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Quarter and guidance in-line with our expectations

CONF CALL NOTES

  • Stronger demand in higher rated segments of group and transient led to better performance in the quarter
  • Continuing a trend we saw developing in the fourth quarter of last year, our banquet and audio visual revenue grew faster than our outlet and lounge revenue, as several of our larger hotels experienced meaningful increases in banquet activity.
  • Discount segment grew 2% but government segment declined slightly
  • Group bookings for the quarter in the quarter increased 6%, leading to a more than 4% increase YoY. Corporate increased more than 6% and discount decreased 5%. 
  • Group booking for the remainder of the year are 7.5% ahead of last year's pace for the balance of the year with rate ahead by 2% YoY and recent rates achieved are 8% better. 
  • Expect to continue to see occupancy gains in 2012
  • Expect positive rate growth in 2013 as well
  • Moving quickly to bring selected assets to the market given the dearth of assets available for sale
  • They are also expecting to be a net buyer of real estate this year, but plan on being opportunitistic
  • Guidance doesn't include any additional M&A aside from whats been already announced
  • Continue to find construction pricing attractive and think that their ROI capex will be accretive
  • They are seeing very strong demand trends and with supply only increasing 0.5%, coupled with better group bookings they decided to raise their RevPAR guidance
  • Believe that this cycle will gain momentum through 2012 and continue through 2013 & 2014
  • Regional RevPAR performance and Outlook:
    • Hawaii: 15.1%. Outperformance due to strong corporate and transient. expected to underperform in 2Q but have a better 2H
    • Houston: 12.8%.  Expect to underperform in 2Q due to difficult convention comps.
    • Miami/Ft Lauderdale: 11.3%. Expected to perform well in 2Q
    • Philadelphia: 30.8% increase.  Benefited from the 2011 renovation. We expect our Philadelphia hotels to be a top performer in 2012 
    • San Francisco: 10.9%.  Strong 2Q performance is expected
    • LA: 8.5%.  Expect continued strength in 2Q 
    • Chicago: 20.3% increase (rate increased 3%). We expect our Chicago hotels to have very good performance in 2Q
    • New York: 6.5%. Results were negatively impacted by renovations in the quarter. Expect a good 2Q
    • D.C.: -3.9%.  Lower levels of citywide demand lead to poor performance.  2012 will be a challenge due to a weaker city-wide calendar, government travel cutbacks, and the lack of legislative activity. 2Q was better than 1Q though. 
    • San Antonio: Down 8% (worst market). Better results expected in 2Q but will continue to underperform
    • European JV:  Excluding Sheraton Roma, constant Euro RevPAR increased 4.8%. F&B revenues also increased 4.5%. 1Q JV results only include Jan and Feb.  In March RevPAR was up 6.2%. 
  • F&B flowthrough was ~35%
  • Continue to see improvements in catering, leading room rental and audio visual revenues. 
  • SG&A, marketing, repairs/maintenance expense increased 4.4%  driven by variable expenses (credit card commissions, reward programs and shared service allocations.) 
  • Utility costs benefited from weather and declined over 3%. Property taxes increased 3.6%, property insurance increased nearly 15%. 
  • Expect rate to be a bigger contributor to RevPAR growth for the balance of 2012, which will help flowthrough
  • 2 & 4Q should especially benefit from strong F&B business with good flowthrough
  • Expect un-allocated cost to increase more than inflation particularly for sales and marketing where higher revenues will increased cost. 
  • Expect property taxes to increase roughly 8%, the utilities to increase between 1% and 2% for the year

