Executives: Gee Lingberg - Investor Relations Edward Walter - President and Chief Executive Officer Gregory Larson - Chief Financial

Officer
Analysts: Smedes Rose - Citigroup Rich Hightower - Evercore ISI Thomas Allen - Morgan Stanley Arpine Kocharian - UBS Steven Kent - Goldman Sachs Research Shaun Kelley - Bank of America Merrill Lynch Anthony Powell - Barclays Capital Chris Woronka - Deutsche Bank Ryan Meliker - Canaccord Genuity David Loeb - Robert W. Baird & Co. Kris Trafton - Credit Suisse Wes Golladay - RBC Capital

Markets
Operator: Good day and welcome to the Host Hotels & Resorts Incorporated First Quarter 2016 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.

Gee Lingberg: Thanks, Eric. Good morning, everyone. Welcome to the Host Hotels & Resorts first quarter 2016 earnings call.

Before we begin, I would like to remind everyone that many of the comments made today are considered to be forward-looking statements under Federal Securities Law. 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 reconciliations to the most directly comparable GAAP information in today's earnings press release, and our 8-K filed with the SEC, and the supplemental financial information on our website at hosthotels.com. With me on the call today is Ed Walter, our President and Chief Executive Officer; and Greg Larson, our Chief Financial Officer.

This morning, Ed will provide a brief overview of our first quarter results, and then we'll discuss our disposition and redevelopment activity, as well as our Company's outlook for 2016. Greg will then provide greater detail on our first quarter performance by markets. Following their remarks, we will be available to respond to your questions. And now I would like to turn the call over to Ed.

Edward Walter: Thanks, Gee.

Good morning, everyone. We are pleased to report that 2016 is off to a solid start on multiple fronts. Less disruption from renovation allowed our hotels to outperform the industry on the topline in the quarter and contributed to better-than-expected improvements in margins and profitability. We also continue to make progress on the initiatives we commenced in 2015 to position Host Hotels for continued growth and value creation, including the disposition of non-core assets and returning capital to shareholders. Let's start with a review of our results.

Adjusted EBITDA for the quarter was $345 million, which reflects an increase of 7.5% over last year, and which exceeded both our expectations and consensus estimates. Our first quarter adjusted FFO per diluted share was $0.41, exceeding consensus estimates and reflecting a 17% increase over last year. These results were driven by several factors. First, demand growth in our portfolio was quite strong, as comparable hotel occupancy grew by 2.1 percentage points, allowing the portfolio to achieve 75.5% occupancy, which represents our highest Q1 occupancy rate since 2000. While we attribute roughly half of this occupancy growth to the reduced levels of construction disruption, overall it still reflects solid demand growth for our hotels.

When combined with average rate growth of 0.7%, the comparable hotel portfolio achieved RevPAR growth 3.6% in constant currency, which exceeded the industry luxury upper-upscale average by 170 basis points. The strong demand growth we experienced was driven primarily by our transient segments. Our transient demand, reduced for the effect of the extra day related to leap year, was up 5%, with solid improvements across all segments other than special corporate. Transient demand growth was the highest in February and March, with the latter aided by the early Easter holiday, which accelerated spring break travel. Conversely, our Group business experienced a demand decrease of slightly more than 2% for the quarter, which was generally caused by a very weak March, driven by the shift in the Easter holiday.

In what we viewed as a favorable sign, corporate group actually increased 2.7% during the quarter. However, that increase was offset by a slight decline in association business and a larger decline in other group, which related in part to the change in the venue of the NBA All-Star game from New York in 2015 to Toronto in 2016. Strong increases in corporate group rates helped drive an overall group ADR increase of 1.8%, which translated into a slight increase in total group revenues. The expected lower level of group activity contributed to a moderate comparable hotel F&B revenue growth of just 1%, as banquet growth increased slightly less than 1% and outlets grew by 1.4%. We expect these growth levels to improve going forward as group activity picks up again in subsequent quarters.

With other revenue growth improving by 3.7%, overall revenue grew by 3.2%. As Greg will describe in more detail, lower utility costs and the implementation of new operating methods allowed us to increase comparable hotel EBITDA margins by 90 basis points, which exceeded our expectations and contributed to solid hotel EBITDA growth of 6.8%. As we've discussed on prior calls, we are very focused on actively managing our portfolio and efficiently allocating capital. We continue to make good progress on our asset sales program, with three asset sales completed during the first quarter, generating proceeds of over $120 million. We have five additional assets under contract, representing gross proceeds of $340 million, with closings anticipated during the second quarter.

Given our general goal of upgrading the portfolio as we complete these sales, it is worth noting that the average RevPAR of these sold or under contract hotels is $112, which falls far short of our first quarter portfolio average of $166. In addition to these expected dispositions, we are currently marketing roughly another $0.5 billion worth of assets. While the market is not as robust as last year, we are seeing some signs of improvement in the debt markets and believe that we will be successful in selling additional hotels through the remainder of the year, assuming current market conditions continue. As we have previously discussed, these asset sales will generate tax gains which will likely require a special dividend at year-end. Given that our current stock price is trading at a meaningful discount to NAV, we believe that the primary use of sale proceeds in excess of dividend and debt repayment requirements is to buy back our stock.

