Host Hotels & Resorts Inc HST
Q4 2011 Earnings Call Transcript

Operator: Eli Hackel, Goldman Sachs.

Eli Hackel - Goldman Sachs: Just two questions. First, could you just talk further about your views of the Atlanta and DC market. Have your views of those markets changed over the last couple of years, and just building upon that you said you're going to increase your dispositions, what markets are you looking to decrease your exposure to. Then second what's your current view on the next peak and margins, while it seems that some permanent costs have come out of the market via staffing and other means, maybe there is some higher costs whether it's taxes or insurance. Do you think that the next peak and margins will be higher than the previous peak?

W. Edward Walter - President and CEO: Well that's a lot and two small questions Eli. Let's talk about the markets first. Yeah, I think on DC, the (travails) of the DC market for last year, meaning 2011, then also the fact that the market is going to struggle a little bit in 2012 were pretty well chronicled. We're still of a mind that DC is a great long-term market as we've commented before and others have commented. At the end of the day DC is just not as volatile as markets like San Francisco, Boston and New York, but over time it generates great strong growth. We still think that the federal government is going to be a strong source of employment and a strong source of activity in DC. There may be some swelling in the rate of growth there, but at the end DC is also matured into a more diverse market and perhaps most importantly is with the advent of the new Convention Center hotel that's coming into Washington I think in 2014, we believe that Washington will become even more competitive from a convention standpoint, and it is frankly the anticipation of that that is one of the reasons why 2012 is not as strong of a market in DC as it might have been in the past, in part because folks are waiting for that new convention centre hotel in order to schedule their event in Washington and take advantages of what is a very nice convention centre. So, as we look outwards, while we are fairly well represented in DC already, DC is a market that ultimately we would still be comfortable in acquiring more in, especially in the downtown area. I think as we look out to the suburbs, we have some concerns out in some of those markets and so over time we would probably be expecting to exit some of the hotels that we own in the suburbs at DC. Atlanta is a market that we have several great hotels in, but as we look at Atlanta, Atlanta is a market that we feel is slowly but surely losing some of the convention share that it has had in the past. It has lost that share to a number of different markets; Vegas has been an issue, but still have Orlando and San Diego. So, as we think about Atlanta, the underperformance as Larry commented in the most recent quarter seems to have been driven primarily by, in the market, has been driven by the fact that there just wasn't the same city-wides in Q4 of 2011 as there was in 2010. We are not necessarily expecting to see a big change in Atlanta in terms of increased city-wides this year so we don't have that much – that optimistic of a perspective on Atlanta for 2012. It is a market that as we look out long-term it's when we – as we have said in the past and would continue to say, we would like to reduce our exposure to, in part because we already own so many good hotels there but also perhaps more importantly we just don't see the long-term growth in Atlanta to be as strong as in some markets elsewhere, and in some ways that gives you some hints into the dispositions – your question about dispositions. But I'd say broadly speaking we are looking to reduce our exposure to non-core hotels in non-core markets. Some of the sale activity that you may see from is in this year and next year, though we maybe in markets that we've identified as primary, some as – say for instance some of the west coast markets, but what we are looking to do there is sell market, sell hotels that might be located near airports or located in suburban markets where we think there will be investor enthusiasm because of the market but not – they're necessarily assets that we expect to hold. Another driver of that as we consider what we might sell in the near-term is to look for hotels where a fair amount of the recovery back to 2007 levels of the EBITDA has already occurred, so that we can feel comfortable that we're not leaving a material amount of value on the table by selling in 2012 as supposed to waiting a bit longer. Overall over the course of the next two or three years we expect to be an active recycler of capital and so of course that – you can't count on doing that all at once and that's one of the reasons why we intend to get started in that process in 2012. Now coming to your question about the peak in March, there certainly is some substantial room to grow from the margins where we were back to peak margins and I think that applies across the industry. Real estate taxes are certainly an issue in this year as Larry described, but I don't know that other than if we certainly become the target for a lot of local municipalities trying to balance their budgets and picking on the commercial real estate industry to achieve that. I don't know that we would necessarily see real estate taxes over the long-term grow at any higher – in any level that's much above inflation. So I don't think they necessarily in the long run will be a drag on margins. I mean, frankly in 2011 they were held – it's in 2012 where they turn out to be a bit of the drag. When we go back and look at what happened say from 2000 to 2007, I know we've commented in the past that one of the things that made it very difficult to achieve our 2000 margin was the fact that we used to make profits of our telephones say in the 90s and right through to 2000, but when you get to 2007, it really had turned into a cost center. I don't believe that other than maybe losing some charges around Internet connectivity that we necessarily have a major item of profit that's going to disappear from the hotel, going forward that would impact our ability to recover to prior peak margins. The real issue of course in achieving margin growth comes down to revenue growth that exceeds inflation and then try to minimize your cost increases to inflation or just above that. So to some degree the speed with which we've achieved those prior peak margin is really going to be based upon how quickly recovery accelerates to higher levels of RevPAR growth. Hope that helps.