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Edited Transcript of HST earnings conference call or presentation 28-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Host Hotels & Resorts Inc Earnings Call

BETHESDA May 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Host Hotels & Resorts Inc earnings conference call or presentation Friday, April 28, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gee Lingberg

Host Hotels & Resorts, Inc. - VP

* Gregory J. Larson

Host Hotels & Resorts, Inc. - CFO and EVP

* James F. Risoleo

Host Hotels & Resorts, Inc. - CEO, President and Director

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Conference Call Participants

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* Anthony Franklin Powell

Barclays PLC, Research Division - Research Analyst

* Bennett Smedes Rose

Citigroup Inc, Research Division - Director and Analyst

* Charles Patrick Scholes

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Chris Jon Woronka

Deutsche Bank AG, Research Division - Research Analyst

* Michael Joseph Bellisario

Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst

* Richard Allen Hightower

Evercore ISI, Research Division - MD and Fundamental Research Analyst

* Robin Margaret Farley

UBS Investment Bank, Research Division - MD and Research Analyst

* Shaun Clisby Kelley

BofA Merrill Lynch, Research Division - MD

* Thomas Glassbrooke Allen

Morgan Stanley, Research Division - Senior Analyst

* Wes Golladay

RBC Capital Markets, LLC, Research Division - Associate

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Presentation

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Operator [1]

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Good day, and welcome to the Host Hotels & Resorts, Inc. First Quarter 2017 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Gee Lingberg, Vice President. Please go ahead, ma'am.

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Gee Lingberg, Host Hotels & Resorts, Inc. - VP [2]

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Thanks, Christina. Good morning, everyone. Welcome to the Host Hotels & Resorts First Quarter 2017 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're not obligated to publicly update or revise these forward-looking statements.

In addition, 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 reconciliation to the most directly comparable GAAP information, in today's earnings press release, in our 8-K filed with the SEC and the supplemental financial information on our website at hosthotels.com.

This morning, Jim Risoleo, our President and Chief Executive Officer, will provide an overview of our first quarter results, discuss our recent transactions and conclude with our outlook for 2017. Greg Larson, our Chief Financial Officer, will then provide greater detail on our first quarter performance by markets, discuss our margins and the balance sheet. Following their remarks, we will be available to respond to your questions.

And now I'd like to turn the call over to Jim.

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James F. Risoleo, Host Hotels & Resorts, Inc. - CEO, President and Director [3]

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Thanks, Gee. Good morning, everyone, and thank you for joining us to discuss Host's first quarter results. As reported this morning, we had a solid first quarter that performed above our expectations from both a top and bottom line perspective. Operating results benefited from the inauguration and Women's March in Washington, D.C. as well as the Easter holiday shift, which positively impacted March performance.

We also took a number of steps to bolster our company in the first quarter, underscoring our disciplined approach to capital allocation and portfolio management. We acquired 2 high-quality hotels, the Don CeSar and W Hollywood, which further improved our iconic portfolio of assets. Both properties immediately fall into the top of our portfolio in RevPAR and EBITDA per key metrics and are strong examples of the types of value-enhancing growth opportunities we are pursuing.

Subsequent to quarter end, we disposed of the Sheraton Memphis for $67 million, an asset that we believe will underperform the rest of the portfolio, has a RevPAR of less than $100 and will require greater CapEx going forward. We also entered into a contract to sell the Hilton Melbourne South Wharf, effectively ending our investment activity in Australia and New Zealand. The seller has significant money at risk, and we plan to close sometime during the second quarter. We have no plans to reenter the region.

As Greg will go into in greater detail, we continue to demonstrate the strength of our investment-grade balance sheet. We completed a 3.875%, $400 million, 7-year senior notes offering, which fills a gap in our maturity schedule and provides us flexibility to deal with multiple opportunities in economic environments.

Organizationally, we formed the Enterprise Analytics group, which contributed to the successful execution of key value-add activities during the quarter and helped drive strong margin improvement and profitability growth.

Speaking of operations, let me provide some insight into our results for the quarter. Adjusted EBITDA was $367 million for the quarter, an increase of 6.4%, and exceeded both our expectations and consensus estimates. Comparable hotel EBITDA growth was slightly higher, increasing 6.5%. First quarter adjusted FFO per share was strong, increasing 7.3% over last year to $0.44, which was also above consensus estimates. An increased level of group activity as well as our continued focus on productivity improvements resulted in comparable EBITDA margin growth of 85 basis points in the first quarter.

While we expected to see some benefit from the Easter holiday shift, group average rate was strong and transient demand was better than anticipated. As a result, on a constant currency basis, comparable hotel RevPAR improved 3.4% in the quarter as a result of a 2.4% increase in average rate and occupancy improving 80 basis points to 75.8%. For the quarter, comparable hotel revenues increased 3.1%.

As mentioned, our group business benefited from both the inauguration and the Easter holiday shift, with group revenue up 9.1% in the quarter based on average rooms sold per night and leap year adjusted. This was a result of strong increases in both demand and rate, up 4.7% and 4.2%, respectively.

Interestingly, January group strength was based more on rate, while March's group performance was more a result of strong demand improvement. In January, group rate increased 8.6%, with demand up 1.3%, driven mainly by the inauguration in our Washington, D.C. hotels. In March, we saw group revenue increase over 14%; this time, a result of demand increasing nearly 10% and average rate over 4%.

Despite the strong group results, and as we expected, group booking activity weakened as we moved throughout the quarter, with new group room nights being booked in the quarter for 2017 down 3% versus last year's bookings. As a result, group revenue on the books for 2017 declined by 30 basis points from the beginning of the year and is now 1.7% versus last year. This excludes our 3 hotels in Brazil.

