Jul 16, 2008
Executives
Greg Larson - EVP, Corporate Strategy and Fund Management Ed Walter - President and CEO Larry Harvey - EVP, CFO and Treasurer
Analysts
Celeste Brown - Morgan Stanley Chris Woronka - Deutsche Bank Felicia Hendrix - Lehman Brothers David Loeb - Robert W. Baird Jeff Donnelly - Wachovia Securities Nap Overton - Morgan Keegan William Truelove - UBS Patrick Scholes - FBR Capital Markets Smedes Rose - KBW
Operator
Good day, everyone, and welcome to this Host Hotels & Resorts Incorporated second quarter 2008 earnings conference call. As a reminder, today's call is being recorded.
At this time for opening remarks and introductions, I would like to turn the call over to the Executive Vice President, Mr. Greg Larson.
Please go ahead sir.
Greg Larson
Thank you. Welcome to the Host Hotels & Resorts second quarter 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 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.
We are not obligated to publicly update or revise these forward-looking statements. Additionally, 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 on our website at hosthotels.com. This morning, Ed Walter, our President and Chief Executive Officer, will provide a brief overview of our second quarter results and then will describe the current operating environment, as well as the company's outlook for the reminder of 2008.
Larry Harvey, our Chief Financial Officer, will then provide greater detail on our second quarter results, including regional and market performance. Following their remarks, we will be available to respond to your questions.
Now here is Ed.
Ed Walter
Thanks, Greg. Good morning, everyone.
Given the challenging economic trend we have seen recently, we are pleased to report solid results for the quarter, that are generally consistent with our expectations. Our comparable hotel RevPAR for the quarter increased 1.7%, driven by a 2.6% increase in average room rate, which was partially offset by a decline in occupancy of 0.7 percentage point.
Food and beverage revenues at are comparable hotels increased 2.5%, with significant growth again coming from the Orlando World Center Marriott. Overall, comparable revenues increased by 1.9% for the quarter.
Despite sub-inflationary RevPAR growth, comparable hotel adjusted operating profit margins decreased by just 20 basis points for the quarter. The adjusted EBITDA of Host Hotels and Resorts LP for the quarter was $419 million, which represented a decrease of $3 million for the second quarter of 2007.
Our FFO per diluted share for the second quarter was $0.56, but that was at the high end of our guidance and exceeded the consensus estimates by a penny. On the year-to-date basis, comparable RevPAR increased 2% and F&B revenues were up 3.1%.
Year-to-date, adjusted EBITDA was $680 million that match last years total and FFO was $0.89 per share. In analyzing what was happening in our business over the last three periods and especially the last six to eight weeks, it has become clear that the various pressure points in the overall economy are combining to depress lodging demand.
When we last spoke in April, we were not seeing any acceleration of weakness in our transient and leisure business, nor in our group bookings or group cancellation rate. However since May, we are seeing increased weakness in both our group and transient segments.
Although we are clearly are still being impacted by our considerable construction program in certain markets even after adjusting for the impact of that disruptions, we experienced weaker demand in the quarter, which resulted in a reduction in our occupancy rate of about 70 basis points to 76.5%. In Q2, the decline was generally attributable to weakness in our transient segment, as we experienced a reduction in room nights of over 3.5%, which was only partially offset by an increase in average rate of over 1.5%.
The decrease in demand was most prominent in our higher-rated corporate and special corporate segments due to the slowdown in business travel in many of our markets, which accelerated meaningfully in May and June dropping 8% overall for the quarter. We were able to offset only some of this decline with lower-rated business.
Tracking the trends we saw earlier in the year, leisure demand, especially on the weekends continue to be soft. Given the various pressures that consumers take, we expect our leisure business will further weaken throughout the remainder of the year.
We also anticipate that corporate travel will continue to decline as businesses seek to cut cost to further limit profit deterioration. Overall, our Group business performed well compared to last year as group room nights were up 2% for the quarter and the average rate increased by a solid 4%.