We repurchased an additional $81 million in stock this quarter, bringing our total to $758 million since the institution of our initial program in April of last year. In combination with our recent dividend payment, we have returned more than $230 million to shareholders in the last 60 days. Now let me spend a few minutes on our outlook for the remainder of 2016. As I mentioned, our results in Q1 exceeded our expectations and we continue to anticipate even stronger results in Q2 and Q3. Given that our group revenue pace in these two quarters is up more than 6.5%, and the generally high occupancies we typically run during those months, usually in excess of 80%, should help drive better improvement in ADR.

At this point, we anticipate that we will experience a more muted but still positive fourth quarter, as the Jewish holiday shift and nationwide election night will reduce group demand, and the traditionally lower occupancy occupancies in the fourth quarter could restrain rate growth. Looking at comparable hotel RevPAR on a full-year perspective, we remain very comfortable with our full-year range of 3% to 4%. Given our strong first quarter comparable hotel EBITDA margin growth, we are increasing our range of full-year improvement to 25 to 65 basis points. This would translate to a full-year adjusted EBITDA of $1.440 billion to $1.475 billion FFO per share of $1.65 to $1.69. It is important to note that our EBITDA estimate for the year was previously reduced by $14 million for the sales that we had closed or under contract in February, and it has been reduced by an incremental $16 million today for the additional sales we have identified.

Had we not placed these latter assets under contract, our EBITDA range would have increased by approximately $9 million at the midpoint from our prior guidance? That being said, we are confident that we are taking a disciplined approach to portfolio management and continuing to dispose of non-core assets will better position us in the long run for future growth and success. In summary, we are very pleased with our strong first quarter results and remain confident about our outlook for the remainder of 2016. With that, I will turn the call over to Greg Larson, our Chief Financial Officer, who will discuss our operating and financial performance in much greater detail.

Gregory Larson: Thank you, Ed. Overall, we are pleased with our solid results this quarter.

The domestic markets that outperformed the portfolio were San Francisco, Los Angeles, DC, and Atlanta, while Latin America was the outperformer in our international markets. Several of our hotels in markets such as Denver, Boston, San Diego, Phoenix ,and Chicago had a slower start, but are expected to improve throughout the rest of the year. First, I will provide some specific commentary on our major markets. Our hotels in San Francisco had an impressive quarter, with RevPAR growing 12.5% on a difficult comp of 15.4% growth last year. San Francisco hosted the Super Bowl this quarter, and all of the RevPAR growth came from double-digit ADR gains, for a total increase in ADR of 12.7%.

In addition, occupancy remained stable at a very high 80%. However, we expect the expansion of the Moscone Convention Center will negatively impact the San Francisco hotels for the remainder of 2016. As a result, our San Francisco hotels may underperform our portfolio in the remaining quarters. RevPAR at our properties in Los Angeles grew at 12.2% in the first quarter, driven by an 8.7% increase in ADR and a 2.6 percentage point increase in occupancy to 83.2%. A solid group base at our Marina Del Rey Ritz-Carlton and Marriott hotels, strong transient demand at several of our other hotels, and tailwinds from the Newport Beach, Bayview and Westin South Coast Plaza renovations last year drove a RevPAR increase this quarter.

Looking forward, group booking pace in Los Angeles looks very strong, as the market is expected to host additional citywides this year. As a result, we expect good performance from our Los Angeles properties. Despite the negative impact of the major East Coast snowstorm in January, RevPAR at our DC hotels increased 7.3%, significantly outperforming the STAR upper-upscale RevPAR increase of only 0.4%. This increase was primarily driven by a 4.3 percentage point increase in occupancy, as well as average rate growth of 0.7%. Several of our DC hotels benefited from renovations completed last year.

Based on strong group booking pace for these hotels, combined with our expectations that we will continue to see benefits from our completed renovation, we expect our properties in DC to achieve solid results in the second quarter. In Atlanta, RevPAR increased 5.2% for the quarter as a result of average rate growth of 3.5% and occupancy increase of 1.2 percentage point. Our hotel operator successfully executed on their strategy to grow weekend and [show their] room night. With supply in the market well below the historical average and strong group revenues on the books for the second quarter, we expect our assets in Atlanta to continue to outperform the portfolio in the second quarter. Shifting to markets that underperformed the portfolio this quarter, Denver was the worst performing market in the portfolio with a RevPAR decline of 2.8%.

We primarily attribute this to the renovations at the Westin Denver Hotel and a supply increase in the downtown corridor, which is impacting the hotel's ability to drive rate and occupancy. Despite these factors, our Denver hotels outpaced the STAR upper-upscale result by 90 basis points. We expect results to improve at our hotels in Denver in the second quarter. Our Boston hotels experienced a RevPAR decline of 1.9% in the first quarter, driven entirely by a rate decrease of 3%, while occupancy improved 80 basis points. A decrease in citywides this quarter caused our hotel operators shift from higher rated group business to lower rated transient business.

The entire Boston market was challenged, as evidenced by the STAR upper-upscale RevPAR decline of 30 basis points. We anticipate that with additional citywide events scheduled at the Hynes Convention Center for the remainder of the year, results at our Boston hotels will strengthen going forward. RevPAR at our assets in San Diego declined 80 basis points this quarter due to the renovation of the Coronado Marriott and a higher mix of lower rated group business to offset a shortage of citywide room nights. Despite the slow start in San Diego, we expect the hotels in this market will strengthen through the rest of 2016, as the city is expected to benefit from an increase in citywide room nights for the remainder of the year, especially in the third quarter. Moving to Phoenix, hotel RevPAR increased 10 basis points in the quarter due to the difficult comparison of the Super Bowl benefit last year.