Not surprisingly, the significant increase in group business in January and March had a limiting impact on transient demand in those months. Overall, we saw a transient revenue decline of 1.7% for the quarter, as a 1.4% increase in average rate was offset by a decrease in transient room night of 3.1%. Importantly, the Easter holiday is typically a strong transient leisure period. So the shift of the holiday into April had a more pronounced negative impact on transient performance in the quarter.

Despite the cautious optimism we voiced on our last call, we have yet to see the special corporate transient customer return. Having said that, the rate of decline in this segment appears to be slowing.

In 2016, Special Corporate rooms declined 3.6%. And for this quarter, volumes for this segment declined only 1%. While we remain hopeful this customer can return in growth, particularly given the optimistic consensus forecast on corporate profits and business investment, we have not yet win these material signs, at [least] at our properties.

Moving to food and beverage. The strong group performance this quarter drove banquet, catering and AV revenue, which increased 7.4%. This contributed to comparable hotel F&B revenue increasing 4.8% in the quarter. Combined with excellent cost controls, this generated a 330 basis point increase in comparable hotel food and beverage profit margins.

On the investment front, as I mentioned at the beginning of the call, we have completed 2 acquisitions year-to-date, the Don CeSar Hotel and the W Hollywood, for approximately $430 million. Since we last spoke, we added the 305-room W Hollywood to our portfolio. We are very enthusiastic about the asset for a number of reasons. In addition to the hotel, which we purchased for $625,000 per room at a 6.25% cap rate, we also purchased 10,800 square feet of high-quality retail space and 7 prominent super-graphic billboard signs for a total value of $219 million. The hotel immediately ranks in the top 5 in both RevPAR and EBITDA per key in our portfolio and is centrally located in the dynamic and rapidly growing submarket of Hollywood. The surrounding area features a strong base of business and transient demand generators and serves as a hub for a thriving creative community and entertainment-related companies such as Viacom, Netflix and Paramount.

We think the deal compares quite favorably on a price per key basis relative to other transactions in the market. We also were pleased to increase our exposure to the L.A. market, which represented only 5% of our total hotel EBITDA prior to the purchase. Having been built in 2010, the asset is nearly brand new with a limited amount of owner-funded CapEx required. This was an attractive feature, as was the opportunity for potential margin improvement under Marriott management.

Last but not least, the contract flexibility of the W Hollywood provides significant value that we did not take into account in our underwriting. The hotel is fully unencumbered by brand and management upon sale beginning in 2021, which allows us to create value in a myriad of ways, including, but not limited to, enhanced sale price, potential franchise conversion, fee negotiations and/or contract trades on other assets within our current portfolio.

While we are actively looking for assets that will enhance the value of the portfolio, the difficulty in predicting availability and timing prevents us from including any additional acquisition assumptions in our forecast.

During the quarter, we also acquired the ground lease for the Miami Marriott Biscayne Bay Hotel for $38 million. We are excited about this deal as it increases our flexibility on the asset, either via sale or brand, but also opens up potential for numerous value-add incentives.

For forecasting purposes, the Sheraton Memphis and Melbourne asset sales are the only additional dispositions included in our guidance.

We continue to look to enhance the portfolio through value-add investments. During the quarter, we invested approximately $16 million on redevelopment, return on investment and acquisition capital expenditures. As expected, we also began to see the benefits from prior year investments in this category.

For the quarter, our non-comp hotels had a RevPAR increase of nearly 16%. We spent approximately $64 million on maintenance CapEx, completing room renovations at the Dallas Airport Marriott and San Francisco Marriott Fisherman's Wharf Hotels. For the full year, we expect to spend between $270 million and $300 million on renewal and replacement capital expenditures and $90 million to $115 million on redevelopment, ROI and acquisition projects. However, our 2017 capital spend should be used with a bit of an aberration as we would expect our normal CapEx spend to be somewhat higher.

Now let me spend a few minutes on our outlook for the remainder of 2017. While we are very pleased with our results in the first quarter, we are aware that overall performance was aided by events that skewed results higher. In fact, we believe that the first quarter will be our best of the year. Like quarter 1, which benefited from the Easter shift, the fourth quarter will be favorably impacted by the Jewish holiday shift from October into September, and we expect it will be our second strongest quarter in 2017. That being said, the events that benefit the first and fourth quarters will negatively impact the second and third quarters, leaving our full year outlook relatively unchanged. Despite this quarter's better-than-expected results, there does not appear to be compelling evidence of acceleration of RevPAR above where we initially guided.

On our last call, we expressed cautious optimism this might occur, which was partially due to positive forecast in business investment and corporate profits. It was also a function of the possibility of pro-growth legislation coming out of Washington in the back half of 2017.

Sitting here now, while the forecast for both business investment and corporate profits remains strong, we do not anticipate any material policy initiatives providing tailwinds to our business until 2018 at the earliest.

Further, and as mentioned, group booking pace appears to be weakening for 2017, with February and March bookings in the year, for the year, slightly softer than last year. This trend, combined with continued economic uncertainty, has tempered our outlook for the remainder of the year. As a result, we are maintaining our full year comparable hotel RevPAR range of flat to 2%. However, given our strong first quarter comparable hotel EBITDA margin growth, we are increasing both the low and high end of our full year margin guidance to negative 60 basis points to plus 10 basis points. The impact of this is a 15 basis point improvement to the midpoint of our range and translates to a full year adjusted EBITDA range of $1.425 billion to $1.49 billion and an adjusted FFO per share range of $1.60 to $1.68.

With that, I will turn the call over to Greg Larson, our Chief Financial Officer, who will discuss our operating and financial performance in greater detail.