The net result was a 6% increase in Group revenues. However, this did fall slightly short of our forecast, as short-term group pick-up in the quarter fail to meet our expectations.
As we look out over the remainder of the year, our booking pace from a rooms perspective has turned slightly negative especially in the third quarter. This represents a combination of reduced bookings over the last 90 days and assessment that attendance level at booked events will likely decline.
We have also seen a slight increase in cancellations and remain concerned that this trend could accelerate. Group revenues for the second half of the year are still riding slightly ahead of last year's.
We are encouraging our operators to be very realistic in assessing group attendance, as we intend to be very proactive in filling these rooms with alternate customers. On the strategic front, we are pleased to announce that early in the second quarter, a European joint venture purchased the 270-room Crowne Plaza Hotel Amsterdam City Centre for 72 million Euros.
The hotel is in a prime location in the centre of the city, close to the train station and to the central district shops, museums and restaurants. The acquisition was financed to the loan of approximately 53 million euros at an interest rate under 6%.
The loan provide the joint venture with the option to borrow up to 12 million euros, an additional proceeds to fund renovation, which we expect will total approximately 17 million euros. This brings the joint venture’s investment to over 1.1 billion euros in 11 properties representing over 3500 rooms.
On the domestic front, we completed the sale of the Sheraton Suites Tampa Airport hotel for $23.5 million and expect to complete the sale of our Sacramento hotel in the third quarter. We continue to work on additional assets sales, which could totaled, as much as $150 million for the year.
However, the current state of the credit market continues to post challenges for buyers in obtaining financing, and therefore makes it difficult to predict the likelihood or timing of disposition. While we are continuing to evaluate potential domestic acquisition, we are not optimistic that we will identify transactions to satisfy our return target.
So, we would guide you to not include any acquisitions in your analysis for 2008. We intent to be opportunistic, as the market place evolves.
Looking at our capital investment program, we are very pleased with the progress we are making and the impact on our results. Our new ballroom in the Orlando World Center Marriott is an extraordinary success and has vaulted that property into a market leadership position.
Bookings to this hotel increased over 17% in 2008, and by an additional 5% in 2009. In mid June, we completed the construction of the new 26,000 square foot Atrium Ballroom at our Atlanta Marriott Marquis hotel, which concludes the property's 80 plus million repositioning project.
In addition to the ballroom, the hotel has 9600 square feet of new breakout space and three new reconstructed food and beverage outlet. We are already seeing positive response to the repositioning as booking pace is up by almost 10% for the remainder of the year, and more than 13% in 2009.
Finally, we have added 8300 square feet of meeting space at our San Francisco Marriott hotel in connection with the lobby and F&B repositioning of that asset. The booking pays for this hotel are up over 20% for the remainder of the year, and 25% for the first half of 2009.
For the quarter, we completed approximately 160 million of projects, building our year-to-date total to 310 million. We continue to expect to spend approximately 640 to 660 million in total for the year.
Finally, we repurchased 2.2 million shares of our common stock for approximately $37 million during the quarter. On a year-to-date basis, our share purchases totaled 4.35 million shares for approximately $72 million.
Our stock represents an incredible value given that we are currently trading at a per key valuation of approximately 180,000 versus a replacement cost valuation of approximately 350,000 per key, and at an EBITDA multiple of about 8.25 based on the midpoint of the earnings guidance we are about to discuss. As we have said previously, additional stock repurchases for the remainder of the year will depend on the conditions in the equity debt and disposition market as well as other opportunities we may have to invest our capital.
Now, let me spend some time on our outlook for the remainder of 2008. As we have already discussed, we have seen demand weaken in both the group and transient segments of our business.
