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Host Hotels & Resorts Inc. (NYSE:HST)

Q1 2008 Earnings Call

April 23, 2008 10:00 am ET

Executives

Greg Larson - EVP of Corporate Strategy and Fund Management

Ed Walter -President and CEO

Larry Harvey - EVP, Treasurer and CFO

Analysts

William Crow - Raymond James & Associates

Steve Kent - Goldman Sachs

Celeste Brown - Morgan Stanley

Felicia Hendrix - Lehman Brothers

Smedes Rose - KBW

Chris Woronka - Deutsche Bank

David Loeb - Baird

Nap Overton - Morgan Keegan

Joe Greff - Bear Stearns

William Truelove - UBS

Operator

Good day and welcome to this Host Hotels & Resorts Incorporated first quarter 2008 earnings conference 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.

Greg Larson

Thank you. Welcome to the Host Hotels & Resorts first 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. And, we are not obligated to publicly update or revise these forward-looking statements.

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

This morning, Ed Walter, our President and Chief Executive Officer, will provide a brief overview of our first quarter 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 first quarter results, including regional and market performance. Following their remarks, we will be available to respond to your questions.

And now here's Ed.

Ed Walter

Thanks, Greg. Good morning, everyone. Given the science to stress the economies demonstrating and the overall state of the financial markets, we were very pleased with our favorable first quarter performance. Our comparable hotel RevPAR for the quarter increased by 2.4%, driven by a 4% increase in average room rate, which was partially offset by a decline in occupancy of 1.1% point.

Food and beverage revenues that are comparable hotels were strong this quarter with an increase of 4%, generated primarily from increases in banquet and audio-visual sales, and an exceptional increase in food and beverage revenues at Orlando World Center Marriott. Overall, comparable revenues increase by 3.2% for the quarter and comparable hotel adjusted operating profit margin decreased by 40 percentage points.

Adjusted EBITDA for Host LP for the quarter increased by $3 million to $262 million. And, our FFO per diluted share was better than expected increasing 10% to $0.33, which exceeded the high-end of our guidance and consensus estimates by $0.03.

Consistent with the trends we experienced in the fourth quarter and what we would expect given the slowing economy, we have seen some weakness in our corporate transient and leisure business, as well as reduced pickup in short-term group booking. However, it is worthwhile to note that we are not experiencing an acceleration of those trends, nor have we seen an increase in attrition rates or group cancellation rates.

On the transient side, room nights were down by more than 2.5% on a quarter-over-quarter basis, but this decline was more than offset by an increase in rate of almost 4%. We did experience the general weakness of business travel across many markets as overall corporate and special corporate bookings declined by roughly 5%. We also saw greater weakness on weekend nights as compared to weekdays, suggesting that domestic leisure business is soft.

On the positive side, we are seeing a general increase in international business as well as our gateway market, which is helping to offset some of the impact of the U.S. economic slowdown.

Our group business experienced a slight increase in occupancy, which combined with a 5% increase in rate generated revenue growth of more than 5%. Group bookings and overall performance were exceptionally strong at our Orlando World Center hotel, which benefited from the completion last year of our new 105,000 square foot Cypress Ballroom. Group bookings for the remainder of the year continue to be favorable with revenues currently ahead of last year’s take by more than 5%.

Given the trends we have identified, all but a few of our hotels have implemented some form of contingency plan. These plans start by focusing on finding additional customers, hopefully, the next highest price point. We're also carefully examining all re-pricing decisions to avoid unnecessary rate adjustment. On the cost front, we are reexamining the right labor models in each hotel, looking to avoid filling positions and emphasizing cross training to add further efficiency.

We are carefully reviewing our food and beverage service platforms to identify opportunities to cut cost, to adjusting hours of operation, or staffing level. In some instances, in consent with our operators, we are mandating across the board expense cuts. In general, we're working very closely with our operators to make certain that our expense levels are appropriate to the level of customer demand we generate.

On the strategic front, we were very pleased to announce in March the formation of a joint venture with an affiliate of GIC Real Estate to invest up to $600 million in equity in hotel projects located in the Asia Pacific region. When fully invested, the funds will likely own between $1.5 billion and $2 billion of real estate. Host will own a 25% interest and have the ability to earn a promote based on achieving certain returns thresholds on the venture's investments. We will also receive a feed for providing asset management services to the venture.

We are very excited about the opportunity to continue our partnership with GIC and expand our platform into the Asia Pacific region, which continues to demonstrate exceedingly strong economic growth and solid lodging fundamentals in many markets. As in the case of our European joint venture, we believe that leveraging our platform and partnering with third-party sources of capital is an excellent way to maximize return on our own capital, while building a business model that will ultimately add to our long-term growth.

On the domestic front, the disarray in the lending market is causing a severe slowdown in the acquisition and disposition market. Although we are continuing to work on asset sales which could total as much as $300 million for the year, the challenge is for buyers in obtaining finance that makes the amount and timing of disposition difficult to predict.

