Executives: Gee Lingberg - Vice President James Risoleo - President and Chief Executive Officer Gregory Larson - Executive Vice President and Chief Financial

Officer
Analysts: Anthony Powell - Barclays Capital Patrick Scholes - SunTrust Shaun Kelley - Bank of America Merrill Lynch Chris Woronka - Deutsche Bank Thomas Allen - Morgan Stanley Rich Hightower - Evercore ISI Wes Golladay - RBC Capital Markets Robin Farley - UBS Securities LLC Michael Bellisario - Robert W. Baird & Co., Inc.

Operator: Good day, and welcome to the Host Hotels & Resorts, Incorporated 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.

Gee Lingberg: 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 are 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 transaction, 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.

James Risoleo: 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 in 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 two 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 and RevPAR and EBITDA for key metric, and our stronger 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, and assets that we believe will underperform the rest of the portfolio, as 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. This summer 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 seven-year senior notes offering, which fills a gap in our maturity schedule and provides us flexibility to deal with multiple opportunities in economic environment. Organizationally, we formed the Enterprise Analytics group, which contributed to the successful execution of P 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 estimate.

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 improvement 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, 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 of 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 grade, which 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 increased over 14%. This time a result of demand increasing nearly 10%, an average rate over 4%. Despite the strong group results, and as we expected, group booking activity weakened as we move 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 it’s now 1.7% versus last year.

This excludes our three 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 and a – as a 1.4% increase in average rate was offset by a decrease in transient room nights of 3.1%. Importantly, the Easter holiday is typically a strong transient leisure period. So the shift has a 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, volume for this segment declined only 1%. While we remain hopeful, this customer can return in growth, particularly given the optimistic consensus forecast on corporate profit and business investment, we have not yet win its material signs of this at our properties.

Moving to food and beverage, the strong group performance this quarter drove banquet, catering in 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 margin. On the investment front, as I mentioned at the beginning of the call, we have completed two acquisitions year-to-date, the Don CeSar hotel and the W Hollywood for approximately $430 million. Since we last spoke, we added the 305 rooms 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 seven prominent supergraphic billboard signs for a total value of $219 million. The hotel immediately ranks in the top five in both RevPAR and EBITDA per key in our portfolio, and is essentially located in a dynamic and rapidly growing stock market of Hollywood. The surrounding area features a strong base of business in 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 LA 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 provide 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 married 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 our 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 investment. 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, including 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 on renewal and replacement capital expenditures and $90 million to $115 million on redevelopment ROI and acquisition project. However, our 2017 capital spend to 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 one, 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 is better than expected results, there does not appear to be compelling evidence of acceleration in RevPAR above where we initially guided. On our last call, we expressed cautious optimism this might occur, which was partially due to a positive forecast in business investment and corporate profit.

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 a lot of forecast for both business investment and corporate profits remain 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 and 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.

Gregory Larson: Thank you, Jim. As Jim mentioned, we had a strong first quarter and are especially pleased 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 startup or 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 in the Women’s March. RBC 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 rate. The strong group business provide a 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 remained 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 a 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 of almost 12%, while increasing food and beverage sales by over 23%. In addition, the Western 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 results by 910 basis points, which is partially a product of several competitors undergoing room renovations this quarter.

Group revenues 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 lack of citywides 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 to 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, a 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 result exceeded the STAR upper upscale market growth by 320 basis points. Although, we do 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 mark 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 market. 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 citywide to return to San Francisco and business that follows to 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, at 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, the Board that will benefit from the Easter shift in April.

This should help our Florida assets outperform the portfolio in the second quarter. Moving to international operation, our consolidated international hotels first quarter RevPAR declined 7.1% in constant currency. This is primarily due to the underperformance of our hotel – 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 two Canadian assets.

RevPAR in our hotels in that part of itself in Canada grew 3.9% with constant currency. Our Calgary Marriott has a strong corporate group and contract business that helped boost performance this quarter. Looking ahead, in the second quarter, we expect the story of these two countries to continue, outperformance in Canada and underperformance in Brazil, which is a continued weakness in Brazil’s economy in the difficult times related to the business leading up to be a Olympic last summer. Shifting to our European joint venture, the portfolio showed signs of recovery this quarter, especially in markets severely impacted by terrorist attack 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 with 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 group. The group volume strength contributed the growth in food and beverage revenue of about 17%, most of the 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 at these hotels for the full-year will outpace our comparable hotel results. We continue to be impressed by the efforts and results of our managers and asset managers that 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 in food and beverage department. 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 one quarter behind us with these products – 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 break-even 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 the 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 and overall REIT space. Importantly, key competitor is 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 a high-yielding value-add projects. In March, we issued $400 million of Series G senior notes due April of 2024 at an interest rate of 3.875%. This transaction filled our 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 is 2.6 times, 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 our 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 two asset sales we announced today and an increase in EBITDA from better than previously estimated profit to be generated from reposition, non-comparable 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 $0.1 of FFFO per share and explains while the midpoint of our our revised adjusted FFO per share guidance is a $1.64 compared to the $1.65 midpoint we articulated in February. Finally, I would urge you to keep the impact of the holiday shift 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’re pleased with our strong results today, particularly with the improving profitability of our assets when 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. To ensure we have time to address questions from as many of you as possible, please limit yourself to one question.