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Gregory J. Larson, Host Hotels & Resorts, Inc. - CFO and EVP [4]

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Thank you, Jim. As Jim mentioned, we had a strong first quarter in our (inaudible) with RevPAR and EBITDA margin growth, which exceeded our expectations. Our properties in D.C. significantly outperformed our portfolio this quarter, with RevPAR growth of over 20%, exceeding the STAR upper upscale results by 400 basis points. These results were better than we had anticipated. As we mentioned last quarter, January was a fantastic month for our properties in D.C., with RevPAR increasing approximately 75% from demand generated by the inauguration and the Women's March. Our D.C. market RevPAR growth was driven by an average rate improvement of over 16% and a 230 basis point increase in occupancy.

On the group side, additional citywide room nights contributed to a 35% rise in group revenues on the strength of significant increases in both room nights and average rates. The strong group business provided compression that drove transient ADR growth of 15.2% and contributed to excellent food and beverage sales, which were up 19.5%, mainly in the more profitable banquet and catering business. Having said that, citywide room nights in D.C. are expected to decline over the remainder of the year, and bookings remain very short term. As a result, we expect RevPAR to moderate in the second quarter.

Our hotels in Seattle also outperformed our expectations and the rest of the portfolio, with an 18% RevPAR increase in the first quarter, which was over 1,000 basis points above the STAR upper upscale market result of 7.8%. The impressive results were driven equally by occupancy and average rate increases of 6.8 percentage points and 7.4%, respectively, and aided by a strong citywide calendar displacement from a competitor's room renovation and the benefits from our W Seattle Hotel that was renovated last year.

Group room night growth of 26% created compression, allowing our managers to drive transient rate up almost 12% while increasing food and beverage sales by over 23%. In addition, the Westin Seattle is now part of a unique special corporate rate program with a local business, which benefited the hotel in the first quarter and will continue to positively impact performance going forward. We expect RevPAR growth at our Seattle properties to continue to outperform the portfolio in the second quarter.

In Denver, RevPAR at our hotels grew 13% in the quarter, driven by a 1% increase in average rate and a 7.6 percentage point growth in occupancy. The RevPAR increase at our properties exceeded the STAR upper upscale result by 910 basis points, which is partially a product of several competitors undergoing room renovations this quarter.

Group revenue growth in this market was strong, up 24.8%, and contributed to the food and beverage revenue increase of more than 66%, predominantly in the more profitable banquet and catering business. That said, we expect a lock of citywide in the second quarter to temper the RevPAR growth demonstrated in the first quarter.

San Diego was, again, one of the top-performing markets as RevPAR growth in the first quarter increased 11.3%, driven entirely by an increase in average rate. Four additional citywides in the market resulted in a 15.8% increase in group revenues, which created compression and yielded an increase in transient average rate of almost 12%. The additional citywides were not the only contributors to the outperformance as strong in-house group business and continued market share gains at the Coronado Island Marriott, post renovation, proved beneficial as well.

It is also worth noting that our RevPAR results exceeded the STAR upper upscale market growth by 320 basis points. Although we did not expect RevPAR growth to continue at the same pace as the last several quarters, we do anticipate that RevPAR growth at our assets in the market will outperform our portfolio in 2017. Over the next couple of years, the San Diego market has some of the lowest expected supply growth, which bodes well for future performance.

Now I'll provide some color on some of our more challenged markets. RevPAR at our hotels in San Francisco declined 6.3% in the first quarter, largely due to a difficult comp given the Super Bowl last year, renovations at the Moscone Convention Center and our rooms renovations at the Marriott Fisherman's Wharf.

Going forward, we anticipate hotels in San Francisco will continue to struggle as the Moscone Convention Center is scheduled to be completely closed in the second and third quarters, negatively impacting all hotels in the Bay Area. However, keep in mind that once the expansion project at the Convention Center is complete in 2018, we expect citywides to return to San Francisco and business to follow suit in a meaningful way in 2019.

In New York, RevPAR decreased 3.9% in the first quarter, with an occupancy decline of 1.7 percentage points and an average rate reduction of 1.8%. Not surprisingly, supply continues to impact our ability to drive rate. We have also noted that European travel to the city continues to be weak due to the strong U.S. dollar and residual effects from the impact from Brexit. As we stated in February, based on our information on the market, we expect RevPAR growth at our hotels in New York to continue to be challenged in 2017.

Our hotels in Florida had a RevPAR decline of 0.4% in the first quarter as the market continues to be negatively impacted by weaker group and leisure activity. Occupancy decreased 2.1 percentage points, but on a positive note, that was offset by an average rate increase of 2.2%. In the short term, we expect our hotels at Florida will benefit from the Easter shift in April. This should help our Florida assets outperform the portfolio in the second quarter.

Moving to international operations. Our consolidated international hotels' first quarter RevPAR declined 7.1% in constant currency. This was primarily due to the underperformance of our properties in Brazil. The continued weakness in Brazil was a function of economic issues and increased supply. However, our performance there was partially offset by the strong performance of our 2 Canadian assets. RevPAR at our hotels in Canada grew 3.9% in constant currency. Our Calgary Marriott has strong corporate group and contract business that helped boost performance this quarter.

Looking ahead, in the second quarter, we expect the story of these 2 countries to continue, outperformance in Canada and underperformance in Brazil due to the continued weakness in Brazil's economy and the difficult comps related to the business leading up to the Olympics last summer.

Tripping to our European joint venture. The portfolio showed signs of recovery this quarter, especially in markets severely impacted by terrorist attacks at the end of 2015 and first quarter 2016. On a broader macro level, we are seeing improving GDP forecast across Europe. RevPAR for the 10 hotels in the portfolio improved 8.2% in constant euros, with occupancy growth of 4.7 percentage points at an average rate increase of 0.7%. This performance was driven by strong corporate group demand at several properties as well as increases in contract revenues through the addition of airline crews.

The group volume strength contributed to growth of food and beverage revenue of about 17%, most of which came in the form of profitable banquet and catering business. Going forward, we are encouraged by the positive signs in Europe and expect that RevPAR growth of these hotels for the full year will outpace our comparable hotel results.