Although we are continuing to evaluate potential acquisition, we are not optimistic that we will identify transactions that satisfy our return target. So, we would guide you not to include any acquisitions in your analysis for 2008. However, we intend to be opportunistic as the marketplace evolves.

We are concentrating on completing capital investments in our existing portfolio, including the expense of CapEx program we've discussed with you before, which includes maintenance of CapEx and the ROI repositioning project with the amount of approximately $650 million this year.

In addition, we are focusing on value enhancement projects such as the time shared development venture at our Hyatt Regency in Maui with highest vacation ownership. We have recently received final development approvals to build a 12-storey tower, comprised of a 131 luxury units with direct ocean views and beach access. The project will also feature an 8,000 square foot open-air lobby, pool, fitness center, owner's lounge, and a casual dinning outlet.

Our investment will include approximately $34 million of cash and a contribution of the oceanfront parking lot, which is our land on this sight, which will be valued to roughly $35 million in exchange for a 50% interest in the venture. Construction of the project is anticipated to begin in 2009, with the completion target of late 2010.

We expect unit sales would commence near the end of 2009. The vacation ownership business is very profitable in Hawaii, and hired vacation ownership has been successful in this industry from many years. We are very excited about this project and believe this investment has the potential to achieve returns greater than 20%.

Finally, we've also invested in our portfolio through the implementation of the $500 million stock repurchase program we announced in conjunction with our fourth quarter earnings release.

During the first quarter, we repurchased 2.2 million shares of our stock for approximately $35 million. Additional stock repurchases for the year will depend on conditions in the equity, debt, and disposition market as well as other opportunities we may have to invest our capital.

Now, let me spend sometime on our outlook for the reminder of 2008. I should start out by noting that our visibility is limited and we continue to be concerned by some of the recent economic reports and the overall weakness in the financial markets. In addition, our results over the last few weeks are difficult to interpret because of the timing of the Easter and Passover holidays, which clearly impacted demand pattern.

Having said that, the first quarter performed in-line with our expectations and while demand was clearly weaker than the prior year, the transient, group, and transient business did not appear to deteriorate further as we completed the quarter and worked our way into the first two weeks of April.

Our group bookings remain favorable versus last year and should provide a base of support for the properties to offset expected transient weakness. Based on those trends, and the fact that we expect constructions disruptions to moderate slightly as we progress through the second half of the year, we are assuming that we will continue to experience moderate reductions in occupancy, which will be more than offset by moderate rate growth.

As a result, we are maintaining our 2008 RevPar guidance of 2% to 4%, and expect hotel adjusted operating profit margin growth to range between down 25 to up 25 basis points for our comparable hotel. Based on these assumptions, we are maintaining our guidance for our FFO per diluted share for the year of $1.88 to $1.98, and adjusted EBITDA of Host LP of $1.450 billion to $1.505 billion.

In summary, we're pleased with our results for the first quarter. We remain cautious for the remainder of 2008. We are intensely focused on our asset management activities with the clear goal of maintaining pricing and achieving strong flow through. As Larry will describe in more detail in his comments, we have taken steps to further strengthen our liquidity position to ensure that we have the capacity to take advantage of opportunities that may present themselves over the coming months.

Our investment approach remains highly disciplined with the goal of maximizing our returns on every dollar invested and with the intent of enhancing our existing assets, and exploring our options in international markets, while domestic market pricing remains unattractive.

Thank you. And now, let me turn the call over to Larry Harvey, our Chief Financial Officer.

Larry Harvey

Thank you, Ed. Let me start by giving you some detail on our comparable hotel RevPar results. Looking at the portfolio based on property types, our resort convention hotels performed the best during the first quarter with RevPar growth of 5.8% led by strong growth at the Orlando World Center Marriott. RevPar for our urban hotels increased 1.8% led by our Boston and New York properties. RevPar at airport hotels increased by 1.4%, and our suburban hotel RevPar increased by 0.6%.

Turning to our regional results; as expected, the New England region continued to perform well with RevPar growth of 10%, as our Boston hotels performed exceptionally well due to very strong group bookings citywide. The Boston market should have a very good second quarter due to the strength in the group bookings, but a weaker second half of the year.

The Florida region performed very well with RevPar growth of 6.8%, driven by the Orlando World Center Marriott. The new exhibit hall and ballroom space that opened in the fourth quarter has helped to drive both group bookings and rates. We expect the Florida region to continue to perform well in the second quarter.

The Mid-Atlantic region enjoyed another good quarter, with RevPar growth averaging 4.1%. Given that both, New York Marriott Downtown and W New York were under renovation in the quarter, our New City properties performed particularly well with RevPAR growth of 4.5%, driven by rate increases and strong short-term lead or bookings. This performance was led by the New York Marriott Marquis, which had RevPAR growth of nearly 10%.

We expect New York City to have a weaker second quarter, as the negative impact of the renovations will be greater in the second quarter. But, a better second half of the year because of strong group bookings during lead times, excellent international leisure transient business, and limited supply growth.