Operator: [Operator Instructions] We’ll take our first question from Smedes Rose [ph]. Please go ahead.

Unidentified Analyst: Hi, thank you. 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 – and your assumption is to get to zero RevPAR for the year, if you are 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 a zero or flat RevPAR growth and not go into negative territory?

James Risoleo: So I think, we are 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 02% 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 shift. Second and third quarter is really going to be weak; but as we looked at group booking pace, we took that into account and that’s why we have affirmed our guidance for the year.

Gregory Larson: Yes, and Smedes, if you look at that, the same thing sort of happened to us last year too, right.

We started with group revenues on our books 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. 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 the bookings in the year, for the year would be a little bit weaker and would bring that group revenue numbers down.

Unidentified Analyst: All right thank you. Thanks for the color.

Operator: We’ll take our next question from Anthony Powell with Barclays. Please go ahead.

Anthony Powell: Hi, good morning guys. Just a bit more on the group piece decline. Are you seeing that concentrating at any hotels or any markets? And do you think meeting planners are just a bit more cautious given some of the policy uncertainty we’re seeing?

James Risoleo: I don’t think it’s any market in particular, right.

I mean when we looked at it, again we had 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 in any particular market.

Anthony Powell: All right and -

James Risoleo: Go ahead.

Anthony Powell: Well, I was going to say some of the other reads are saying that they are attempting to replace some – this lost group or corporate transient with things like LNR business, associations, contracts. Is that available to you and are you pursuing that strategy?

James Risoleo: Anthony, it is available to us.

And in fact that’s just a 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.

Gregory Larson: Yes, in fact Anthony, if you – 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’d have to go all the way back to the first quarter of 2000 to see a higher occupancy level. So, again it’s pretty easy in this environment to replace the business with other business; but as we talk 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 would be able to have a higher rated customer.

There would be a positive mix shift and then we could produce a higher rate growth and therefore higher RevPAR growth.

James Risoleo: Just to reaffirm what we said on the first quarter call, we discussed this very topic with respect to the fact that special corporate have not shown up. We indicated 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 corporate profit. But the simple fact of the matter is, is that we haven’t seen that happen today and that’s another reason why we’ve elected to keep our guidance in 02%.

Gregory Larson: 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 looks strong, business investments looks strong, our group revenues are sitting here up at 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 supply is increasing at touch this year. And like I said, we ignored those positives in giving guidance of 0% to 2%.

Anthony Powell: Got it, and there is one more quick one for me. Do you have a year-to-date RevPAR growth number which is including April?

Gregory Larson: For April, you know we’re expecting because of the holiday shift.

We’re expecting actually April for us that actually have a decline in RevPAR.

Anthony Powell: Right.

Gregory Larson: But we haven’t finished the month yet, so –

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

Anthony Powell: Got it, all right. Thanks a lot for the color.

I appreciate it.

Operator: We’ll take our next question from Patrick Scholes with SunTrust. Please go ahead.

Patrick Scholes: Hi good morning. Just when looking at your performance for San Francisco in 1Q negative six, is it fair to assume that as the – is it fair to assume for 2Q that things could actually be worse than negative six for you?

James Risoleo: Patrick, when we think about San Francisco, obviously our hotel are down 63 [ph] was worse than the SAAR data for the industry.

So, because of that I actually think our Q2 could be slightly better than our down 63. You might be right though, for the industry could be a little bit weaker in Q2 than in Q1. I do think that that at least based on our group booking pace, you know our best quarter of the year at least in our forecast when we think about San Francisco is actually Q3.

Patrick Scholes: 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 revenues pace for 2018 is looking very strong.

How do you feel now?

James Risoleo: You know, 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 – if 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 looks pretty good.

Gregory Larson: Very good.

James Risoleo: Very good, very good; but it’s not a number that we’re prepared to discuss.