Despite that, we outperformed the STAR upper-upscale RevPAR by 70 basis points. Phoenix is another market with supply still projected to be below the historical average. That, combined with a strong booking pace for the second and fourth quarters, should translate to our properties outperforming our portfolio for the rest of the year. Our hotels in Florida underperformed the portfolio with a RevPAR increase of only 40 basis points. Milder weather in the Midwest and Northeast, plus cold weather in January and February in Florida, the media coverage of the Zika virus, decrease in international travel, and continued new supply hampered growth in the first quarter.

Based on the weakness experienced in the first quarter, we anticipate our hotels in Florida to underperform the portfolio in the second quarter. While RevPAR at our Chicago assets improved just 30 basis points, our properties outperformed the STAR upper-upscale market by 860 basis points due to the benefits from room renovations at several of our hotels in 2015. The Chicago market was negatively impacted by a 53% decline in citywide room nights this quarter. Citywide room nights continue to decline in the market. However, we expect to benefit from strong in-house groups, which will result in improved performance at our Chicago hotels going forward.

Despite the negative impact of the January snowstorm, the abundant new supply, our New York hotels experienced a positive 0.6% increase in RevPAR in the first quarter, outperforming the STAR upper-upscale market RevPAR decline of 2.1%. Our hotel managers in New York changed their strategy and began to add wholesale transient business three months out, which helped boost occupancy by 4.3% in a challenging rate environment. In addition, the New York Airport Marriott benefited from last year's renovation. Going forward, the New York market is expected to remain challenged as it continues to absorb new supply and, as a result, our hotels will likely underperform the portfolio in the second quarter. Moving to our international assets, these hotels had an impressive constant dollar RevPAR growth of 9.6% in the quarter.

Latin America drove much of the international growth, with a constant dollar RevPAR increase of 22%, primarily from pre-Olympic test business in Rio. The Group booking pace our hotels in Rio due to the upcoming Olympics this summer, although demand in Brazil could be impacted by the potential presidential impeachment, continued weakness in oil, and concerns over Zika. Shifting to our European joint venture, terrorist attacks in Paris and Brussels negatively impacted our results, with a RevPAR decline of 3.1% in constant euros this quarter. Negative results in Paris, Brussels, and London were somewhat mitigated by positive results in Amsterdam, Berlin, Barcelona, and Madrid. We expect continued weakness in Paris, Brussels, and London as travel alerts and warnings continue to be issued.

However, positive market fundamentals still exist in Europe, including the fact that supply remains low at approximately 1% and the weak euro to the U.S. dollar could drive demand from the US to Europe. Moving to our margins, our comparable EBITDA margin expansion of 90 basis points is very impressive; especially considering the majority of the RevPAR increase this quarter was attributable to occupancy growth. Part of this notable EBITDA margin growth is the result of our cost savings initiatives, such as time and motion studies to improve productivity at many of our hotels, as well as energy ROI projects. The third-party time and motion studies, combined with our internal initiatives, resulted in sustainable productivity improvements of 17 basis points this quarter.

The utility cost decline was the result of the mild winter and favorable gas and electric prices, in addition to our properties beginning to realize the benefits of our cost-saving energy ROI initiatives. We have invested in numerous projects over the past year, from small projects such as the conversion to LED lighting and replacement of showerheads, to major projects such as solar panels in Maui, and steam-to-gas conversions in New York. In the first quarter, hotels that had completed energy ROI projects decreased their utility costs by approximately 16.5%, which is seven percentage points better than those hotels that did not have energy ROI projects. Given the positive margin results in the first quarter, we now expect 2016 comparable EBITDA margin to increase 25 to 65 basis points. We also expect approximately 29% to 30% of our total EBITDA to be generated in the second quarter.

As discussed in our press release, during the first quarter, we repurchased 5.1 million shares for a total purchase price of $81 million. Since the inception of this share repurchase program in April 2015, we have now bought back 43.4 million shares of common stock for a total purchase price of approximately $758 million. We currently have $242 million of capacity remaining under the repurchase program. In addition, we paid a regular first quarter cash dividend of $0.20 per share, which represents a yield of 5.1% on the current stock price. Given our strong operating outlook and significant free cash flow generation, we are committed to sustaining a meaningful dividend.

In addition, based on the disposition plan for non-core assets we have outlined and continue to execute on, we anticipate that asset sales will likely result in taxable gains, which could lead to a special dividend. While special dividends will vary and be one-time distributions, it should result in a meaningful return of capital to our stockholders. Moving to one of the key pillars of strength and competitive advantage, our balance sheet. We had approximately $234 million of cash and $4 billion of debt. We continue to maintain a leverage ratio as calculated under our credit facility of 2.8 times, which is approximately half that of our lodging peers, and one-third that of our REIT peers.

