HST Q3 2014 EARNINGS CALL NOTES

Strong Q3 but Q4 tempered by renovations and more difficult YoY compares in 2015

PREPARED REMARKS

Ed Walter, CEO

  • Strong F&B and Group rated results in Q3
  • Feel good about business and outlook
  • Highest Q3 occupancy since 2000 which drove ADR
  • Q3 strong demand across all group segments especially Association +14%  and strong Corp demand +3.5% resulted in Corp rate +4.5%, Sept group revenues +15% was second strongest month of the entire year.  
  • Group demand in the quarter increased nearly 6%, rate jumped by more than 4.5% and  group revenues improved by more than 10.5%.
  • Group limited transient occupancy, resulted in transient rate ADR +6.5% 
  • Banquet & AV revenues +8%, 40% flowthrough
  • Acquisitions 
    • European JV buying Grand Esplanade Berlin Euro 81 million
    • b2 Miami $58 million
    • Desire to buy hotels with third party operators, currently have seven third party operated hotels in portfolio
  • Disposition
    • European JV Sheraton Skyline
    • Tampa Marriott $199 million
  • CapEx $29 million - ROI projects such as:  1) conversion of underutilized space such as Manchester Grand Hyatt San Diego;  2) rebranding/ renovations such as Memphis;  3) projects to reduce energy costs $17 million in NY for $3 million in annual savings
  • Q4: lower group demand, lower F&B
  • H2 > H1 results
  • Rooms booked in 2014 for 2015 +5%
  • 2015 RevPAR driven by rate and change in business mix

Greg Larson, CFO

RevPAR results

  • Lat Am +26%; Q4 will be slower
  • West: rate driven, strong group, group revenues +11.4%. Group created compression eliminated special corp.  Q4: SF continue to out perform, SEA & LA in line, DEN under perform. Phoenix better/stronger
  • HI and San Diego, under performed, higher airfares.  SD meeting space renovations and pre-construction.   Q4: SD weak/construction; HI out perform
  • South Central:  strong group rev +11.9%, 8% F&B rev.  ATL, CHI strong.  Group volume 8%, rev +11%.  Outperform in Q4.  Houston weak due to difficult comps.  Q4: negative due to renovations
  • East: transient rev +15%.   Q4 Boston / WDC weaker - Boston Q4 13 World Series.  NY: under performed in Q3, =8.5% Group revenue gain, but impacted by select service supply.  Q4: NY under perform
  • European JV:   Q4:

Margin Growth:  180 bps in H1 and 170 bps in H2

Special Dividend:  possible in Q4 if not find 1035 exchange for Tampa Marriott proceeds

Q&A

Q: Independent hotels - why shift, why now?

  • Focus on limited markets, more deeply - already own many large group/convention hotels in current markets, this is natural extension to grow portfolio

Q: Group as %age of revenue mix, now vs. last cycle?

  • ~40% normally, last peak was 43%, 37% today.

Q: Independent hotels - growth and size of this segment

  • Likely grow from acquisitions, have some conversion ideas, would like 10% of total rooms independent channel.

Q: Capital allocation vs. length of cycle - buying assets vs. share repo?

  • Feel good about cycle, look at acquisitions over 10 years, therefore must include some period of softer results as compared to other buyer who may look to buy but also try to sell prior to peak.

Q: Group weakness in Q4?

  • Renovation disruptions....if not renovations, group +4%.
  • Group bookings 4% higher in Q4 if not have renovations across portfolio

Q: 2015 RevPAR comments/framing?

  • Drivers: U.S. economic growth and Worldwide economic growth driving international travel growth
  • Expect strong year, reacceleration

Q: What portion of portfolio unencumbered by mgmt contract flexibility?

  • US portfolio 40% flexible mgmt contract agreements - especially in non-core markets.  So, 75% of assets looking to sell in non-core markets have flexible mgmt contracts

Q: NY & WDC concentration?

  • May look to sell in both NY and WDC over time

Q: RevPAR assumptions regarding demand?

  • US hotels +/- 20% demand is from international travel while in NY +/-40% demand is from international travel. 
  • Lat Am:  World Cup challenges YoY in Brazil, Mexico City strong 2014 due to easy comp vs. 2013, Aussie/NZ MSD RevPAR growth.

Q: Acquisitions - fine tuning brand/market mix vs. EBITDA moving?

  • Issue is scale and size of acquisition, not need to be bigger to be bigger, about improving overall growth and earnings per share. More about fine tuning.

Q: Renovation schedule/activity?

  • About 35% of capex in Q4
  • More importantly, larger hotels undergoing room or meeting room renovations.  Half of disruptive capex happening in Q4 vs. full year

Q: Urban select service?

  • Overall small, but big growth rate, because many small $20 million asset purchases absent a portfolio transaction.

Q: Orlando

  • Finished all work in Q1 and Q2 and Q3 not impacted by construction. Expect good 2015.  Florida portfolio to out perform in 2015

Q: NY Marriott Marquis - update?

  • Construction virtually completed.  Vornado not announced contracts. Expect to get sign operational next month. Look forward to getting retail and observation areas to open.
  • Want to make sure Vornado maximizes rents: retail leased by early 2015, but maintain some signage hold backs due to opportunity of size/location of screen.

Q: Opportunities to convert hotels to select-service

  • Look for opportunities to modify operating model outsource F&B, improve margins and thus maintain full-service rate but select-service margins.

Q: NY issues vs. portfolio ex Marriott Marquis

  • Less about occupancy problem vs. select service additions keeping price ceiling on market. Marquis is a group driven hotel.

Q: Four Seasons Philly - updated on timing and cost conversion?

  • Likely independent, soft brand, but affiliated with major brand.

Q: IMF trends

  • H1 2014 down, FY 2014 +4%, 2015 should

Q: European acquisition pricing in 2014 vs. next year - appetite strength for acquisitions?

  • Cap Rates in Germany 100-150 bps vs. US, London = best US markets at approximately 4% to 5%
  • Expect Germany to have better GDP growth relative to Europe
  • London: capital aggressively seeking assets, more willing to sell than buy in London.
  • Process of marketing other hotels in Europe, look to reduce size of portfolio given buyers willingness to pay full price - especially middle of the pack assets.
  • Still like Europe will stay just more focused.
  • Europe finance on asset-by-asset basis.  Financing shorter term in Europe. Financial markets more aggressive in Europe, delta vs. last year cost of debt lower.

Q: San Antonio lawsuit addback

  • $25 million in restricted cash account.  GAAP impact of $69 million, but EBITDA accrual was $59 million, net-net interest accrual and other litigation accruals.

Q: Supply/Demand for Group, moving to softer nights?

  • Robust transient demand, high occupancies mid-week, so now moving groups around.