The Philadelphia market also outperformed the overall portfolio for the quarter, with the RevPAR growth of 2.9%. Philadelphia would be weaker in the second quarter due to fewer city-wide and weaker group bookings.

Overall RevPAR growth for our Pacific region was 2.5% for the quarter. However, results varied by market. The Los Angeles market continues to perform well, with RevPAR of 7% due to the excellent transient and group demand. The San Francisco market continued its strong performance with RevPAR up 4.9%, driven by both group demand and rate growth.

On the other hand, RevPAR per Hawaiian properties increased less then 1% because of lower leisure transient demand. We expect the Los Angeles market to perform well in the second quarter, while San Francisco will be weaker in the second quarter relative to the rest of the year due to the lower group demand.

RevPAR for Atlanta region increased 2.2% for the quarter. The growth was driven by strong group bookings somewhat offset by lower transient demand, particularly in Buckhead, and the region is expected to be weaker in the second quarter due to flat year-over-year group booking, but rebound in the second half of the year due to better group bookings.

Our DC Metro region performed poorly, with RevPAR decreasing by 5.7% due to four hotels under renovation in the first quarter of 2008 versus no hotels under renovation in the first quarter of 2007. We expect the DC Metro region to rebound in the second quarter as the hotels ramp-up from these renovations.

The North Central region also performed poorly in the first quarter, with RevPAR declining 11.2%. Results in Chicago were particularly weak as RevPAR fell by over 23% primarily due to renovations at three of our Chicago properties and no Downtown city-wide activity in Chicago in January and February. We expect the North Central region to rebound in the second quarter as renovations are completed and group bookings in city-wide activity increases.

While the New Orleans Marriot is not in our comparable hotel set, we have seen improved signs of light in this market as RevPAR increased over 12% for the quarter. We expect the property will continue to perform well in the second quarter.

Our European joint venture had a strong quarter with RevPAR calculated in Euros increasing by 6.9% despite several properties undergoing renovation. The Westin Palace in Madrid and the Hotel Arts Barcelona performed particularly well. If calculated in U.S. dollars, RevPAR was up by 20.8%.

The outlook for 2008 remains positive as the EU economy continues to grow at a solid rate. For the quarter, adjusted operating profit margins for our comp hotels decreased by 40 basis points. Profit flow through the rooms department was affected by higher wage and benefit costs.

Food and beverage flow through was excellent due to the growth in banquet and audio-visual business, resulting in a 50 basis point improvement in comparable hotel adjusted food and beverage margins. Wages and benefits increased by roughly 3.9% and unallocated cost grew by 4.5% for the quarter.

As anticipated, real estate taxes increased by 6.3% as assessed evaluations continued to catch with increases in property values. On a positive side, utility costs increased less than 2% for the quarter. However, we expect natural gas and other energy costs to increase significantly throughout the rest of the year, which will lead to utility costs increases in excess of inflation.

For the quarter, property insurance costs decreased 4%. Looking forward to the remainder of the year, we expect to see a significant decrease in our insurance costs as our recently completed April 2008 renewal reflected an annual premium decline of roughly 25%, even though we enhanced the level of our coverage's and lowered some of our deductibles.

We finished the quarter with $317 million of cash. Subsequent to quarter end, we entered into a $165 million term loan that was an add-on to our $600 million credit facility. The term loan has a maturity date of September 9, 2011, and is pre-payable without penalty after 18 months. The loan bears interest at LIBOR plus 175 basis points, with a LIBOR floor of 2.25%.

The proceeds from the term loan were used to repay the $100 million draw under the Credit Facility that was made after the end of the quarter and to supplement our cash positions. We currently have $600 million of available capacity on a credit facility. The term loan provides us with additional financial flexibility and investment capacity to implement our business plan.

In addition, as we discussed in the year-end earnings call, our only significant debt maturity in 2008 is the 2009 $1 million mortgage near Orlando World Center Marriott. During the quarter, we executed a term sheet with the vendor for refinancing proceeds well in excess of the existing mortgage and we expect to close on the refinancing by June 30.

Turning to our second quarter guidance. As we discussed previously, the second quarter of 2008 will have considerably more business disruption from our CapEx program in the second quarter of 2007. However, because of strong group bookings during the second quarter, we expect RevPAR growth for our comparable hotels to be 2% to 4% for the quarter, which is consistent with our full-year guidance. We are also forecasting the FFO per diluted share for the quarter will be in the range of $0.54 to $0.56 per share.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instruction)

And we'll take our first question from William Crow at Raymond James & Associates.

William Crow - Raymond James & Associates

Good morning, guys.

Ed Walter

Hi, Bill.

William Crow - Raymond James & Associates

A couple of questions here. Could you comment on what you see in for group bookings in '09?

Ed Walter

Yes. Short answer is that they are ahead of pace from where we were at this time last year. They is no one near as far ahead of pace as we are in '08, but they are slightly ahead of pace.