Subsequent to quarter end, we drew on the credit facility to repay the $100 billion mortgage loan secured by the Hyatt Regency Reston hotel, bringing our encumbered properties to just three consolidated assets in Asia. Upon exiting the Asia market, we will no longer have any consolidated assets that are encumbered by mortgage debt. Finally, as we mentioned in today's press release, due to the adoption of the new accounting pronouncement regarding consolidation, we deconsolidated the partnership that owns the Harbor Beach Marriott and recasted the prior period to reflect the new treatment. As a result of the adoption, the operations of the property are no longer presented in other revenues on our income statement, and instead reported as a net amount in equity and earnings of affiliates. Therefore, revenues for the first quarter 2016 and 2015 exclude rental income of $15 million earned by the partnership.

However, the adoption does not affect net income, adjusted EBITDA, or adjusted FFO. In summary, we are pleased with our results this quarter as our assets are benefiting from aggressive asset management strategies and the tailwinds from our comprehensive capital program in 2015. This concludes our prepared remarks. We are now interested in answering any questions you may have. To ensure we have time to address questions from as many as possible, please limit yourself to one question and one follow-up.

Operator: Thank you. [Operator Instructions] And we'll take our first question from Smedes Rose with Citi.

Smedes Rose: Hi, good morning, thanks. I wanted to ask you just to clarify something. You had mentioned that there was $16 million of incremental EBITDA associated with assets being sold.

Is that associated with the five hotels that you put in your press release as under contract for $340 million?

Edward Walter: Yes, that’s correct.

Smedes Rose: Okay, so those are being sold at over 20 times EBITDA?

Edward Walter: That's probably a little bit of an overstatement, because we are giving you the EBITDA that we will lose over the course of the remainder of the year compared to our original expectations.

Gregory Larson: That's right. The other thing I would add is in our prior press release, in our prior quarter, we had five assets, two under contract, two sold, three under contract for I think a total of $215 million. So to look at the proceeds, you have to take the proceeds of $340 million from this press release, subtract that from the $215 million, and then do the math that you were suggesting with the EBITDA.

Smedes Rose: Okay, thanks. And then Ed, I just wanted to ask you, are group revenues for the year still tracking at around 6% in total? And have you - are you hearing any sort of change in tenor on corporation’s willingness to send people either out on the transient front or on the group front, given GDP was pretty disappointing yesterday? Just kind of any color around that.

Edward Walter: Sure. Overall group revenues are trending lower than 6%. I think we identified back in February that, while we were running at roughly 6% up in bookings back in February, that we had assumed, because we had booked so many rooms in advance, that that number would likely decline over the course of the year.

In fact, we continue to believe that and we continue to expect that our group revenues would fall within the range of overall RevPAR growth that we suggested, but likely towards the higher-end of that range. As it relates to corporate demand, we have seen special corporate drop, not every month, but in general, so there has been some weakness on that side. But as you look at corporate activity and translate that into group activity, our corporate business was actually up in the first quarter, which we viewed as a good sign. So, I am assuming that, given that we had a 0.5% GDP growth in the first quarter, we will likely see some choppiness over the course of the year from the corporate sector. That will depend a lot on particular industries, with finance being the one that seems to be a bit weaker.

But we are not necessarily – we are certainly not seeing a wholesale trend across all corporations that they are cutting back.

Smedes Rose: Okay, thank you. Appreciate it.

Gregory Larson: Smedes, I also would just like to clarify my first answer. So, on page 3 of the press release, if you add the hotels under contract for $340 million, plus the total sales, that obviously – adding those two together would get you to $461 million.

If you do the same thing from our prior quarter's press release, you had $215 million. So the additional proceeds from those three additional assets are really $246 million.

Smedes Rose: Okay, thank you.

Operator: Next will be Rich Hightower with Evercore ISI.

Rich Hightower: Hey, good morning guys.

Edward Walter: Good morning, Rich.

Rich Hightower: So I just want to go back to a quick comment that Ed made in the prepared remarks about debt markets improving in the context of future asset sales. So my question here is, if you could sort of characterize for us the composition of the buyer pool and which of those buyers are more debt dependent, more leveraged buyers, than maybe more equitized buyers that have a different cost of capital, different time horizon, and some of those considerations.

Edward Walter: Yes. I would say right now, given that the REITs are generally, with maybe an exception or two, out of the acquisition market, that the two broadly defined groups of buyers would be international capital, which seems to generally be less leverage sensitive, and then domestic capital, which I think tends to be real estate opportunity funds or operators aligned with financial partners.

And that group, it does seem to be fairly sensitive to changes in debt availability. So, I would say by – just to provide a little clarification around my comment, we are not saying that the debt markets are anywhere near as strong as they were last year. But we were seeing a very severe trend in the end of last year, beginning of this year, and sort of weakening in terms of turns. And we are starting to hear some signs that availability has improved a little bit. In some cases, spreads have come in a little bit.

But again, not back to where it was in the past, but at least a better trend than what we were feeling at the end of the last year or the first month or two of this year.

Rich Hightower: All right, that is helpful, Ed. And then one quick follow-up. Is there any specific reason that share repurchase volume in the first quarter decelerated somewhat meaningfully from the fourth quarter, for instance? Or is it just a question of timing with the asset sales, or something else?

Edward Walter: I think it was primarily related to the fact that the asset sales had not yet closed. As I think we said last quarter, we are comfortable right now with the environment that we are in, sort of stage of the cycle we are in with where our leverage is.