Patrick Scholes: Okay, fair enough, thank you.

Operator: We’ll take our next question from Shaun Kelley with Bank of America. Please go ahead.

Shaun Kelley: Hi, good morning guys.

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 in the last couple of years. But in most cases 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 with this given that you kind of know or that you expected the environment to be a little bit softer.

James Risoleo: Yes, that’s a great question Shaun. We had a meeting with our major operator Merlin 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 in 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, two went to three, and we’re down at 1.7, these are said and done sometime, but it’s something that we’re keenly focused on.

Gregory Larson: Yes, Jim, I think that’s 85% of the group business that we ultimately think that we’re – sorry that was like – it’s a good number. You know, 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 descent clip. It just happens to be year-to-date we’re booking and that’s just slightly lower clip than we did last year; but we’re still booking. There is 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 is 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 that 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.

Shaun Kelley: Okay, yes, I’m sorry if I mischaracterized that. Thank you very much.

James Risoleo: Yes.

Gregory Larson: Yes.

Operator: We’ll take our next question from Chris Woronka with Deutsche Bank. Please go ahead.

Chris Woronka: Hey, good morning guys.

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?

James Risoleo: Well, I think that there are a couple of things that drove margin improvements in general this year, Chris. And then I’ll come back to your question regarding food and beverage. We have been 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 to 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 is 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 cost.

Gregory Larson: Yes, you know 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, you know in first quarter obviously we’re getting all the benefits from those time motion studies and in first quarter of last year we probably hadn’t 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.

Chris Woronka: Okay.

Gregory Larson: And Chris, the final thing and you know this, 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.

Chris Woronka: Okay, very good. Thanks guys.

Operator: And we’ll take our next question from Thomas Allen with Morgan Stanley. Please go ahead.

Thomas Allen: It’s been almost six months now since the Marriot-Starwood deal closed. Can you just give us your updated thinking on potential there? And I think Marriot’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?

James Risoleo: I think what we’re trying – we will definitely see benefit 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 OTA. 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 cost. The sheer size of the combined company will enable Marriott to drive a better deal for a good to be provided to the hotel. Lastly, we continue to see Marriot make improvements in operations, they are running the properties tighter than Starwood did, so we’re optimistic that that should continue to flow through to us and better margin performance as we move forward.

On the other side of it, you didn’t ask the question for sake [ph], 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 two 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 to lower credit card commissions. So those are some of the things that we’re looking at as we move throughout 2017 and into 2018.

Gregory Larson: Certainly tailwinds for us both in 2017 and 2018.

James Risoleo: Yes, absolutely.

Thomas Allen: Is it okay to take from what you said that the margin outperformance during the first quarter wasn’t really – it was more your own channel for measures and any kind of Marriott-Starwood synergy measures and so the opportunities…

James Risoleo: I think that’s right Tom. I mean it really was the effect of our – and we work very closely with our operators and we worked hard together to drive productivity improvements and to keep a tight lid on food and beverage costs. You know 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 the tune of 85 basis points in EBITDA margin increase in first quarter.

Thomas Allen: Again, just a follow-up, your transaction in the quarter had mixed messages around whether you are trying to diversify away from Marriot, how are you thinking about the need to diversify?

James Risoleo: Which transaction are you speaking of?

Thomas Allen: It’s more talking cheap bread, you bought the W Hollywood some more Marriott exposure there and then you bought the Don CeSar, so sold that and then you sold 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?

James Risoleo: 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 – they are the best is the space. I mean they were great before Starwood and now with their increased scale for a number of the 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.

Thomas Allen: Helpful, thank you.

Operator: We’ll take our next question from Rich Hightower with Evercore ISI.

Rich Hightower: Hey, good morning guys.

James Risoleo: Hey, Rich.

Rich Hightower: Two questions here, the first one is 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 to our margins in the first quarter relative to initial expectations? And then how margins alongside sort of it’s in RevPAR across the quarters that you mentioned, how margins will progress as well for the rest of the year?

Gregory Larson: Hey, Rich, this is Greg. I don’t know if it is a 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 and that’s always helpful on margins, right, and so I think that that certainly helps our margins. I think when you think about the quarter is 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, than you should assume margin will actually decline in those quarters. On the other hand, where we mentioned in our comment, we think RevPAR will rebound in fourth quarter and if that occurs and 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 were able to comfortable increase the midpoint of our margin guidance by 15 basis points.