The combination of these trends and the continued deterioration in the economy has altered our outlook for the second half of the year. While we had anticipated a significant slowdown in economic growth for 2008, due to the housing market, as well as the financial credit crisis and rising energy prices, we initially anticipated that the majority of the decline would be captured in the first half of the year, before moderating and paving the way for a gradual second half recovery, helped in part by external events such as the economics stimulus package and continued reduction of interest rates by the Feds.
Unfortunately, as we are all well aware, the issues confronting the credit markets have not abated and it now appears that we are caught in a prolonged slowdown that will last through the end of 2008 and likely into 2009. This January consensus forecast for the second half of the year for GDP consumer spending and business investments, all key drivers of lodging demand have been reduced by approximately 50% and the outlook for 2009 has deteriorated as well.
In addition, corporate profits were previously expected to increase in the second half of the year, but are now expected to decline. Price of oil had reached an all-time high and spikes in the price of commodities that could increase pressure on consumers.
We have also began to witness the decrease in airline capacity due to rise in fuel cost, which will likely affect lodging demand, especially with respect to price sensitive leisure business. These and other cost pressures are forcing both individual and businesses to restrain their travel spending.
As a result of these trying economic fundamentals we have already thought of revising our estimate downward for the reminder of the year. We generally expect that the second half of the year will reflect negative RevPAR growth, which results in a full year estimate that ranges between -1% to 1%.
In this weaker operating environment, combined with higher inflationary cost pressures, we expect hotel adjusted operating profit margins to decline between 75 and 125 basis points for our comparable hotel. Based on these assumptions we are reducing our guidance for FFO per diluted share for the year to a $1.75 to $1.85.
Adjusted EBITDA of Host LP is expected to be between $1.375 billion and $1.425 billion. We continue to expect to declare a fixed $0.20 per share common dividend each quarter and based on our revised guidance, expect the special dividend paid in January, will be in the range of $0.15 to $0.20 per share, resulting in a full year dividend of $0.95 to $1.00.
In summary, we are pleased with our second quarter results but expect the remainder of the year to be challenging. We are intensely focused on our asset management activities, with the clear goal of containing cost as demand weakens.
Our investment approach remains highly disciplined with the goal of maximizing our returns on every dollar invested and with the intent of enhancing our existing assets and exploring our options in international market, while domestic pricing remains unattractive. Thank you.
Now, let me turn the call over to Larry Harvey, our Chief Financial Officer, who will discuss our operating financial performance for the quarter in more detail.
Larry Harvey
Thank you, Ed. Let me start by giving you some detail on our comparable hotel RevPAR results.
Looking at the portfolio based on property types, our resort convention hotels performed their best during the second quarter with RevPAR growth of 2%, led by strong growth at the Orlando World Center Marriott. RevPAR for our urban hotels increased 1.7% led by our Boston properties, while RevPAR at our airport hotels increased by 1.8%, and our suburban hotel RevPAR increased by 1.2%.
Turning to our regional results; the New England region continued to outperform, with RevPAR growth of 6%, as our Boston hotels performed exceptionally well, due to very strong group bookings at citywide. In particular, RevPAR growth for the Hyatt Cambridge and Sheraton Boston exceeded 13% and 11% respectively.
As we previously discussed, the New England region and Boston in particular will have a weaker third quarter, due to fewer city-wide and softening leisure demand. The Florida region also had a strong quarter with RevPAR growth of 4.4% driven by the gain at Orland World Center Marriott.
The new exhibit hall and ballroom space that opened in the fourth quarter of last year continues to drive both group bookings and rates. The Florida region will have a weaker second half of the year due to a significant amount of business disruption with three properties under room renovations and a storage construction for ballroom addition at the Harbor Beach Marriott and The Ritz-Carlton, Amelia Island.
Our DC Metro region, has RevPAR growth of 1.8%, rebounding from a weak first quarter because of four hotels under renovation. Our downtown hotels outperformed particularly the JW Marriott and the Hyatt Regency on Capitol Hill each with RevPAR growth in excess of 7%.