We continue to be impressed by the effort and result of our managers and asset managers to bring more profit to the bottom line. In the first quarter, we increased EBITDA margins by 85 basis points, driven by outstanding productivity improvements throughout the hotels, notably from excellent cost containment and food and beverage departments. Food and beverage margins improved 330 basis points.

We continue to focus on productivity improvements through our time and motion studies, which we have rolled out at our medium and small hotels. As we have already seen at our large properties, our managers have made structural changes to processes and procedures, enabling them to more effectively schedule labor on demand and minimize excess staffing, thereby reducing costs and increasing productivity. With the benefit of 1 quarter behind us and with these productivity savings in mind, we expect RevPAR growth of 2% will translate into a 10 basis point increase in margin expansion as opposed to the previous assumption of breakeven margins we guided to on our last earnings call.

In April, we paid a regular first quarter cash dividend of $0.20 per share, which represents a yield of 4.2% on our current stock price.

We continue to operate from a position of financial strength and flexibility and believe we have one of the best balance sheets in the lodging REIT in the overall REIT space. Importantly, this key competitive and strategic advantage enhances our ability to sustain the dividend throughout the lodging cycle while also allowing us to invest when accretive opportunities arise to either buy assets, buy back stock or reinvest in high-yielding value-add projects.

In March, we issued $400 million of Series G senior notes through April of 2024 at an interest rate of 3.875%. This transaction filled a gap in our debt maturity schedule and demonstrated the continued strength and flexibility of our investment-grade balance sheet. Part of the proceeds were used to repay $250 million that have been drawn under the revolver portion of our credit facility, while the rest remains available for general, corporate purposes.

We ended the first quarter with approximately $411 million of cash and $784 million of available capacity remaining under the revolver portion of our credit facility. Today, our leverage ratio at 2.6x is calculated under the terms of our credit facility.

As Jim noted in his remarks, we have increased the midpoint of our margin guidance for the year and maintained a RevPAR guidance from our prior earnings call. In addition to the change in our margin assumption, our guidance now includes the loss of EBITDA related to the 2 asset sales we announced today and an increase to EBITDA from better than previously estimated profits to be generated from repositioned non-comp for both hotels.

The interest expense from the issuance of the new $400 million Series G notes and the repayment of $250 million of the credit facility equates to the loss of approximately $0.01 of FFO per share and explains why the midpoint of our revised adjusted FFO per share guidance is $1.64 compared to the $1.65 midpoint we articulated in February.

Finally, I would urge you to keep the impact of the holiday shifts in mind, as second and third quarter RevPAR results are anticipated to be significantly weaker than the first quarter, with a rebound expected in the fourth quarter. Looking specifically to the second quarter, we expect nearly 29% of our total EBITDA for 2017 will be generated in that quarter.

Overall, we are pleased with our strong results today, particularly with the improving profitability of our assets in what continues to be a competitive market and lower growth environment.

This concludes our prepared remarks. We are now interested in answering any questions you may have. (Operator Instructions)

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Smedes Rose.

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Bennett Smedes Rose, Citigroup Inc, Research Division - Director and Analyst [2]

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Jim, it sounds like in your prepared remarks that group demand declined maybe more than you had expected over the course of the quarter. And I'm wondering if the -- in your assumptions to get to 0 RevPAR for the year, if you're assuming that same pace of decline. Or do you expect that to kind of flatten out? And I guess, really, kind of the -- my question is, how confident are you that you can at least achieve 0 or flat RevPAR growth and not go into negative territory?

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James F. Risoleo, Host Hotels & Resorts, Inc. - CEO, President and Director [3]

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I think, Smedes, we were very thoughtful in our reevaluation of our prior forecast. I would tell you that we expected, as we move through the quarter, that group would weaken. As you may recall, we started the year with group up 2%. We saw a strengthening in February to 3%, and then we saw it weakening down to 1.7%. At this point in time, I think we're comfortable with providing our guidance of 0.2 -- 0 to 2% RevPAR growth. I think if you step back and look at the comments with respect to the first quarter, the fourth quarter and the respective holiday shifts, second and third quarters are clearly going to be weak. But as we look at group booking pace, we took that into account, and that's why we'd affirmed our guidance for the year.

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Gregory J. Larson, Host Hotels & Resorts, Inc. - CFO and EVP [4]

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Yes. And Smedes, look, the same thing sort of happened, too, as last year, too, right? We started with group revenues on our book at one level, and then as we moved throughout the year, the groups that booked sort of in the year, for the year were a little bit weaker than the prior year. And so as a result, the group revenues that we had -- group still outperformed transient in 2016, but the group level at the end of the year was just lower than where we started. And so as Jim mentioned, right, we started the year at 2% on the group side, and when we gave guidance of 0 to 2%, we were certainly expecting that bookings in the year, for the year, would be a little bit weaker and would bring that revenue number down.

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Operator [5]

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And we'll take our next question from Anthony Powell with Barclays.

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Anthony Franklin Powell, Barclays PLC, Research Division - Research Analyst [6]

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Just a bit more on the group pace decline. Are you seeing that concentrated at any hotels or in any markets? And do you think meaningfully, you're just a bit more cautious given some of the policy uncertainty we're seeing?

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Gregory J. Larson, Host Hotels & Resorts, Inc. - CFO and EVP [7]

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I don't think it's any market in particular, right? I mean, when we look at it, again, we have certain markets that were quite strong this year -- this quarter. Yes, I'm looking at it as I'm talking to you now. I don't think it's any particular market.

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Anthony Franklin Powell, Barclays PLC, Research Division - Research Analyst [8]

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I was going to say, some of the other REITs are saying that they're attempting to replace some either lost group or corporate transient with things like [L&R] business, associations, contracts. Is that available to you? And are you pursuing that strategy?