Q&A

  • Group booking room nights were up 13% vs. 7% at the same time last year for the remainder of the year
  • For the full year their group revenues on the books are up over 8%, which is much stronger than were they were in the first quarter. Over 7% is due to occupancy and a few % due to rate
  • Booking pace starting the year was up around 5%, now for the full year is much higher.  The reason its higher is because they booked more rooms in the quarter for the quarter and in the quarter for the rest of the year compared to last year
  • They are a  little surprised at how fast occupancy has returned to peak. Staffing levels lower relative to 2007 and 2009, and based on their numbers staffing levels have come back with managerial levels slower though.  However, they are still below where they were in the past. They are being thoughtful in how they add staff back. Productivity levels are better than they were in prior recoveries
  • D.C. is expected to be stronger than the first quarter. Expect flatish RevPAR going forward
  • If there are portfolio coming on the market they will definitely get a call on those and take a look. That isn't their sweet spot though. There still is a pricing expectation gap between sellers and buyers. 
  • Part of the reason that people think that there will be a pick up in M&A in 2H12 is because there is debt maturing and lenders are no longer extending and pretending.  
  • Their larger hotels vs. smaller hotels are in roughly the same position vs. prior peak. Larger hotels are doing better on rate but behind in occupancy. The larger hotels are seeing less of their business coming from Group than they have in the past. Do see bigger increases in the smaller hotels then their larger hotels, similar to Marriott.  The smaller hotels tend to book a lot more of their rooms closer in
  • Association business and corporate business is better. Association are looking into holding bigger events in the future which should benefit those larger hotels
  • Don't expect many hotels to come to market in Europe unless their is debt maturity. They will be cautious in investing in Europe.  Feel better about Northern Europe. Over 40% of their business in Europe comes from outside of Europe and the UK
  • Their Marriott hotels have certain had a surge in booking activity over the last 6 months.  Part of that can be due to fixing some of the salesforce one bugs
  • Their European debt investment matures this quarter. The owners are marketing the portfolio for sale.  They are closely monitoring the situation
  • There is nothing that they see now that would suggest that they should see a deceleration in Europe. But they remain cautious. However, DC is improving off of 1Q levels. 
  • In certain markets they are able to push banquet pricing with Groups. However, they are a little ways away from being able to push the envelope on event banquet spending. There are a number of Groups that are outspending their guarantees at the very last minute. They have been beating more than missing their F&B forecasts for Groups
  • European JV guidance: They are seeing strength in their European JV. Their revised forecast for Europe takes in the outperformance from 1Q but they are being reallly conservative and assuming flat RevPAR for the balance.
  • They still feel really good about F&B but are more cautious on other revenues. Expect F&B to grow slightly less then RevPAR but not much less.  Other is also less profitable
  • Helmsley budget has increased slightly, but the increase is really due to a reconfiguration of the hotel F&B area. They are also going to accelerate the work at Hyatt in 2012 before the NAREIT event in November. 
  • They are already seeing the benefit of newer bookings at higher rates. 80% of their room nights for 2012 are on the books (for group). They started the year at about 70%. In 2010 they only had 20% of their group business was on the books and that's when things started to improve. In 2013, almost 80% of their business would have been booked in 2011 and beyond
  • Altanta was really healthy and expect an even better 2Q with the 2H comparable to 1Q.  
  • M&A capital is more available. Its not clear that capital is really available for go private like transactions they saw through 2006-2007.  Thinks that more of it is company to company deals where there are strategic syngeries. Usually at the half way point of a recovery, M&A starts to pick up. However, its not clear that they are there yet. 
  • Most of the branded hotels would like to be more asset light, but they also don't need the money so they are very selective on sales. 
  • Because this has been a transient lead  recovery, its been hard to get aggressive on rates. 

HIGHLIGHTS FROM THE RELEASE

  • 2012 guidance:
    • RevPAR: raised by 1% to 5-7%
    • EBITDA raised $20-30MM to $1,120-1,165MM
      • Consensus is at $1,125MM
    • Adj FFO raised by 4 cents to $0.99 to $1.06
      • Consensus is at $1.03
  • Consistent with the Company's expectations, the completion of the 2011 rooms and meeting space renovations at the Philadelphia Downtown Marriott led to outstanding results in the first quarter, with RevPAR for the hotel up over 50% when compared to the first quarter of 2011. The improved results for this hotel accounted for approximately 80 basis points of the Company's comparable hotel RevPAR growth
  • On a calendar quarter basis, which includes the March results for these hotels, as well as eight additional days of March for the Company's Marriott hotels, comparable hotel RevPAR increased 6.4% compared to the first calendar quarter of 2011.
  • ROI capex of $48MM in 1Q12. During the first quarter, the Company substantially completed the redevelopment of the Chicago Marriott O'Hare, Atlanta Marriott Perimeter Center and 95,000 square feet of meeting space at the San Diego Marriott Marquis & Marina. The Company expects that its investment in ROI expenditures for 2012 will total approximately $150 million to $170 million.
  • During the first quarter of 2012, the Company delivered the first few floors of newly renovated guestrooms at the New York Helmsley and completed the renovation of the 270 rooms at the W New York - Union Square, which was acquired in late 2010. The Company spent approximately $14 million on acquisition projects in the first quarter of 2012 and expects to invest between $100 million and $110 million for 2012.
  • $100 million in renewal and replacement expenditures spent in 1Q12. Major renewal and replacement projects completed during the first quarter included the renovation of 743 guestrooms at The Ritz-Carlton, Amelia Island and the Pentagon City Residence Inn and almost 10,500 square feet of meeting space at the W New York. The Company expects that renewal and replacement expenditures for 2012 will total approximately $300 million to $330 million.
  • On March 23, 2012, the Company sold the 685-room San Francisco Airport Marriott for a sale price of $108 million plus $5 million for the furniture, fixture and equipment replacement fund and recorded a gain of approximately $48 million
  • In 1Q12, HST issued ~11.1MM shares at an average price of $15.67per share, for net proceeds of approximately $172 million. On April 24, 2012, the Company entered into comparable Sales Agency Financing Agreements with BNY Mellon Capital Markets, LLC and Scotiabank for a new at-the-market equity offering program with a capacity of $400 million.
  • On March 6, 2012, the joint venture in Asia ("Asia/Pacific JV"), in which the Company holds a 25% interest, acquired the 278-room Citigate Perth in Perth, Australia for A$61 million. In connection with the acquisition, the Company drew A$14.4 million on its credit facility. The Asia/Pacific JV expects to invest approximately A$17 million to upgrade and rebrand the hotel as a Four Points by Sheraton.