So, in general, while it's not specifically tied to asset sales, the pace of our stock buyback activity will generally relate or correlate with our ability to get asset sales done. So we are very encouraged by the overall pace of our activity. But I guess I would say we have all been around long enough to know that just because you are under contract with money at risk doesn't necessarily mean things are going to close. So, we are waiting to get those closings completed before we necessarily accelerate activity.

Rich Hightower: All right.

That makes sense, thank you.

Operator: The next question is from Thomas Allen with Morgan Stanley.

Thomas Allen: Hi, I thought it was interesting that your occupancy was a strong as it was in the first quarter in the context that industry occupancy was down. I mean you obviously had renovation tailwinds this year, as occupancy was down 70 basis points last year. But can you just given any more color on what is driving the occupancy and how to think about it for the rest of the year? Thank you.

Edward Walter: Yes, I would agree with you that we certainly – as we looked at our results and compared them to what we saw in the industry, we were very pleased to see the occupancy growth that we had. Now, some chunk of that was due to the fact that there were rooms out of service, but I think largely we attribute it to the fact that we had very good leisure demand. Perhaps not in Florida, but in pretty much all of our other markets. And on a relative basis to the industry, I suspect our group demand was fairly strong, too. So, as we look through the rest of the year, given the fact that we've got a very strong group base, we are expecting to see – I don't know that we would necessarily expect to see occupancy growth at the same rate going forward as we have right now.

We probably would expect to see our RevPAR growth lean a little bit more towards rate growth going forward, just because these next couple quarters are months where we start off with a really strong occupancy base. But we would still expect to see some gains in occupancy throughout the rest of the year.

Thomas Allen: And then just my follow-up. Were you tempted at all to bring up the high-end of your RevPAR guidance after this quarter? I mean you have Hilton and Marriott guiding at three to five. You had stronger first quarter results than them, so were you tempted at all to bring it up?

Edward Walter: We are always tempted.

But I guess what I would say is that we were pleased with the way the first quarter played out. I think that we took what we thought was an appropriately conservative perspective on RevPAR at the beginning of the year. Our properties are more optimistic right now than we are. But on the other hand is what was demonstrated in first quarter GDP is the economies maybe not quite as robust as we all would like to see. So, I think for right now, sitting where we are and feeling very comfortable with where we are, it was the right answer for us.

Thomas Allen: Thank you.

Operator: Next will be Robin Farley with UBS.

Arpine Kocharian: Hi, thank you. This is actually Arpine for Robin. And to follow-up on that question, actually, you had mentioned the tougher comps in Q1 and Q4.

And it seems like Q1 came in slightly better than what you expected. Does that mean the shift impact on Q2 is a little bit less now, unless there is a shift within your guidance range? And then do you still expect Q3 to be strongest in group business?

Edward Walter: Yes, so I don't know that we necessarily were commenting on tough comps in Q1. I think what I was saying in my prepared remarks, and I will elaborate a bit, is that we have exceptionally strong group bookings in Q2 and Q3. And those are months where we run at higher occupancy levels. And it is what we have been seeing of late, is in general, when we are running at higher occupancy levels that seems to be when we have the best opportunity to push rate.

So that’s why we feel very good about Q2 and Q3. And I would confirm what you said, which is that today our group bookings for Q3 are the strongest that we have throughout the entire year. Q4 is impacted by a number of things. I think what probably matters most is the shift in the Jewish holiday, which will now impact October. And secondly, the fact that this year's election will probably Q1 that most people want to pay attention to.

The net of those two things is we would expect less group business in the fourth quarter. And then finally, the other reason why we expect the fourth quarter to be a hair weaker is the fact that November and December tend – the second half of November and December tend to be lower occupancy months. So what we experienced last year was that it was more difficult to push rate in those months. We are expecting that same sort of a scenario will apply again this year.

Arpine Kocharian: Right, thank you.

And if I may, a quick follow-up. Now that we know that two of your large hotel managers are combining, as an owner of those assets could you talk a bit about the general sentiment among owners, what this could mean, whether in terms of loyalty programs, occupancy sharing, and just balancing of issues and opportunities?

Edward Walter: Well, I am not going to try and speak for what other owners might think, but I guess I would say from our perspective, we see both positives and benefits from this. I think what probably matters in some ways in the near-term, assuming that they navigate and we expect that they will - the challenges that exist around the integration. When we compare our cost structures leaving out management fees, between Starwood and Marriott. Right now Marriott - if our Starwood hotels sat within the Marriott system, we would be able to save costs and improve margins.

So we are hoping that they execute as we expect they will, and that we ultimately get the benefit from that. I think that the challenge that the industry in general has identified with the combination is that there will be a number of brands that will all sit beneath one family, under one company, and it will be important to be thoughtful about how to continue to distinguish those brands. We look forward to working with Marriott in order to make certain that happens in a cost-effective manner.

Arpine Kocharian: Thank you.

Edward Walter: Thank you.

Operator: The next question is from Steven Kent with Goldman Sachs.

Steven Kent: Hi, can you hear me.

Edward Walter: Now we can.

Steven Kent: Sorry about that. Can you just – I just have a question broadly on some of the hotel loyalty programs on booking direct.

Has that impact did you positively or negatively? And then the other thing is, just on the pacing of asset sales over the next 12 months, what does the transaction environment look like? How are you thinking about that over the next year or two?