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James F. Risoleo, Host Hotels & Resorts, Inc. - CEO, President and Director [9]

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Anthony, it is available to us. And in fact, that's just the strategy we took last year, where we had holes in occupancy because the high-end business traveler didn't show up. We were able to fill in with either lower-rated group or more government and other lower-rated business. And that's the same strategy we're pursuing this year.

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Gregory J. Larson, Host Hotels & Resorts, Inc. - CFO and EVP [10]

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Yes. In fact, Anthony, just to build on what Jim just said, I mean, if you think about it, our occupancy ended here in this first quarter at 75.8%. For our first quarter occupancy, you would have to go all the way back to the first quarter of 2000 to see a higher occupancy level. Again, it's pretty easy in this environment to replace business with other business, but as we talked about before, right, I mean, what we would love to see at some point this year is to see the corporate, special corporate customer come back and the business traveler to come back because at that point, we'd be able to have a higher rate of customer, there'll be a positive mix shift, and then we could produce higher rate growth and, therefore, higher RevPAR growth.

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James F. Risoleo, Host Hotels & Resorts, Inc. - CEO, President and Director [11]

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Just to reaffirm what we said on the first quarter call, we discussed this very topic with respect to the fact that special corporate had not shown up. We indicated that we were cautiously optimistic that they, in fact, would show up, and that's based on the forecast for business investments and the forecast for the corporate profits. Well, the simple fact of the matter is that we haven't seen that happen to date. And that's another reason why we have elected to keep our guidance to 0 to 2%.

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Gregory J. Larson, Host Hotels & Resorts, Inc. - CFO and EVP [12]

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Yes. I think that's the good news, Jim and others, is that even though -- there certainly are some forecasts. As Jim mentioned, corporate profits look strong. Business investment looks strong. Our group revenues are sitting here, up 1.7%, which is sort of near the high end of our RevPAR guidance. I think we ignored a lot of those positives and just really focused on the fact that supplies increasing a touch this year. And like I said, we ignored those positives in giving guidance of 0 to 2%.

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Anthony Franklin Powell, Barclays PLC, Research Division - Research Analyst [13]

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Got it. And just one more quick one for me. Do you have a year-to-date RevPAR growth number? Was it -- including April?

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Gregory J. Larson, Host Hotels & Resorts, Inc. - CFO and EVP [14]

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For April, we're expecting -- because of the holiday shift, we're expecting actually April for us to actually have a decline in RevPAR. But we haven't finished the month yet, so...

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James F. Risoleo, Host Hotels & Resorts, Inc. - CEO, President and Director [15]

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We don't have the final data in, so it's not something that we're in a position to provide.

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Operator [16]

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And we'll take our next question from Patrick Scholes with SunTrust.

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Charles Patrick Scholes, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [17]

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Just when looking at your performance for San Francisco in 1Q, negative 6%, is it fair to assume that as the -- is it fair to assume for 2Q that things could actually be worse than negative 6% for you?

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Gregory J. Larson, Host Hotels & Resorts, Inc. - CFO and EVP [18]

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Patrick, when we think about San Francisco, obviously, our hotel -- our down 6.3% was worse than the STAR data for the industry. I -- so because of that, I actually think our Q2 could be slightly better than our down 6.3%. You might be right, though, for the industry, it could be a little bit weaker in Q2 than Q1. I do think that, at least based on our group booking pace, our best quarter of the year, at least on our forecast when we think about San Francisco, is actually Q3.

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Charles Patrick Scholes, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [19]

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Okay. And then just one follow-up question, if I may. Just for overall, not just San Francisco, but overall for 2018 group, how are you feeling about that? I think, last quarter, you mentioned that the group revenue pace for 2018 is booking very strong. How do you feel now?

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James F. Risoleo, Host Hotels & Resorts, Inc. - CEO, President and Director [20]

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We have seen continued strength in 2018 pace. However, we think it's too early to really provide any guidance. It's too early in the year. And what we've -- history repeats itself, which it likely will. There will be some slippage in terms of what's on the books today. I would tell you the numbers today look pretty good.

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Gregory J. Larson, Host Hotels & Resorts, Inc. - CFO and EVP [21]

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Very good.

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James F. Risoleo, Host Hotels & Resorts, Inc. - CEO, President and Director [22]

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Very good. Very good, but it's not a number that we're prepared to discuss.

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Operator [23]

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And we'll take our next question from Shaun Kelley with Bank of America.

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Shaun Clisby Kelley, BofA Merrill Lynch, Research Division - MD [24]

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Maybe just to stick with the whole group conversation sort of in the year, for the year pattern. Just curious if you could give us a little bit more color. It seems like some operators out there have actually entered the year with the strategy of trying to group up to gain some visibility, just given how -- just how challenging the demand environment has been for the last couple of years. But in Host's case, it seems like you knew that in the year, for the year would be tough to come by, and now it is. I'm just curious if you can kind of help us think about like why can't you source more group business and maybe even just try and push for this given that you kind of know or that you expected the environment to be a little softer?

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James F. Risoleo, Host Hotels & Resorts, Inc. - CEO, President and Director [25]

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That's a great question, Shaun. We had a meeting with our major operator, Marriott International, over the last couple of weeks to discuss group booking pace. I will tell you that we have -- today, 85% of the group business is on the books for 2017. And I think that there is a general strategy that if we can find group business at an attractive price point, that we will take it today. Now that said, if you think back to the trend that we've seen over the first quarter, where we started it 2%, went to 3%, and we're down at 1.7%, easier said than done sometimes, but it's something that we're keenly focused on.