Our suburban DC properties underperformed because of weaker transient business and lower short-term group demand. We expect the rest of the year to play out that way with the downtown hotels generally continuing to perform well, although the Hyatt Regency on Capitol Hill will be under renovation and the suburban hotels continue to struggle.
Overall, RevPAR growth for our Pacific region was 0.5% for the quarter. However, results vary by market.
The Los Angeles market continued its strong performance with RevPAR up over 8% due to excellent transient and group demand. The San Diego market also had a good quarter with RevPAR up 3% driven by the San Diego Marina Marriott.
On the other hand, RevPAR for our Hawaiian properties declined 5% because of lower leisure transient demand. We expect that trend to continue into the second half of the year due to rising fuel costs and lower airline travel in Hawaii.
As anticipated, the San Francisco market was weaker in the second quarter due to lower group demand at the San Francisco Moscone. Overall, we expect the San Francisco market to rebound strongly in the third quarter driven by increased city-wide and favorable year-over-year comparison, as two hotels were under renovation in the third quarter of 2007.
We also expect the Seattle market to have a good quarter, while the Los Angeles and San Diego markets will have a weaker third quarter due to softening transient demand and lower group demand. The Mid-Atlantic region had an interesting quarter with RevPAR growth of just 0.2%.
RevPAR growth for our New York properties was limited to 1.3%, as the renovations of the New York Marriott Downtown and the W New York affected the second quarter. Excluding those two hotels RevPAR growth would have been 5.8% for the quarter.
We expect the third quarter to be better because of strong group booking needs, during lead times solid international leisure transient business although the W New York will still be under renovation in the third quarter. RevPAR for our Philadelphia properties declined 3.6% due to fewer city-wide and weaker group bookings.
The Philadelphia market will continue to struggle due to fewer city-wide and group bookings, and a significant decrease in leisure demand because of the departure of the King Tut exhibit, which drove a substantial amount of demand in 2007. As expected, Atlanta had a weak second quarter as RevPAR decreased to 5.6%.
The poor performance was driven by weak group bookings, lower transient demand and a very disruptive room renovation at The Ritz-Carlton Buckhead. While we anticipated Atlanta would rebound in the third quarter.
At this point, we expected to continue to perform poorly, as the group and transient booking pace is lagging, and The Ritz-Carlton Buckhead room renovations continues during the third quarter. The South Central region also performed fully in the second quarter with RevPAR declining 0.7%.
Performance varies by market. Houston had a very good quarter with RevPAR up nearly 6% due to strong group bookings.
The market was led by the JW Marriott, which had RevPAR growth an excess of 14%. Results would have even better, but the St.
Regis, Houston had a room’s renovation during the quarter. Results in San Antonio were particularly weak, as RevPAR fell by over 6%, primarily due to the opening of the Grand Hyatt and renovations at the San Antonio Riverwalk Marriott.
We expect the San Antonio and Houston markets to perform poorly in the third quarter due to the continued renovations and a weaker group booking pace in Houston. As one who has traveled in this region, I should mention that the New Orleans Marriott is not in our comparable hotel set.
We continue to see improved signs of light in this market, as RevPAR increased over 30% for the quarter. We expect the property will continue to perform exceptionally well in the third quarter.
Year-to-date, the international region has been our best with RevPAR growth of 22.6% in US dollars, primarily driven by the weak dollar and strong growth in our Chilean assets and the Calgary and Toronto Eaton Centre Marriott followed by the New England region, which RevPAR growth of 7.2%. The North Central region with the RevPAR decline of 4%, in the Orlando region with the decline of 2.4% have been our weakest performers.
Our European joint venture had a weaker quarter with RevPAR calculated in euros, increasing by 1.5%, as several properties were undergoing renovations. If calculated in US dollars, RevPAR was up by 18%.