Edward Walter: Steve, it's a little hard right now for us to get a clear indication on how some of the booking direct programs were impacting us. We do know that, in an effort to drive more bookings directly to the website, there were some – there are some rate reductions. I would say I think that's probably contributed to less growth in our transient rate than what we might have normally seen in the past. Maybe and from that standpoint, a slight negative. The flipside is, of course, is that when you look at what gets through the bottom line, the cost of booking a reservation directly with an operator is significantly cheaper than if it were to happen through one of the OTAs.

So we are certainly supportive of the overall strategy and we look forward to working with them to fine tune that as they move forward. As it relates to the asset sales, I think that market is clearly not as robust as it was last year. We do - as I indicated in my prepared remarks, in addition to the assets that are under contract at this point that we identified in the press release, we have another $0.5 billion of activity that we are working hard on and I would feel we are making good progress on. At this point, we would expect to attempt to sell additional assets in the second half of the year, but a lot of that will depend upon how we see the market evolve over the course of the summer and what the outlook seems to be for the second half of the year for transaction activity. So I’m feeling relatively good about where we stand right now.

I think we certainly were one of the first in the industry to begin to look to sell assets. We did not just come up with this idea in the last six to eight months. And I think we're made great progress overall on the sale program. I am hopeful that we will be able to keep going. But at this stage, I think we will have to take a little bit of a wait-and- see attitude for the second half of the year.

Steven Kent: Okay, thanks for the color.

Operator: And the next question is from Shaun Kelley with Bank of America Merrill Lynch.

Shaun Kelley: Hey, good morning, guys. I just was wondering, I think in the prepared remarks you mentioned a little bit about some of the cost savings initiatives, and I was wondering if you could talk a little bit more about where we are in the roll - in the timing of the rollout of those. Like, is there a lot more to come on this? Are we relatively early on?

Edward Walter: I would guess it's a little hard to judge that in a vacuum.

But I think we are probably about halfway through. My guess is we have implemented more than half of those measures already. And I would also tell you that we are not - just because we are - when I say we are halfway through, we are halfway through the first, call it, 20 to 25 hotels that we ran the program on. We are operating on a scaled down basis; been executing the program on some of our mid-sized hotels. The benefits there will not be as significant in a total dollar context as they were on the larger hotels, simply because the hotels are smaller.

But as we work our way through getting the benefits from this, part of the structure of this program is that there is a bit of a cost-sharing relationship with the company that is helping us with that. And so, part of what we are - the second of the benefit we don't really pay for anything. Consequently, there is an opportunity for further pickup there. So, I would say we have certainly gotten meaningful benefits. We would expect to continue to get more going forward.

Shaun Kelley: Great, thanks. And then my second or follow-up question would be to go back to the implications of Marriott and Starwood on the merger front. We had seen in the past around some of these prior integrations and with Marriott's rollout of Sales Force One some churn and some challenges that worked themselves out over time, but in the sales organization specifically. And you guys are obviously a very big group house for both of these brands. So, could you talk a little bit about what you think the sales impact might be as they start to integrate some of the direct property level sales managers and all of that? Is that something you think they are well prepared for and they have reached out to you on yet? Or how do you think that is going to play out?

Edward Walter: Shaun, it's probably a little early for us to try to have any informed comment on that.

We have talked with them about some of their preliminary thoughts. And it certainly – the issues that you are identifying and the concerns that you are identifying are concerns that we have. But specifically how they are going to approach that, they have not given us any details on that yet. So, I think I am sure we will learn more as they move forward with consummating the merger and then working towards the integration. But they are not at the point now where they have given us significant detail on that.

Shaun Kelley: Thank you very much.

Operator: Next will be Anthony Powell with Barclays.

Anthony Powell: Hi, good morning everyone. Could you comment on how group production for future periods trended so far this year? Have you seen corporations pull back at all on their future group plans?

Edward Walter: Generally, the answer is that we have not seen corporations pulling back on the businesses that they already had on their books. There were some markets where we saw some slight – we saw some reduction in production compared to prior levels on smaller groups.

But the larger – we are not seeing any – certainly not seeing any trend of significant cancellations. We are not seeing a trend of significant attrition compared to the levels that might have been under contract. It was interesting on the food and beverage side, just because that is something that we are clearly watching in this area, we actually saw in the first quarter that our spend for our food and beverage spend per group room night actually was up somewhere between 2.5% and 3%, which we viewed as fairly favorable, especially given some of the overall economic headwinds.

Anthony Powell: Right, got it, thanks. And we have heard some other REITs talk about better international inbound demand trends across the balance of the year.

Are you seeing that and where could that be most impactful for your portfolio?

Edward Walter: That is always a little tricky to get information that we fully trust on that area. Our sense was that we were still down in the first quarter on international travel. Now, I would say we were fairly encouraged by some of the arrival data that we have been tracking, which goes through February, which showed that Europe was up mid-single digits, that China was up nearly 20%. Japan, actually – arrivals from Japan actually trended up, which was a nice change compared to what we saw last year. The two major inbound markets that we saw were down from the standpoint of air arrivals were Canada and Brazil, which were both down about 1%.

So those were two markets where – I think in Brazil it is probably an economic situation; in Canada I think that's really being hit by the dollar. There was some discussion that – actually at our recent GM's meeting, that there was a feeling that we may start to see international improve in the summer, both because of some better circumstances in some of those countries, and also the fact that – if the U.S. dollar does not continue to strengthen, then the year-over-year change in the dollar is not as dramatic as what we saw in 2015. But that is on the come. We don't know whether or not that is actually going to happen.