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Gregory J. Larson, Host Hotels & Resorts, Inc. - CFO and EVP [26]

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Jim, I think that 85% of the group business that we ultimately think that we're -- is a good number. I also think, Shaun, you mentioned that the group bookings are, I think, you said very weak. I wouldn't go that far. Again, I think we're still booking group business at a decent clip. It just happens to be, year-to-date, we're booking at just a slightly lower clip than we did last year, but we're still booking -- there's still group business to be booked. And frankly, the groups that we're booking now are pretty high-quality groups. I mean, if you look at our first quarter, our food and beverage growth was quite strong. In my comments, I talked about our banquet business has been quite strong. We're starting to charge groups for room rentals, and [net] profit just drops down to the bottom line. So I think we're still booking. We're just booking a touch -- at a rate that's a touch less than last year.

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Operator [27]

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We'll take our next question from Chris Woronka with Deutsche Bank.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [28]

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Jim, I was hoping maybe you can elaborate a little bit more on the food and beverage margin improvements because it's a pretty big deal to the bottom line, and I think you said you've done it in your small and medium-sized hotels. And so how should we think about the opportunities across the rest of the portfolio going forward?

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James F. Risoleo, Host Hotels & Resorts, Inc. - CEO, President and Director [29]

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Well, I think that there are a couple of things that drove margin improvement in general this year, Chris. And then I'll come back to your question regarding food and beverage. We have been doing time motion studies throughout the portfolio, and those studies are not done yet. But we have really gone through the bigger hotels, and we've rolled out the same process now at our smaller hotels. So what has driven our margin performance, by and large, is productivity gains. And productivity gains, both in hotel operations, i.e. rooms productivity and undistributed as well as food and beverage. Food and beverage productivity or food and beverage margin gain this year was up 330 basis points. That's a combination of just the sheer increase in volume but also in very strong productivity gains and really a decrease in food and beverage costs.

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Gregory J. Larson, Host Hotels & Resorts, Inc. - CFO and EVP [30]

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Yes. And Jim mentioned the time motion studies. As you know, Chris, we completed those time motions or we were completing them last year with our big hotels. And what's happened here in the first quarter is some of the time motion studies that we completed throughout 2016, in first quarter, obviously, we're getting all the benefits of time motion studies. And in first quarter of last year, we probably had and fully implemented them. And then combine that with the fact, as Jim said, that this year, we're starting to implement some of those studies on our medium and small hotels. So in the second half of the year, we'll get the benefit from that as well. And Chris, the final thing, and you know this, too, the one thing that always helps out margins, and Jim sort of mentioned it, is strong revenue growth, right? So when you have strong F&B growth, that's helpful. And then especially when it comes from the higher-margin business, the banquet business, that's also very helpful.

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Operator [31]

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And we'll now take our next question from Thomas Allen with Morgan Stanley.

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Thomas Glassbrooke Allen, Morgan Stanley, Research Division - Senior Analyst [32]

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It's been over 6 months now since the Marriott-Starwood deal closed. Can you just give us your updated thinking on central benefits there? And I think at Marriott's Investor Day in March, they talked about rolling out some better procurement and other cost-saving plans in the next few weeks. So is that something you guys start benefiting from?

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James F. Risoleo, Host Hotels & Resorts, Inc. - CEO, President and Director [33]

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I think, over time, we will definitely see benefits from the Marriott-Starwood acquisition. We're looking forward in a number of different places, Tom. First and foremost, I think that it is immediate as the travel agent costs with respect to the OTAs. Marriott had a much stronger deal than Starwood did with Expedia and Booking.com, and we expect that, that is going to benefit us over the course of 2017 and 2018. Another area that we feel we will see benefit over time does relate to procurement costs. The sheer size of the combined company will enable Marriott to drive a better deal for goods to be provided to the hotels. Lastly, we continue to see Marriott make improvements in operations. They're running the properties tighter than Starwood did, so we're optimistic that, that should continue to flow through to us in better margin performance as we move forward. On the other side of it, you didn't ask the question per se, but I think that the fact that Marriott has a fantastic sales engine, group sales engine, is going to benefit us going forward as well as the combination of the 2 rewards programs, which, when combined, will have over 100 million members, and they're adding about 1 million members a month. So all in all, we're very happy about the Marriott-Starwood acquisition. Going back to the rewards program alone, I mean, Marriott -- this will impact the rewards program. Marriott is in the process of negotiating a new credit card deal, which we think will benefit us as well, through lower credit card commissions. So those are some of the things that we're looking at as we move throughout 2017 and into 2018.

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Gregory J. Larson, Host Hotels & Resorts, Inc. - CFO and EVP [34]

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Certainly, tailwinds were [small] for '17 and '18.

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James F. Risoleo, Host Hotels & Resorts, Inc. - CEO, President and Director [35]

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Absolutely.

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Thomas Glassbrooke Allen, Morgan Stanley, Research Division - Senior Analyst [36]

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So I kind of take from what you said that the margin outperformance in the first quarter wasn't really -- it was more your own kind of measures than any kind of Marriott-Starwood synergy measures. And so...

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James F. Risoleo, Host Hotels & Resorts, Inc. - CEO, President and Director [37]

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I think that's right, Tom. I mean, it really -- the effect of our -- we work very closely with our operators, and we work hard together to drive productivity improvements and to keep a tighter lid on food and beverage costs. Our time motion studies that we implemented at the hotels have been meaningful, and we've seen a meaningful uptick in productivity to allow us to outperform on the margin perspective to -- 85 basis points in EBITDA margin increase in the first quarter.

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Thomas Glassbrooke Allen, Morgan Stanley, Research Division - Senior Analyst [38]

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Okay. And then just to follow up, your transactions in the quarter kind of send mixed messages around whether you're trying to diversify away from Marriott. How are you thinking about the need to diversify?

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James F. Risoleo, Host Hotels & Resorts, Inc. - CEO, President and Director [39]

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Which transaction are you speaking of, Tom?