Rich Hightower: Yes, 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 Don, I think we all get the point that they, both of the those deals enhance average RevPAR for the portfolio, average EBITDA for each of the portfolio, but there is a risk of course that you can over pay 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 that NAV accretion? And then also in a portfolio context, raising the average RevPAR for the assets in the portfolio, how you think the markets value for those right now?

James Risoleo: 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 are 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 it to account all capital needs of the property as we look out over a ten-year period of time. And solving for a hurdle rate of return to our cost of capital that is at 100 basis points to 150 basis points at a minimum and higher depending on the risk profile in the transaction.

So there’s a lot of fact that goes into every deal that we underwrite and 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 are very unique metrics. The Holly – the W out of the box is going to be top five in the portfolio. And if you think about our hotels, another – and newer hotel, I mean the W is a new property, the Don had a significant investment, completed before we bought the hotel. But if you think about something like the W with a RevPAR that the hotel generates, that would lead to the conclusion that your owner’s funding CapEx is going to be relatively de minimis compared to other properties, compared to lower RevPAR hotels, compared to properties that are older, that might need more money, so there’s a lot that goes into our decision on every acquisition opportunity.

Gregory Larson: Yes, Rich, I agree, obviously as Jim said, we are always looking for that 100 basis points to 150 basis points return unlevered 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 two great acquisitions, the returns were good and so that’s what we’re look at, but when we look at things, we look at returns for assets, but we also look at…

James Risoleo: Alternative uses of the capital.

Rich Hightower: Yes, that’s all great color guys, thank you.

Operator: We’ll go next to Wes Golladay with RBC Capital Markets.

Wes Golladay: Good morning everyone. Looking at the group bookings, can you comment on how in-house group bookings are looking and maybe if we would see F&B revenues close the gap versus RevPAR, and should that hang in there be a more in-house? And in particular San Francisco, how are you doing in 2Q and 3Q for the in-house?

Gregory Larson: Hey, Wes, this is Greg. So, as we said in our prepared remarks, right, of 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 those at a pretty decent pace, the pace will be slightly lower than the pace that we booked through the last year, and so that 1.7% growth in group revenues well over throughout the rest of this year should end up trending lower.

So that is sort of how we – I’m sorry.

Wes Golladay: So, as I was 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 through that might be down and you might be having more in-house group and then you might get more F&GB, so total PAR would be a little bit better?

James Risoleo: Hey, Wes, I’m sorry, I thought you were talking about in total and San Francisco, what I just told – talked about was our entire portfolio.

Wes Golladay: Yes.

James Risoleo: If you think about just San Francisco, yes, we have, like I mentioned earlier, we have some in-house group activity in Q3. And so because of that, I think, our hotel in the third quarter should – our hotel in San Francisco should perform much better than what the performance that you witnessed here in the first quarter.

Wes Golladay: Okay. And then probably to the point they would maybe better on total total par. So I mean, F&B we price at a model that been down too much for the…?

James Risoleo: 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 and San Francisco, we actually had a very strong group that generated very strong food and beverage growth for that hotel.

Wes Golladay: Okay.

Thanks a lot.

Operator: We’ll take our next question from Robin Farley with UBS.

Robin Farley: Great, thanks. And I don’t know if you commented on this at the beginning of a call because I had to miss part at 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?

James Risoleo: 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 2017 and 2018. And also did add spreads on potential acquisition 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 two dispositions, the sale of share to Memphis and the sale of their home in Melbourne, and it includes the acquisitions we completed year-to-date.

We have not included any further sales, or dispositions in the guidance.

Robin Farley: Okay. All right. Thanks. And then maybe also, I don’t know if you made comments on.

When you look at your solid branded property, are you seeing an improvement there in index? And do you think it’s coming from Marriott Board 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 maybe some occupancy being shared now with this reward program?

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

Robin Farley: Okay, great. Thank you.

James Risoleo: Thanks, Robin.

Operator: We’ll take our next question from Mike Bellisario with Robert W. Baird.

Michael Bellisario: Thanks. Good morning, everyone.

Just a quick question on the moving parts and 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 doing them? Any run rate figures would be great as well?

Gregory Larson: Hey, Michael, it’s Greg. Yes, if you look at the two 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 two dispositions and those two assets combined probably reduced our EBITDA by about $10 million or $11 million.

Michael Bellisario: And then any benefit from the ground lease acquisition?

Gregory Larson: Look, as you know, ground leases are usually low cap rate acquisitions. I mean, as Jim mentioned in his comment, 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 to that.

Michael Bellisario: Thank you.

Operator: 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.

James Risoleo: 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 provide 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 and NAREIT in New York. Have a great day.

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