s really hard to predict where a rate would be certainly outside of the balance sheet areas, it is difficult to predict where rates are going to be. As that begins to settle down, you get a little bit more liquidity in the financial markets, you’ll probably start to see pricing begin to adjust as velocity in the market begins to increase.
Your next question comes from Bill Crow - Raymond James.
Bill Crow - Raymond James
You said that cap rates on potential sales have moved up 100 bips. Can you give me a ballpark range of where you think that is today on those assets? Is that up to 8? 7.5?
I would say that, as best as we can judge it, we would probably say for the top quality assets in the market, you’re still looking at cap rates in the 6.5 to 7.5 range. I think as you work your way up to maybe airport -- still good, but airport-style hotels or full-service hotels located in suburban markets -- you’re probably more in that 8 to 9 range now.
Bill Crow - Raymond James
I think the statement was made earlier that you’re trading at an 8.5% implied cap rate today or your stock price at 225,000 per key but you believe the portfolio is worth 340,000 to 350,000 per key. What does that imply for a cap rate if you get back to that
asset value number?
Larry K. Harvey
Bill, there’s a couple of different concepts in there. I think what we said is we’re trading at about an 8.5 and I think generally feeling that a great majority of our portfolio would fit into the top quality assets here, because the assets that we’re selling represents just a very minor part of our portfolio, especially when you look at an EBITDA range. I think we would feel comfortable that the bulk of our portfolio should be valued in that 6.5 to 7.5 cap rate range that I mentioned.
That’s what it would sell for today. The 340 to 350 replacement cost number is what it would cost to rebuild that portfolio at current pricing. So those are slightly different numbers and that’s why that -- I’m sure why you’re asking that question is in part because the delta seemed to be a bit big and that is the explanation.
Bill Crow - Raymond James
Finally, what do you see as your recurring CapEx number for this year? Are you still in that 310 to 325 sort of range?
Larry K. Harvey
I would say long term we would still expect that recurring CapEx should be about 5% of revenues. This year’s going to be a little bit higher and I’d say that roughly 50% of the capital that we projected to spend is going to turn out to be in maintenance CapEx.
Bill Crow - Raymond James
Larry K. Harvey
50% of that overall number.
Your next question comes from David Loeb - Edgar.
David Loeb - Edgar
Just a follow-up on the cap rate question. As you look at acquisitions is it the same kind of trend that you’ve just described? Can you talk a little about cap rates in Europe, Asia, and Latin America?
Certainly on the properties that we’d be trying to acquire it generally follows the same trends that I described. I think as you look at Europe, you would find that cap rates there have traditionally been a bit lower, about 100 basis points lower then where they have been in the U.S. As best as we can tell that still stands, seems to be the case. As you move outside of the U.S. and Europe and look to some of the other environments you would typically see higher cap rates but they will vary considerably based upon the volatility versus stability of the particular market that you are investing in.
David Loeb - Edgar
As you looked in Asia and Latin American are you considering a fund structure or you looking at more of a straight JV?
In terms of investing outside of the U.S. in either Asia or Latin America we would be looking to invest in the form of a JV. We’d been very happy and pleased with the way our European effort has progressed. As I mentioned, we’d invested more than EUR 1billion in Europe in the last two years, that represents slightly in excess of two-thirds of the overall capital that we expect to invest in our first fund.
By using the JV, as many of you may remember, we not only typically use local countries which I think tends to limit some of our exposure to currency issues but more importantly we get the opportunity there in asset management fees and a promote within the overall structure of the venture because we are typically using sources of capital that have lower return expectations then we do.
So especially in these international markets I think we find that approaching these from a JV prospective makes a lot of sense and it allows us to increase our return and frankly because we combine more assets with less of our capital it also allows us to diversify a bit as we invest in foreign markets.
David Loeb - Edgar
So if I’m hearing you right you’re talking about a discretionary fund type of structure where you line up investors but you have control of the timing and the investment decision?
It will depend upon the jurisdiction; I mean our efforts in these areas are relatively preliminary so a lot of it would depend upon whether we would end up with multiple investors which would be the fund approach that you are describing, David, or it’s also possible and we would be very open to this, is that we might pursue an approach where we would have just one or two or three signature investors, be more of a club transaction.
Not surprisingly if you have a smaller investor group, then you’re probably not going to end up with discretion in that format, but you’ll be playing a leading role in terms of deciding what the venture buys.
Your next question comes from William Truelove - UBS.
William Truelove - UBS
Did you guys say how much CapEx you anticipated spending this year?
About $650 million.
William Truelove - UBS
And of that, half of it’s going to be maintenance right?
William Truelove - UBS
This is just sort of an accounting question, if you guys are anticipating selling assets in the first half of the year, I noticed on your balance sheet you don’t have any assets held for sale listed. How does that work?