On a year-to-date basis, RevPAR calculated in euros increased 3.1% and increased 18.7% in US dollars. For Westin Palace, Madrid, the Renaissance Brussels and the Marriott Brussels outperformed in both the quarter and year-to-date periods.
For the quarter adjusted operating profit margins for our comp hotels decreased by 20 basis points, which represents solid performance given that RevPAR growth was below inflation. Food and beverage flow through was excellent due to the growth in banquet and audio-visual business, resulting in a 60 basis point improvement in comparable hotel adjusted food and beverage margins.
Wages and benefits increased by roughly 3% and unallocated grew by 4.3% for the quarter. As anticipated real estate taxes increased by 7.9% as assessed evaluations continued to catch up with increases in property values.
Utility costs increased 7% for the quarter. We expect natural gas and other energy costs to remain high throughout the rest of the year.
On a positive note, property insurance cost decreased nearly 20% reflecting the successful renewal of our property insurance plan. Year-to-date our comparable adjusted operating profit margins had decreased by 30 basis points.
For the rest of the year, we expect margins to come under pressure in addition to the expected increase in utility cost, we expect margins to be affected by decline in food and beverage revenues particularly in the more profitable business such as banquet and audio-visual and in overall increase in food cost. Every hotel we owned has implemented some level of contingency plan, and roughly 20% of our hotels are at the highest level.
We are proactively working with our managers to right size the work force to the amount of business being generated and have implemented the series of additional cost cutting measures such as eliminating the discretionary spending, not filling vacant positions, modifying restaurant outlet operation hours, intervening in implementation of room standards. As we discussed in the first quarter earnings call, we entered into a $165 million term loan that was an add-on to our $600 million credit facility.
Subsequent to the earning calls, we closed on an additional $45 million under the term loan with two vendors outside of our bank group, increasing the overall size of loan to $210 million. The loan bears interest at LIBOR plus 175 basis points.
The proceeds from the term loan were used to repay the $100 million draw under the credit facility that was made after of the end of the first quarter and to supplement our cash position. In addition, during the quarter, we closed on the refinancing of the $208 million mortgage on the Orlando World Center Marriott.
This loan was our only refinancing obligation in 2008. The new loan is a non-amortizing $300 million mortgage that bears interest at LIBOR plus 350 basis points.
The loan matures in July 2011, and we have the option to extend for two, one-year periods upon the satisfaction of an interest coverage test. The excess loan proceeds of $90 million will be used for general corporate purposes.
We finished the quarter with $505 million of cash and we currently have $600 million of available capacity on the credit facility. Due to the level of disruption in the credit markets, we are maintaining additional cash- on-hand for working capital purposes.
Turning to our third quarter guidance, we expect comparable hotel RevPAR to be down 2% to 4% for the quarter due to lower group bookings, less short-term group pickup and softer leisure demand, as well as a difficult year-over-year comparison, since the third quarter of 2007 was our strongest quarter of the year with RevPAR growth of 7.2%. We are forecasting that FFO per diluted share will be in the range of $0.27 to $0.29 per share for the third quarter.
This completes our prepared remarks. We are now interested in answering any questions you may have.
Operator
Thank you. [Operator Instructions] We will take our first question from Celeste Brown at Morgan Stanley.
Celeste Brown - Morgan Stanley
Hi, good morning.
Ed Walter
How are you doing?
Celeste Brown - Morgan Stanley
Good. Just first on your guidance, and maybe I am understand it wrong here.
It looks like you are implying a potential for RevPAR to be positive in the fourth quarter, is that because of group business or is that now what is implied in the fourth quarter number?
Ed Walter
It depends a little bit upon what your perspective is on what happened in the third quarter, and how you had got to the plus 1 scenario. I would say overall, we expect RevPAR to be negative in the second half of the year.
We do think that there are some opportunities for the fourth quarter to be better than the third quarter, which I think you correctly surmised. Those would come from a combination of the fact that the group bookings for the fourth quarter are stronger.