Anthony Powell: All right, thank you.

Operator: Next question will be from Chris Woronka with Deutsche Bank.

Chris Woronka: To ask you on the RevPAR guidance, which has been at three to four since last time you reported. And it is a tighter range, obviously, than many of the others. Can we read into that, that maybe you have already grouped up a bit for the rest of the year, and that a lot of this is baked? And the question really is do you have I guess adequate if transient does reaccelerate, do you think you have a lot of upside to the number? Or is it the tighter range more a reflection of having more group and maybe a little bit less variability?

Edward Walter: I think to answer the last part of your question first, I think that the group activity that we have is very strong.

And of course, as you know, it represents 37%, 38% of our overall business. We have always been more significantly weighted to group than the industry. I am comfortable that with that base, that to the extent that we saw a reacceleration in corporate transient, that we would – that would not present a problem for us, because that would just be directly reflected in the form of higher rates that we would be able to charge transient customers. And in fact, that is one of the reasons why we like to have a very solid group base. I think if you look more broadly at why we are where we are and others may be where they are in terms of outlook, I think some of this is the fact that we do have a very diversified portfolio.

So, no market represents more than 11% of our EBITDA. We have got some exposure to some lower supply markets, whether it's Phoenix, Atlanta, or maybe New Orleans, where we are looking at very strong growth this year out of those markets. The fact that we have a significant chunk of our portfolio in some key resort assets I think also helps, because so far the trend we have been seeing this year is very strong leisure demand, and we hope that that continues. Then lastly, back to the group point, the large number of big group hotels that we have, which contribute meaningfully to our profitability, they are all in good physical condition. We've invested significantly in them, and this is the part of the cycle where they have an opportunity to truly perform, both at the top and the bottom.

So, as I stated in response to a question before, we continue to be conservative in our approach to guidance. But we are – we feel very comfortable with where we are right now based on the information that we can evaluate.

Chris Woronka: Great, thanks. And just a quick follow-up. On the Marriott-Starwood merger, I think on paper the consensus this is going to have a lot of long-term benefits.

Do you guys as you look out, whether it is second half or maybe even next year, is there any concern that there is any near-term slippage that maybe some of the larger competing brands try to take some of that business away temporarily as Marriott and Starwood sort some things out at the property levels?

Edward Walter: I guess what I would say is that we are certainly concerned, as anyone should be, that when two large companies that represent a significant chunk of your portfolio are merging, you hope that that merger happens and that integration happen as effectively and as quickly as it can. We have no doubt, based on our conversations with the folks at Marriott, that they understand the importance of getting that right. Not just for our own sake but obviously for their own success. They are a talented group of people and the one thing that Marriott has always been very good at execution. So, I don't want to underestimate the challenges that they face, but I certainly think that they are aware of what they are heading into and doing the best they can to manage that process.

At the property – some of that - there obviously is activity that happens above the property on the marketing side. But I don't want to leave everybody with a sense that – when you look at who is running the hotel on a day-to-day basis, those folks are on-site at the property. As we just - again, we had a meeting with all of our GMs a week ago, and it was clear that in talking to both the Starwood and the Marriott GMs, they are all very enthusiastic about this combination. It dramatically improves their opportunity. It will facilitate cooperation in an appropriate manner in various markets where we may have assets branded under both companies.

And I think in a lot of ways, at the property level, they are very fired up about what the future might bring. So, we are very focused on making certain that they stay focused on what they are doing, but we are very much aligned with those property GMs in terms of their activities. Again, we are certainly paying attention to this and we will be staying as close as we can to making certain that every effort is being made to complete the integration as quickly and completely as they can get it done. But I suspect we will be okay.

Chris Woronka: Okay, very good.

Thanks, Ed.

Operator: And we’ll go next to Ryan Meliker with Canaccord Genuity.

Ryan Meliker: Hey, guys, thanks for taking my questions. Not to beat a dead horse, but I just want to talk a little bit about RevPAR growth. You guys came in the upper half of your range in the first quarter, with RevPAR coming in flat.

And it sounds like your pace is up 6.5% in 2Q and 3Q. So, is there any reason for us to believe that RevPAR growth is not really going to accelerate over the next couple of quarters unless we see a fall-off on the transit side, which obviously the brands aren't forecasting and people seem to be getting more comfortable surrounding the macro, not less? Are there any particular portfolio-specific challenges that you see that might limit that RevPAR growth, is another way of asking that question.

Edward Walter: No, I think in general, what you described is generally what we expect, which is to see some improvement in Q2 and Q3, especially in Q3. And then I think Q4 is the part that is a little harder to judge at this point.

Ryan Meliker: Sure, and that's helpful.

And then on the margin front, you guys were able to institute a lot of cost controls, grow margins pretty materially on a modest RevPAR growth environment. So do you think that you'll see similar type margin growth on increased RevPAR growth in 2Q and 3Q or are you lapping some challenges?

Gregory Larson: Ryan, I am not sure 90 basis points of margin growth with 3.6% RevPAR growth was stronger than what we would have predicted, so maybe we will be pleasantly surprised as we move forward as well. But sitting here today, as Ed said, we are expecting stronger RevPAR growth in both Q2 and especially in Q3. So that certainly should be helpful in margins. Obviously Ed, also mentioned that we expect to continue to have occupancy increases, but it will be more - the RevPAR increase will be more balanced between rate and occupancy, which also will be helpful for us.