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Thomas Glassbrooke Allen, Morgan Stanley, Research Division - Senior Analyst [40]

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It's more talking -- you bought the W Hollywood, so more Marriott exposure there. And then you bought the Don CeSar, so less Marriott. And then you sold the Hilton. So I was just -- it didn't seem like there was any -- there was nothing suggesting a strategy to move away from Marriott exposure.

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James F. Risoleo, Host Hotels & Resorts, Inc. - CEO, President and Director [41]

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No. No, I don't think there's a strategy to move away from Marriott. As I said, we are very comfortable and think that they are the best in the space. I mean, they were great before Starwood, and now with their increased scale, for a number of reasons that I mentioned just a moment ago, we're very comfortable with Marriott, and we love the relationship we have with them. I think when we think about acquisitions and dispositions, every deal we do, whether it's a sale or an acquisition, is with an eye toward enhancing shareholder value. And when we think about diversity, we think more about geographic diversity as we look at balancing the portfolio among various markets and not necessarily looking at brand at the outset.

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Operator [42]

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We'll take our next question from Rich Hightower with Evercore ISI.

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Richard Allen Hightower, Evercore ISI, Research Division - MD and Fundamental Research Analyst [43]

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Two questions here. The first one's on margins, really quickly. I don't know if I caught this in the prepared remarks, but can you give us a sense of what the better-than-expected mix shift in the first quarter did for margins in the first quarter relative to initial expectations? And then how margins -- alongside sort of the changes in RevPAR across the quarters that you mentioned, how margins will progress as well for the rest of the year?

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Gregory J. Larson, Host Hotels & Resorts, Inc. - CFO and EVP [44]

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This is Greg. I don't know if this is much of a mix shift. It's just -- when our RevPAR growth is stronger than expected, which obviously occurred in the first quarter with 3.4% RevPAR, and if you look at our domestic hotels, 3.8% RevPAR, then that's always helpful on margins, right? And so I think that certainly helped our margins. I think when you think about the quarters going forward, you can think about that comment. In quarters where we're predicting very low and maybe no RevPAR growth, like Q2 and Q3 in aggregate, then you should assume margins will actually decline in those quarters. On the other hand, we mentioned in our comments, we think RevPAR will rebound in fourth quarter. And if that occurs, then obviously, that will be better margin performance in that quarter than in Q2 and Q3. I think the good news overall, obviously, we had a great quarter on the margin front in the first quarter, and that's why we are able to comfortably increase our -- the midpoint of our margin guidance by 15 basis points.

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Richard Allen Hightower, Evercore ISI, Research Division - MD and Fundamental Research Analyst [45]

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All right. So that is helpful, Greg. And then the second question here, kind of hitting back on Tom's question about acquisitions and capital allocation. When you look at deals like the W Hollywood and the Don, I think we all get the point that they -- both of those deals (inaudible) average RevPAR for the portfolio, average EBITDA per key for the portfolio, but there is a risk, of course, that you can overpay for those sorts of things. And I just want to know kind of how you guys balance out each deal on its own in the sense of any of the accretion. Then also, in a portfolio context, raising the average RevPAR for the assets in the portfolio, how do you think the market values those right now?

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James F. Risoleo, Host Hotels & Resorts, Inc. - CEO, President and Director [46]

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Well, I'll answer the first question last. I don't think it's being valued fairly. With respect to the underlying quality of the assets that we have in the portfolio, when you look at the Don and the W, they're 2 truly iconic assets that are exceptionally difficult, if not impossible, to duplicate. And when we think about how we can enhance shareholder value, we take a very disciplined approach to any investment opportunity or, frankly, any sale that might -- sale opportunity that might present itself by looking carefully at where we are in the cycle, underwriting the asset appropriately and taking into account all capital needs of the property as we look out over a 10-year period of time and solving for a hurdle rate of return to our cost of capital that is 100 to 150 basis points at a minimum and higher depending on the risk profile in the transaction. So there's a lot of thought that goes into every deal that we underwrite in every acquisition that we make as we go forward. And I think that when you look at the metrics on both of these deals, they're very unique metrics. The W out of the box is going to be top 5 in the portfolio. And if you think about our hotels, another -- and newer hotels. I mean, the W is a new property. The Don had significant investments completed before we bought the hotel. But if you think about something like the W with the RevPAR that the hotel generates, that would lead to the conclusion that your owner-funded CapEx is going to be relatively de minimis compared to other properties, compared to lower RevPAR hotels, compared to the properties that are older that might need more money. So there's a lot that goes into our decision on every acquisition opportunity.

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Gregory J. Larson, Host Hotels & Resorts, Inc. - CFO and EVP [47]

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Yes, Rich, I agree. Obviously, as Jim said, we're always looking for that 100 to 150 basis point return on levered IRR above our cost of capital. But the other thing we do is we always compare that return to buying back stock. And as you know, right, last year, we bought back stock with a 15% handle on it. So even though there were opportunities in the market last year, we felt that buying back our stock with a 15% handle was a better investment, so that's what we did. And so, again, if you fast-forward to today, we found these 2 great acquisitions. The returns were good. And so that's what we're looking at. But when we look at things, we look at returns for assets, but we also look at...

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James F. Risoleo, Host Hotels & Resorts, Inc. - CEO, President and Director [48]

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Alternative uses of capital.

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Gregory J. Larson, Host Hotels & Resorts, Inc. - CFO and EVP [49]

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Yes.

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Operator [50]

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And we'll go next to Wes Golladay with RBC Capital Markets.

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Wes Golladay, RBC Capital Markets, LLC, Research Division - Associate [51]

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Looking at the group bookings, can you comment on how in-house group bookings are looking and maybe we could -- if we would see F&B revenues close the gap versus RevPAR? I mean, should that hang in there, be it more in-house? And in particular, San Francisco, how are you doing in 2Q and 3Q for the in-house?