We also had much more construction disruption in 2007 in the fourth quarter, and so we are optimistic that having more of those rooms available for customers will ultimately result in slightly better occupancies and consequently better RevPAR in Q4. So, a lot that is going to depend ultimately on, due to the trends that we are seeing from a standpoint of weaker corporate business and slower group pickup, do they accelerate further into the fourth quarter, or having stepped down a bit in the May/June period, do we remain at that level going forward through the rest of the year?
Celeste Brown - Morgan Stanley
Okay. Then, given the contingency plans you have implemented at your hotels, what RevPAR do you need to maintain your margins?
Ed Walter
I think at this point we probably assume that we need to be in the mid-3 range, probably about 3.5 in order to maintain block margins.
Celeste Brown - Morgan Stanley
Okay. Thank you.
Operator
We will take our next question from Chris Woronka at Deutsche Bank.
Chris Woronka - Deutsche Bank
Hey, good morning.
Ed Walter
Okay, Chris.
Chris Woronka - Deutsche Bank
Could you maybe give us some guidance on how much of your group bookings for either full-year '08, or maybe just first-half '08 were booked in prior years?
Ed Walter
Chris, could you repeat that for some reason you are breaking up as we try to hear that.
Chris Woronka - Deutsche Bank
Yes. Could you maybe give us a little bit of guidance on what percentage of your group bookings for either full year '08 or its just first half '08 were booked in prior years?
Ed Walter
I would say that if you look at the year roughly about three quarters of our group room nights were on the books when we started the year. If you look at what is left for the year a slightly more than 90% of our full year group bookings either have occurred or on the books.
Chris Woronka - Deutsche Bank
Okay, that is helpful. Also in terms of thinking about the contingency plans and the cost cuts, where is your low hanging fruit, if you already gotten that out of the way in the second quarter.
I mean, how harder does it get to be, to continue to cut costs without significantly impacting the revenue side?
Larry Harvey
You know each of these contingency plans happen on a property-by-property basis and they are always tied to the level of business that you are seeing at the individual hotel. So, things like closing F&B outlet and adjusting other levels of staffing will be implemented in a more severe form, if you begin to see occupancy decline at a more severe rate.
So, I think that I would say overall I would not view it as the coincidence by any means that the full impact of our contingency plans has already been felt and implemented. The way these tend to work, they worst it gets the more that we implemented.
So I think we’ve captured that in the margin guidance that we’ve given you. However, I do not think that by any means we fully exhausted the benefits from those plans.
Chris Woronka - Deutsche Bank
Okay, great. Can I just clarify the first data point you gave us you said 90% of your room nights that were booked in prior years for '08 are already happened or…
Ed Walter
Struck. No, what I was trying to say is that at this point in the year, 90% of our group room nights either have occurred because we are halfway through the year or are on the books.
Chris Woronka - Deutsche Bank
Okay.
Ed Walter
So, 10% of our group business, it is really less than that. It is really closer to 8% of our group business for the full year remains to be booked.
Chris Woronka - Deutsche Bank
Okay, that is helpful. Thanks.
Operator
We will go next to Felicia Hendrix at Lehman Brothers.
Felicia Hendrix - Lehman Brothers
Hi. Good morning.
I just wanted to talk about your the special dividend that you reduced, which is clearly understandable given the state of things right now. Wondering though if we should be concerned at all about any risk to your regular dividend?
Wondering if you could help us understand at what RevPAR levels do you start reassessing your dividend goal?
Larry Harvey
I would say as it relates to our normal $0.20 per quarter dividend there you should not be worried about that at all. Number one, we’ve taxable income.
We expect taxable income to be well in excess of that for this year. Consequently, we will be required to distribute that.
In fact, we are capturing that taxable income also in our special dividend. Looking forward, I think you have to see a very draconian decline in RevPAR and in EBITDA before we will reconsider the dividend.