William Crow - Raymond James & Associates

Okay. And then, as you look out to the rest of this year your expectations are obviously bullied by the group bookings, what percentage of those group bookings have confected minimum room usage in food and beverage expense?

Ed Walter

Bill, it's hard to track that exactly. Maybe one data point that's helpful is at this point, about 85% of our group room nights, our projected room nights are under contract at this point.

William Crow - Raymond James & Associates

Okay.

Ed Walter

And I would tell you that of the remaining 15% closed, half of that is listed by the operators as tentative, which we generally have been told that that shows up its tentative, it's pretty solid that we're going to get it.

So in terms of what is there and in terms of it being firmly booked, we are in pretty good shape. You obviously still have some risk that you'll always have that at the end of the day you could see some increases in attritional levels. But that trend does not materialize again.

William Crow - Raymond James & Associates

All right. And then one final question, how do you think about starting new renovations given the economic backdrop? I mean, is this the time to move forward on things and say you're going to have less disruption because occupancy is down or do you say this is the time to increase your cash flow and we're going to do the best we can and not disrupt business. How are you thinking about that?

Ed Walter

I think we're looking at this point that we're going to stick with the plan that we had all along for this year was to have a fairly comprehensive capital program. You know kind of looking at the two descriptions that you laid out we believe in more towards the former than the latter.

We're in a great financial position as Larry described and we indicated in our press release. We've taken some steps to bolster what was already a fairly solid liquidity position. So we don't have worries at this point on that front.

Not that we want to have lower operating conditions but the reality is if we can do it with less disruption that's usually our goal. Anyway we're normally targeting a lot of this activity to weaker time period. So to the extent that we may have some softer period, it's good to take advantage of it and continue to update our properties as necessary.

Where we are probably being a bit more cautious though would be in the areas around some of our ROI improvements. And I think we are being very careful as we evaluate ROI possibilities right now, to make certain that if it's adding additional group meeting space.

And that was the assumptions that underlie that decision are tied to significant increases in demand, then, we might end up concluding that some of those types of investment should be deferred to the extent that we were worried in a particular market that the demand won't be there.

But on the other words, everything that we have in process including some of the major ballroom additions that we're doing, we are comfortable that those are exactly what we should be doing for those properties in the long-term and consequently fully intent to move forward with them.

William Crow - Raymond James & Associates

Great. Thank you, Ed.

Operator

And we'll take our next question from Steve Kent with Goldman Sachs.

Steve Kent - Goldman Sachs

Hi. You mentioned earlier in your presentation that you were not pursuing too many acquisitions or you felt like things were slowing down there a little bit for you because the returned targets weren't really there yet.

Could you just give us a little bit of information on that? Is there now been a reckoning on the prices to make it more attractive at this point? Is it your own forecast, which obviously are modest from profitability standpoint when you look at even new transactions?

And then, also, the international business looks so strong. I know it's a relatively modest part of your portfolio, but maybe you could give us a little bit more color on that, why the year-over-year was so strong and maybe the expectations?

Ed Walter

Sure. Let me start with the acquisition market. I think you summarized some of the challenges in that area and we talked about this a little bit on the last call. We have seen an upward movement in cap rates on the assets that we've been selling, which I might for this purpose describe it's a four star asset.

We're yet to see any real movement on the types of assets that we've been buying over the last five or six years, which I generally put more on the five star category. And having said that, I'd also kind of confirming what I said in our prepared comments. The markets had really slowed down a bit. And I think that you're just not seeing a lot of activity at this point in time.

I think you probably or is that phase in the cycle ware, we're likely to see some adjustment in pricing but the sellers have not yet conceded to where prices are likely going to have to go and the buyers are not anxious to commitment till they see some changes and where prices are and where cap rates are.

So I suspect that we'll see muted levels of activity probably, certainly, through this summer. And it won't surprise me if it carried through the rest of the year. And at some point as always seems to happen, we'll start to see each side move a little bit closer to each other.

It can't ignore in assessing what's going on in the acquisition markets to disarray in the debt markets and until people can get more comfortable about the ability of their lenders from whatever source they maybe. And their ability to commit and come through at the levels that they have committed, it's going to be hard to see a real meaningful pickup in activity.

Switching over to the international side, you are right in your assessment that not a lot of our RevPAR or FFO at this point comes from international operations. We certainly did have, if you looked at our press release some pretty good results in Canada and Chile and Mexico, which is where the international part of the portfolio that's consolidated is represented.

Some of that was due to currency and some of that was due to the fact that some of those markets either they had renovations last year or just simply performed quite well because economic growth was stronger, it was really a variety of different positive benefits there.

Steve Kent - Goldman Sachs

Okay. Thanks.

Operator

And we'll take our next question from Celeste Brown with Morgan Stanley.

Celeste Brown - Morgan Stanley

Hi, guys. Good morning.

Ed Walter

Good morning.