I’m going to turn that question over to our CFO rather than try to describe that for you. Larry, would you explain that to everybody?
Our policy, as we explained very detailed in our 10-K is that we have to have a signed contract and capital at risk, money at risk, by the buyer before that asset goes into held for sale. What you see last year in that $96 million number, we had several properties under contract where the buyer had gone hard on the contract so there’s money at risk and they were classified as held for sale.
As of the end of the year there weren’t any in that position.
Your next question comes from Steve Rose - CBW.
Steve Rose - CBW
I’m curious your European joint venture, what is the debt on that now and what is your effective pro forma interest in the JV at this point?
We have right now about EUR 685 million of debt on that joint venture. The average leverage ratio is probably somewhere around 60%, 62%. We own a third of the venture in our limited partner position before taking into account any of the benefits we would receive from our promote.
Steve Rose - CBW
You’ve slightly adjusted the way that you show your EBITDA and that’s essentially adding back a full third of the EBITDA from the venture, is that more or less right? Versus just whatever your net income was at it previously?
That’s correct. Before what we used to show would be the cash that we would distribute from the venture. One of the things that we have found, as we have begun to operate in Europe is that generally in the context of how the venture is run and dealing with some of the restrictions you run into on distributing cash in foreign environments, it just is a lot more logical to leave the cash over there and then use that for subsequent reinvestment needs, either for new properties or for CapEx. Consequentially, we have not distributed as much cash as we have frankly earned in the market and so as we looked at that and looked how others were addressing EBITDA we felt that the change that we were making was appropriate.
Steve Rose - CBW
Where in your income statement are the insurance proceeds included?
Larry K. Harvey
In the expense side, it’s the gain on insurance settlement. It’s a credit on the expense side, accounting symmetry, but in the detail that is on page 9.
We’ll go next to Joseph Greff - Bear Stearns.
Joseph Greff - Bear Stearns
Good morning guys, a question back on the CapEx for ’08. Can you break that out by quarter? I know you said the renovations will be a little bit heavier in 1Q.
We don’t have a quarterly breakout right now. The impact will be larger in the first quarter, but I think we’re probably guessing somewhere around $125 million to $150 million in the first quarter, but it’ll be generally strong throughout the entire year.
Part of the point we were making relative to the impact being greater in the first quarter is really the year-over-year delta. One of the things that we ran into in the fourth quarter, which I think did have an impact on our occupancy to some degree, was the fact that in ‘06 we had spent about $140 million in CapEx in the fourth quarter and in ‘07 we spent about $250 million. Well as we look at the displacement that’s coming from some of the capital plans that we have for the first quarter, we’re seeing that our displacement in the first quarter is going to be three to four times more than what it was in ‘07. so the level of CapEx, I’m not certain in the first quarter overall is going to be that different from the rest of the year, some of that will just tie to the actual timing of when projects are completed, but the impact of that capital on our operations, because it’s either big rooms redo projects or its some larger meeting space renovations will be greater than what we would have experienced in 2007.
We’ll go next to Joshua Eddie - Citi.
Joshua Eddie - Citi
Can you talk about why you feel comfortable that you could hold the margin decline to only 25 basis points at the low end of your guidance, maybe in the context of you only did 50 basis points on a 5% to 6% revPAR gain in the fourth quarter.
That’s a good question and, frankly, it’s an issue that we spent a fair amount of time thinking about in trying to decide where to guide you for the year. Because I think you’re right from the standpoint in a normal environment, if you were to be, I can only talk in terms of the mid-point of the guidance just to make the conversation simpler, if you were to look at 3% revPAR you would probably say generally that you wouldn’t expect flat margins at 3% RevPAR.
The reason why we think that that’s achievable is because having watched some of the weakness develop at the end of the fourth quarter, we were fairly proactive in circling back with our operators and encouraging the development of contingency plans, really at the end of last year. So in certain weak markets, say Chicago, Philadelphia, Orange County and a couple of others, we’ve already implemented the contingency plans or the first steps in some of the contingency plans that have been developed for the hotels.
So as a result of that, while the normal flow-through that you would expect would probably guide you to think that the margin performance would be worse than we’ve indicated, our sense is that because of the efforts that we’ll be making at the properties and because we’re making them quickly, we should be able to restrain some of the margins, the effect of lower RevPAR and lower overall revenues on our margins.
Ladies and gentlemen, this will conclude today’s question-and-answer session. I’d like to turn the conference back over to Mr. Walter for any additional or closing remarks.
Great, well thank you very much for joining us on this call today. We appreciated the opportunity to discuss our results and our outlook with you. We look forward to providing you with much more insight into how 2008 is playing in our first quarter call in late April. Thanks again and have a good day.
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