But having said that I don’t know that that we can sit here and count on utility costs always being down 11% or more. So we will see. Obviously, we tried to take into account the success that we had in the first quarter and then we tried to - frankly, my view for the rest of the year is slightly stronger than what it was just a quarter ago. So we tried to take into account both of those things to come up with our new guidance of 25 basis points to 65 basis points.

Ryan Meliker: No, that is really helpful.

Thanks, Greg. And then just one quick follow-up with regards to asset sales. If I think about this correctly, it sounds like you have got about $30 million of lost EBITDA this year from the $461 million in asset sales. A couple of those assets were sold in the middle of the first quarter, a few being sold later in this quarter, if we just assume roughly four months of ownership across the group. And that would mean that you have got eight months left, so we would true up the $30 million to roughly $45 million in annual EBITDA at $461 million.

That is about 10 times EBITDA. Is that the right way to think about it? And then from the buyer perspective, how material are these PIPs? Are these guys paying significant CapEx that brings what they are paying even lower on an EBITDA multiple basis?

Gregory Larson: Ryan, I always appreciate fuzzy math to come up with multiples. But I think if you look at the eight assets that we talked about in our press release, the three that we have sold and the five under contract, and look at an aggregate EBITDA multiple, it is around 11 times. And so it is pretty - obviously pretty close to the multiple where our stock trades today.

Ryan Meliker: Sure.

Any color on what type of PIPs that buyers might be looking at? Are these material PIPs, or has everything pretty much already been done on the assets that have been sold and the ones that you are looking to sell?

Edward Walter: It varies by asset. So in some cases, there is a sizable PIP, and in other cases there is virtually no capital required.

Ryan Meliker: Okay, thanks. Appreciate it.

Edward Walter: Thank you.

Operator: The next question is from David Loeb with Baird.

David Loeb: Just to continue on the asset sales, I just want to clarify, are there three new transactions since the fourth quarter call? So did the two carry over or did some fall out?

Edward Walter: There are three new ones and two that we had – two assets that were identified on the fourth quarter call have just not yet closed.

David Loeb: Okay. And is one of those a New York City hotel?

Edward Walter: New York City Hotel is not in the group of assets we've identified so far. That continues to be a priority.

And I would hope that we would be able to announce further progress down the road on that, but we are not there yet.

David Loeb: Okay, great, thank you.

Gregory Larson: Thanks.

Operator: The next question is from Kris Trafton with Credit Suisse.

Kris Trafton: On the Marriott-Starwood merger.

How we think about the potential risk of a nonunion hotel force in the collective bargaining, similar to what would happen with the IHG-Kimpton merger?

Edward Walter: Yes, I think that is certainly one of the issues that needs to be studied as part of this. And it's a unique thing to each individual market, so we don’t have anything there that we are necessarily prepared to disclose, but that is certainly something that we are looking at as part of the valuating the overall impact of the merger.

Kris Trafton: Okay, great. And then just one more. With social issues oftentimes the main impediment to consolidation, what are your thoughts on taking a closer look at RLJ, with Tom moving over to Hilton?

Edward Walter: As tempting as it would be to discuss M&A activity, I just – I've generally found that the best answer to those sorts of things is to just not try to comment on potential M&A transactions until they are announced.

Kris Trafton: Okay, fair enough. Thanks guys.

Operator: And we will take our final question from Wes Golladay with RBC Capital Markets.

Wes Golladay: Yes, good morning everyone. You mentioned that group pace was trending a little bit lower than a 6% due to the elevated booking pace.

What is your year-end expectation? Was that around the 4%? If I was hearing your comment correctly, is that a good goal for the year? And how much of that would be occupancy versus rate?

Edward Walter: Yes, I would say – I would probably would say we are somewhat – we are in the 3% to 4% range, and then we're expecting to be at the upper end of that range right now. I don’t know that we got a clear delineation on what it is between occupancy and rate, but I would imagine it is about a 50-50 break.

Wes Golladay: Okay. And then going to the New York transaction market, what are you seeing on the ground there? It looks like – what is the depth of the buyer pool? And then also, on the selling side, it looks like a lot of people want to exit the market. How does that compare versus maybe six months ago?

Edward Walter: I think there has been a high volume of transactions on the market from New York, for more than just the last six months.

I would say that there is a high degree of buyer interest in the transactions that are there. As I mentioned on the last call, our sense is that the properties that have attracted the most interest are ones where there is potentially brand flexibility, or use of the building flexibility. Because that broadens the pool of folks that would be interested in a particular asset. So, I don't think there's any doubt that a lot of people are interested in looking at New York right now, but I would also agree with what you are implying, which is there's a lot of assets on the market.

Wes Golladay: Okay, thank you.

End of Q&

A
Operator: This concludes today's question-and-answer session. Mr. Walter, at this time, I would like to turn the conference back to you for any additional remarks.

Edward Walter: Well, thank you, everybody, for joining us on the call today. We appreciated the opportunity to discuss our first quarter results and our outlook for the rest of the year.

We look forward to providing you with more insight into how 2016 is playing out in our second quarter call in July. Have a great weekend everyone.

Operator: This concludes today’s call. Thank you for your participation.