Celeste Brown - Morgan Stanley

Can you talk a little bit more about your ability to borrow? I was really surprised to see one; that you are able to access the capital markets and two; well, not as cheap as you borrowed in the past, like very attractive pricing. Is it because of your relative positioning or you're just seeing things loosen up in general?

Ed Walter

I don't think. After I finish with this, Larry, you should comment too. I think the short answer is not loosened up yet. I think you are seeing in some instances in the last week there were a couple of things, CNBS transactions that have happened.

But in general, I would say that the credit markets continue to be constrained and in fact, I would probably guess that over the last 60 to 45 days, whatever our pricing expectations would have been as the beginning of that time period, they probably widened a bit as we worked our way through the last 60 days.

I think in our case, we are fortunate that we have always had a fairly deep bank group. We had very good relationships on that front. We identified probably four, five weeks ago that that particular market could offer the most attractively priced financing available today. And that's frankly why we went after the term addition to our credit facility.

And I think we are still seeing some activity on the life company side and that's really the target that we're going after for the refinance of the Orlando property. But even in that market, we are finding it difficult to identify lenders that are willing to lending more than $100 million on any particular property.

So, I wouldn't say at this point that we've really seen any favorable trend in that business, other than the one that suggests that around the edges you are seeing some slight improvement in activity. Larry, you want to add anything to that?

Larry Harvey

I think the last point I'd add would just be that from the senior note perspective, we have seen spreads has started to contract finally. They have got very high, not just on our odd notes but as well as other. So those rates have come down and still nowhere where we would issue senior notes. But at least they have come down roughly 150-160 basis points in the last 30 days or so.

Celeste Brown - Morgan Stanley

Okay. And then there we're seeing tremendous group cancellation in Las Vegas. Do you think you are picking up some of that group business that why shows a different kind of business and that's why your group cancellations haven't gotten any worst?

Ed Walter

Yes. That's a great question. I am not certain since we're not tied into Las Vegas in terms of our portfolio that we have a lot of inside into that. I would doubt that we're picking up a lot of the business, because I would assume that when it's cancelled at least in the near-term they paid some sort of cancellation penalty, which means they probably aren't going to have the event.

I think in general, what we've been seeing is just not a lot on a cancellation front and the only industry that I have early heard any theme that has been weaker right now has been Pharma. Even the financial world which is the key component of some of our higher end properties is actually been fairly stable over the course of this year, which I view as a welcome development.

Celeste Brown - Morgan Stanley

Okay. Thank you.

Operator

And we'll take our next question from Felicia Hendrix with Lehman Brothers.

Felicia Hendrix - Lehman Brothers

Hi, good morning, guys. A few questions, just in the quarter specifically, the RevPAR seemed to be driven by the results in the convention/resort area. I know that's partially due to the easy comps you had last year given the renovations, and you also gave us color on your transient and your business bookings. But I am just wondering if you expect those strength in the segments to continue to be stronger than others going forward?

Ed Walter

I think the resort will hold up fairly well certainly into the second quarter. I think what I would view is relative underperformance of urban was really driven by a combination of some weakness in a couple of key markets for us and some renovations at five or six of our hotels in Chicago and Washington D.C.

If you have to pull those five or six hotels out, you would have found that urban would have performed a lot better and probably in the 3.5 to 4 range. And so I think some of what you saw there was the strength of the number of properties like the Orlando World Center and Kierland hotel and our Coronado hotel. The other part of it was that just where the impact from the renovations that we had talked about having in the first quarter where that would have hit.

Felicia Hendrix - Lehman Brothers

Okay. That's really helpful. Thanks. Now with you are on interest in the GIC venture, I am just wondering when you expect that to start hitting your P&L?

Ed Walter

I am sorry. I missed that again, Felicia, could you give me that again?

Felicia Hendrix - Lehman Brothers

Yeah. With your interest in the GIC venture, when do you start expecting that to hit the P&L?

Ed Walter

I wouldn't expect that we would be acquiring any properties that would have any meaningful effect on our P&L this year. I think you're really looking more at '09 for that. I mean, we've announced the venture. We have beginning to develop a pipeline. We are in the process of establishing our office in Asia.

Knowing how long it takes to ramp-up this sort of an activity and kind of looking frankly at our history in Europe recognizing, if you leave out the jump start that we got on that portfolio, it took a while before we developed a deep pipeline. I suspect that we're really looking more at '09 for the first impact from that.

Felicia Hendrix - Lehman Brothers

And would it be late '09 or mid? Come on some of us go quarterly model.

Ed Walter

Why don't we say mid-'09 and hopefully, we can beat that? It's just hard to tell. I mean, I can't tell how quickly we're going to identify deal that's going to make sense for us. Obviously, both Host and GIC are very excited about the opportunity to move into those markets. The GDP growth, the lodging fundamentals and the number of sub-markets are quite attractive there.

Our sense is that while there has been some effect on the financial markets there from the problems that exist in the U.S. and to a lesser degree in Europe, there is availability in financing, which should also help transactions well.