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Gregory J. Larson, Host Hotels & Resorts, Inc. - CFO and EVP [52]

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This is Greg. So as we said in our prepared remarks, right, our group revenues on our books today, up 1.7%, right? But what we also mentioned is in our guidance, our assumption is as we progress through the year, even though we'll continue to book groups at a pretty decent pace, the pace will be slightly lower than the pace that we booked groups at last year. And so that 1.7% growth in group revenue as well over throughout the rest of this year should end up sort of trending lower. So that's how we -- I'm sorry?

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Wes Golladay, RBC Capital Markets, LLC, Research Division - Associate [53]

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I was just saying, so was that referring to all the in-house group? I was wondering if you had -- does that include the groups you assigned -- that gets assigned to you from the Moscone Center. I figured that might be down and you might be having more in-house group and then you might get more F&B, so maybe total par would be a little bit better.

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Gregory J. Larson, Host Hotels & Resorts, Inc. - CFO and EVP [54]

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Wes, I'm sorry, I thought you were talking about in total and San Francisco. What I just talked about was for our entire portfolio. If you think about just San Francisco, yes, we have -- like I've mentioned earlier, we have some in-house group activity in Q3. And so because of that, I think our hotel in the third quarter -- our hotel in San Francisco should perform much better than what -- the performance that you witnessed here in the first quarter.

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Wes Golladay, RBC Capital Markets, LLC, Research Division - Associate [55]

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Okay. And then probably -- to the point that will maybe better on total par, I mean, F&B, we probably should have modeled that being down too much for the...

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Gregory J. Larson, Host Hotels & Resorts, Inc. - CFO and EVP [56]

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Well, the interesting thing about San Francisco is even though our hotels in San Francisco had a decline of 6.3%, we actually had -- at the Marriott Marquis in San Francisco, we actually had a very -- a group that generated very strong food and beverage growth for that hotel.

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Operator [57]

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And we'll take our next question from Robin Farley with UBS.

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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [58]

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I don't know if you commented on this at the beginning of the call because I had to miss part of the beginning, but have you sort of given guidance on whether you expect on a full year basis to be a net buyer or seller of assets this year?

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James F. Risoleo, Host Hotels & Resorts, Inc. - CEO, President and Director [59]

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Robin, it's a great question, and we didn't comment on it. I think that we are very cognizant of some of the tailwinds that the lodging sector is going to face, given some supply considerations that we're looking at for '17 and '18, and also [bids as] spreads on potential acquisitions as we look at the landscape out there. So I don't have a definitive answer for you today because we are -- as Greg mentioned before, in addition to having the ability to acquire hotels, we will also opportunistically sell hotels. And if the stock price drops to a level where we feel the right decision is to buy back shares, we'll certainly do that. So as I mentioned, the -- our guidance for the balance of the year includes the 2 dispositions, the sale of the Sheraton Memphis and the sale of the Hilton in Melbourne, and it includes the acquisitions we've completed year-to-date. We have not included any further sales or dispositions in the guidance.

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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [60]

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Okay. All right. And then maybe also, I don't know if you made any comments on -- when you look at your Starwood-branded properties, are you seeing an improvement there in index? And do you think it's coming from Marriott rewards members? Is that where you're seeing occupancy coming from? And sort of the second part of that question would be, are you seeing impact on your Marriott-branded hotels in the same market? In other words, is there -- to what degree is there may be some occupancy being shared now with this rewards program?

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James F. Risoleo, Host Hotels & Resorts, Inc. - CEO, President and Director [61]

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We haven't seen -- that's a great question. We haven't seen any deterioration in yield index on the Marriott hotels. And given the group sales engine that Marriott has in-house, which is very powerful, we would expect to see RevPAR index improvement on some of our bigger Sheraton hotels going forward.

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Operator [62]

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And we'll take our next question from Mike Bellisario with Robert W. Baird.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [63]

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Just a quick question on the moving parts in guidance. Can you quantify how much Memphis and Melbourne are impacting the full year EBITDA range? And then what sort of benefit the ground lease buyout might have in those figures, too? And then Any run rate figures would be great as well.

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Gregory J. Larson, Host Hotels & Resorts, Inc. - CFO and EVP [64]

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Michael, this is Greg. Yes, if you look at the 2 dispositions, I mean, obviously, because we increased our margin guidance for the year and we mentioned that our non-comp forecast for the year is stronger today than what it was a quarter ago, that would lead you to believe that our EBITDA guidance should be higher. The reason why the top end remained the same is because we're now baking in -- taking into account these 2 dispositions. And those 2 assets combined probably reduced our EBITDA by about $10 million or $11 million.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [65]

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And then any benefit from the ground lease acquisition?

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Gregory J. Larson, Host Hotels & Resorts, Inc. - CFO and EVP [66]

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Look, as you know, ground leases are usually low cap rate acquisitions. I mean, as Jim mentioned in his comments, lots of good reasons to do it, adds a lot of flexibility to that hotel and gives us a lot of really nice options going forward. But that's such a small acquisition at a lower cap rate. There's not much impact there.

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Operator [67]

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That concludes today's question-and-answer session. Mr. Risoleo, at this time, I will turn the conference back to you for any additional or closing remarks.

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James F. Risoleo, Host Hotels & Resorts, Inc. - CEO, President and Director [68]

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Thank you for joining us on the call today. We appreciate the opportunity to discuss our first quarter results and outlook with you. We look forward to providing you with more insight into how 2017 is playing out on our second quarter call this summer, and I'm sure I'll see a lot of you at NAREIT in New York. Have a great day.

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Operator [69]

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And this concludes today's call. Thank you for your participation. You may now disconnect.