We're certainly committed in making it a fairly significant priority for the company over the rest of this year and into next year. So, I am hopeful that we'll get lucky. We'll find some deals that make sense and be able to see some contribution early on. But we'll just have to see.

Felicia Hendrix - Lehman Brothers

Okay. And just final question. The percent of your overall business is being driven by international visitation through the U.S. you mentioned that was the benefit in the quarter but am just wondering if you could quantify that?

Ed Walter

Unfortunately, we don't really have great tracking to be able to tell how much of our business actually comes from international. I can tell you in a market, maybe anecdotally if you look in a market like New York, our census in New York City right now that somewhere between say, 20% and 25% of our business in New York is being driven by international.

And kind of consistent with our comment and scenes that we are seeing that is being one of the benefits this year is that that we can tell in New York we're up about 25% in international business so far this year. I think they generally expect that trend to continue throughout the rest of the year.

So if you start to think about that that can offset a fair amount of some of the areas where we have been weak.

Felicia Hendrix - Lehman Brothers

Okay. Great. Thanks a lot.

Ed Walter

Thanks.

Operator

And we'll take our next question from Smedes Rose at KBW.

Smedes Rose - KBW

Hi, good morning. My question was about your timeshare venture with Hyatt and I am wondering if you see any more opportunities along these lines with some of your properties so with other timeshare operators?

Ed Walter

The short answer is yes. I don't know how many of the other opportunities will happen at a scale or in the structure that we have with Hyatt. But we have some we have land associated with our Westin and Kierland property with there is an opportunity to do time share. And we've had some discussions to its Starwood about how to approach that.

A couple of our Florida properties on the Atlantic coast have spared land that could be develop into either condos, fractional or timeshare. And we are in the midst of discussion with the operators of both of those proprieties about the potential to try to pursue that type of transaction.

So in each of our resort location, this is something that were looking at. And in certain cases depending upon the status of the market, it may not make sense to go proceed with that right now. But in lot of cases we've started the approval process to be in position for when the market recovers we could then take advantage of it.

Smedes Rose - KBW

Okay. And then if you could just maybe a little more color on the DC market, just given that this is an election year, when would you expect RevPAR maybe to pick up in that market?

I think it’s for National outside of DC impact in the market at all or do you think that's more of a Baltimore issue?

Ed Walter

It's hard to imagine that you get at that many rooms sitting just outside of downtown Washington DC and not have some effect. I can't say that our in town properties has been overly concerned about it so far, but I think we'll obviously be watching that fairly closely to see what the effect that property has long-term on our properties.

Part of it, as we look at that, there's some business that they're bringing to the markets that hasn't otherwise been coming to Washington. So, that's not hurting us.

A lot of our business that we tend to do in our in town properties tends to be focused on Capitol Hill and National Harbors located fairly far outside of town for that business to kind of match up with the business that we've been doing.

So, I think in some ways we're protected by where our locations are because we truly are Center City Properties. But in the long run there will probably be some effect.

Looking at the Washington market I think we're going to be looking at a pretty good spring in summer there. That seems to be the case so far. Some of the slowness that we had in the first quarter in the city was really driven primarily by the fact that the JW, DC was undergoing a fairly significant lobby renovation and our Westin brands hotel was undergoing a very comprehensive room innovation.

Most of the renovations are now behind us. So we should be able to take advantage of some pretty traditionally strong activity through into August or into September. I suspect that also on looking at historical trend, we would be counting on a lot in October and in early November simply because everybody will be out in the city campaigning.

Smedes Rose - KBW

Okay. Thank you.

Ed Walter

Thanks.

Operator

And we'll take our next question from Chris Woronka from Deutsche Bank.

Chris Woronka - Deutsche Bank

Hi, guys. Good morning.

Ed Walter

Hi, Chris.

Chris Woronka - Deutsche Bank

Question on the margin guidance I guess to hit your guidance you'll need a little bit pickup in the rest of year, is that due to the kind of the new insurance contract that maybe a little bit less displacement from renovation? Or is there something else going on, just any color would be great?

Ed Walter

I think it's a couple of items. Particular you got a property insurance is pretty substantial savings. We will see that through the last three quarters of the year here. And also, from a standpoint of displacement, the first half of this year as we talked about was significantly higher than last year.

And then, that will reverse in the fourth quarter portion that. So we'll have some at least better year-over-year comps in the fourth quarter with respect to displacement should help on the margin side as well.

Chris Woronka - Deutsche Bank

Okay. Great. Then just a quick question on the outlook for group bookings, what's the breakdown second, third, fourth quarter, I would assume third quarter has the least amount of group bookings is that right?

Its sounds like you are in good shape for what's on the books. I would guess that's little bit more in 2Q and 3Q and how are you looking at the summer in some of the resort hotels?

Ed Walter

Overall, I think you are right that the third quarter tends to be slightly lower group quarter. And I would probably say looking at our page for the rest of the year that quarter is not the strongest quarter, looking at the remainder of the year.

So I think that that's a quarter that we're watching fairly carefully at this point in time. In terms of the spread across resort versus some of the others sectors, I don't know if there's any dramatically trend as it relates to third quarter versus the other quarter for the resorts.

It depends a lot on where they are. I mean, certainly some of our resorts are just weak in general during the summer such as the ones that are in Palm Desert, others in Florida still have a fairly high level of group activity. The price point is just lower.

Chris Woronka - Deutsche Bank

Okay. Very good. Thanks.

Operator

And we will take our next question from David Loeb at Baird.

David Loeb - Baird

Hi. Firstly quick one about guidance. You reported $0.03 or $0.04 above your 1Q guidance, but you didn't change your annual guidance, what's your thinking there?

Ed Walter

Yeah, David, I guess what I would just say is that, yeah, this was just the first quarter of the year. We probably as we indicated, we did better in the first quarter than we thought. Some of the elements of that like some of the corporate expense savings, which is generally related to restricted stock, I am kind of hoping its going to even out over the course of the rest of the year.

So I am hopeful that that's not actually something that it turns up in the final analysis. And as it relates to some of the others, I guess, I just say it's good that we are ahead. It just gives us more confidence that will follow it in the range at the end of the year.

It may seem that all we did was reiterate our guidance. We really spent a lot of time digging in on an entire analysis of the portfolio to try to understand what we really thought was going to happen over the rest of the year.

And at the end of the day, I think we started off a little bit more cautiously than some others in our outlook for the year. And as we dug in on it given where the first quarter came out, what our bookings looked like, the fact that the recent trend was actually fairly good and wasn't indicating additional weakening.

In fact, that we saw international travel building and the fact that we think we're going to get some left later in the year, all of that kind of came together in our minds and leave us comfortable that we should still use the same two to four range that we talked about before.

But I think in China assessed how we did in the first quarter and FFO within the context to that. We didn't think we should make any adjustments for the fact that first quarter came in a little bit stronger.

David Loeb - Baird

Okay. That's helpful. And Larry a little more detail, if you can, on the Orlando World Center refinancing. Can you just give us an idea about what the terms are like on that? You had mentioned that that was likely an insurance company lender. Would this be a club deal given its size or is the single lender willing to take that much?

Larry Harvey

It's a single lender but, I apologize I am just really not comfortable disclosing that stuff at this point. It is single lender that is stepped up, proceeds well in excess of the existing $209 million mortgage. And at rates that are consistent with what we budgeted, we were refinanced the property for.

Ed Walter

And a rate that's lower than what exist today.

Larry Harvey

Yeah. It's a 7.48% mortgage on a property today. So the refinance rate will be well below that.

David Loeb - Baird

And how do you weigh that against just paying half the existing mortgage and drawing from the alignment waiting for better debt markets?

Ed Walter

Yeah, I think that the answer there is that sort of consistent with the theme that I highlighted in our initial comments is that we are looking to maintain a higher amount of liquidity and as much flexibility as we can at this point in time, just in anticipation that there maybe some opportunities that develop for us over the course of the next 12 to 18 months.

So I think this is a natural property to refinance in some ways and I think we had all concluded here that it would be better to maintain the $600 million of availability on the credit facility at this point rather than deploy that to payout this loan.

Obviously, we could change our philosophy. In the future, we could also if a problem develop here, we certainly be comfortable in using the facility to pay off. But I think from balance sheet perspective, we like the idea of having additional capacity on the facility.

David Loeb - Baird

Great. Okay. Thank you.

Operator

We'll take our next question from Nap Overton with Morgan Keegan.

Nap Overton - Morgan Keegan

Good morning. In the last cycle than last down cycle, a multitude of distressed seller or motivated sellers never really materialized because that was so available and interest rates remained low throughout the down part of the cycle. Do you anticipate, are you aware of any developing situations that interest you in terms or what is your outlook for some distressed motivated sellers to show up in this cycle that we appear to be entering?

Ed Walter

I think that's a great question. I'd say so far would just a couple of exception you haven't seen too many opportunities like that develop. But I think that's also because if you really look at where we are right now, while RevPAR growth has moderated from where it was the last three or four years. We are still talking about positive growth and we're still generally talking at most property about positive and wide growth too.

So, while the financial markets are in disarray, you're really not at a lot of defaults yet on individual mortgage loans secured by real estate, because the properties aren't underperforming at this point in time. I think as we go forward, this cycle will be a little different from the last one, primarily because of the levels of leverage that the lending community was prepared to advance on hotel assets this cycle compared to last.

If you go back to the 90s, the lending community was really still reacting to the debacle of the 90s to late 80s, where you saw a lot of 105, 110 or higher percentage loans. When operations decline in the early 90s with over leveraged properties, you ended up with lenders owning a lot of real estate.

There's lot more discipline on the lending front. At the end of the 90s, as the lenders remembered that environment that they had gone through and loan-to-value ratios were lower. I wouldn't describe what happened over the last four or five years as equivalent to what happened in the 80s, but I think we all know if you look at a variety of different situations, you will see that leverage levels were higher this time than last.

And I think that at some point here, its probably not this year, its probably more next year, you'll begin to see some situations develop where folks have loans that are coming due and in this lending environment they can't borrow enough money to be able to repay that loan, which will start to put some pressure on the situation.

So that's our insight on at this point in time and I think we, kind of, coming back to the first point. Other than a few small instances where we detected some pressure on a few sellers, there really hasn't been much it's happened yet, but I think we're expecting more of that to come.

Nap Overton - Morgan Keegan

And if such situations did develop within the next 24 months or so, how much muscle would you be willing to flex for an attractive opportunity?

Ed Walter

I think we have a fair amount of capacity in our balance sheet right now. I mean we are looking at coverage levels that are well into the force. And we are comfortable as a company kind of looking at it from a safety perspective, being at least a full turn lower than that.

So to the extent that the right opportunity developed and the transaction met all of the various targets that we would have around the transaction, we could be in a position to act on that in the future.

Nap Overton - Morgan Keegan

Okay. Thank you.

Operator

And we'll take our next question from Joe Greff at Bear Stearns.

Joe Greff - Bear Stearns

Hi, good morning, guys. Can you hear me okay?

Ed Walter

Sure, Joe. It's fine.

Joe Greff - Bear Stearns

Hi. A quick question or two quick question, your comments on 2009 group bookings you talked about pace, what's pricing like on 2009 group bookings relative to 2008?

Ed Walter

It's up a little bit.

Joe Greff - Bear Stearns

Okay. And then if you would look at the last 12 months or full-year 2007, we may sell to Wall Street of financial services (inaudible) what is that number?

Ed Walter

I don't have that here with us. So it's something we can probably look up for you Joe. If you are looking for year-over-year comparison, I'd have to believe in general in the industry that it's down a little bit. In terms of actual number of nights that we sold last year to them, we don't have that number available.

Joe Greff - Bear Stearns

Thank you.

Operator

And we'll take our next question from William Truelove with UBS.

William Truelove - UBS

Hi, guys. A couple of question here. First, what is your budget for ROI projects that is currently under funded that you could divert to share repurchases this year?

Ed Walter

We are looking this year and expecting that our repositioning in ROI projects in total will be somewhere in the 270 to 290 range. A fair amount of that's already underway. We're going to have a big quarter of construction this quarter.

You'd have to really sit down and be carefully analyze that. I would suspect that probably a third of that could be cancelled if we need it to but there maybe some costs associated with canceling that, including some business disruptions that we sort of built into the schedule but virtue of anticipating the construction project.

William Truelove - UBS

If you're not going to do the construction project when you have less business disruption, wouldn't that be a positive?

Ed Walter

Well not, yes and no. If what you were doing was affecting meetings space was part of what your ROI involved and you already had a plan for the third quarter. If you then cancel the project, you're right you wouldn't have more business disruption, but I guess what I am saying is I am not certain you could fill that meetings space with new customers given the timeframe that we are talking about.

So in effect, by scheduling it the way we have we've already incurred the cost of the business disruptions. If we don't go forward with the project, I doubt we'd be able to book a lot of additional business in. So as a result we still incur the cost associated with the business disruptions. That makes sense?

William Truelove - UBS

Yeah. That makes sense.

Ed Walter

Okay.

William Truelove - UBS

The second question I may have is on your timeshare joint venture with Hyatt, if you are going to beginning to say call it 20% plus returns, usually in timeshare that requires you to also participate in the financing section of it. So is your participation to JV is strictly on the real estate only? Or in this joint venture we also participate in the financing games associated with the timeshare?

Ed Walter

We would be anticipating that we would participate in all facets of the development. Our anticipated returns was the profit on the land, profit on the sale of the unit, and ultimately any profits that might stem from the financing.

William Truelove - UBS

All right. And then last easy question is which hotels are held for sale now, that you recently listed?

Ed Walter

Sheraton Campus suites.

William Truelove - UBS

Sheraton Campus suites?

Ed Walter

Yes. That's the assets held for sale.

William Truelove - UBS

Okay. I thought there were two about.

Larry Harvey

Well, the Sacramento property has been taken by the city of Sacramento as they are expanding their airport. But that's a leasehold interest. So it’s a very small balance sheet amount.

William Truelove - UBS

Okay. That explains it. Thanks so much then.

Ed Walter

Great.

Operator

And due to time constraints, we are going to conclude the question-and-answer session today. I would like to turn the conference back over to Mr. Walter for any additional closing remarks.

Ed Walter

Thank you very much for joining us on this call today. We've appreciated the opportunity to discuss our first quarter results and our outlook with you today and look forward to providing you with more insights into how 2008 is playing out in our second quarter call in mid July. Have a good rest of your week everyone.

Operator

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

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Source: Host Hotels & Resorts Inc. Q1 2008 Earnings Call Transcript
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