As we’ve discussed in the past, the structure that we created a few years ago, when we reinstituted our divided it was designed to put us in a position, where we could give investors a fair degree of comfort that we will be paying that is $0.20 per quarter dividend going forward. I do not see a scenario today that would suggest we will not be able to maintain that.
Felicia Hendrix - Lehman Brothers
Okay, great. Then just wondering if you could give us an overview obviously they have deteriorated, but where are you seeing cap rates now?
Ed Walter
We know that continues to be one of the most challenging questions in our business because its difficult to actually get comparable that one can evaluate that would confirm your sense, that pricing should be going down a bit. I think everybody was talking at the NYU Conference about the sale that happened out in California by Sunstone and clearly the multiple on that was quite strong and so as an indication of where high profile top colleague properties would sell as an owner it was somewhat comforting to see the evaluations would be at that level.
Having said that, knowing what happened in the financial markets and really applying some of that to and probably also capturing some reduced expectations for the next 18 to 24 months, as people trying to look at what is going to happen. I think you have to assume, that if we would have said and did say a couple of quarters ago, the top part of our portfolio, the bulk of our portfolio would probably range between 6.5 and 7.5.
We do think that those cap rates have modified a bit, we are probably think more in terms of a range of 7 to 7.5. I probably guess to that if you look at the assets that we are selling, will probably be in a similar 25 to 50 basis point increase in cap rates for those types of assets.
Felicia Hendrix - Lehman Brothers
Okay. That is really helpful.
Thank you. Just a final question on the renovations that you have remaining for this year and even maybe some that you have that you can talk about for next year.
Can you just walk us through the status of those, so we’ve a better idea of how to model that?
Ed Walter
You mean in terms of the timing of the cash flows?
Felicia Hendrix - Lehman Brothers
Well, just in terms of when the timing of the completion of the renovations and where they are?
Ed Walter
I mean, that we are spending as much money as we are spending those are hitting at all various times that over the course of the year. The larger one in Orlando obviously we talked about was finished at the end of last year, Atlanta just finished.
I think Chicago, which is another big meeting space addition is not due to finish until the middle of the next year. As I say that is probably in terms of the big meeting space addition that is probably the timing for those.
Felicia Hendrix - Lehman Brothers
Okay. Okay, that is helpful.
Thanks a lot.
Ed Walter
Thanks.
Operator
We will go to our next question from David Loeb at Baird.
David Loeb - Robert W. Baird
Hi. Just to hit the cap rates again.
At earlier, you talked about valuation, in terms of EBITDA multiple replacement cost. It looks like the market is implying a cap rate that is well north of nine, maybe close to ten.
What do you think about the difference between that and your current share pricing, how does that affect your buyback analysis?
Larry Harvey
Yes, David. I think we would agree with your assessment that if you look at current numbers right now, it would suggest that we are being valued at close to a 10 cap.
I think that only would confirm in our minds the opportunity that exists in buying our stock and its one of the reasons why as we look at our investment program for the year. You heard us indicate that we were less optimistic about investing in assets in the US and more optimistic about the prospects of buying our stock.
I also think a part of what you have got there is a dislocation still between where the private market is valuing the assets and where the public market is valuing company.
David Loeb - Robert W. Baird
Does that mean you are going to be substantially more aggressive in buybacks or at least considering that?
Larry Harvey
No, I would think, I mean. At the end of the day, right now, I think it hard for anybody to be confident in the overall economic outlook.
So, I think that we would still stand by the comment we made, description that we’ve used for most of this year, with respect to the stock buyback program that we would approach it in a measured way. The way the year has played out frankly, confirmed the intelligence of that strategy in my mind.
I think, as we look more broadly at what we are trying to do to deal with this environment, we start with being focused on making certain, that we are maintaining appropriate levels of liquidity, because while we are in excellent shape right now, and I think we’ve done a great job of that I think that it is incumbent upon all of us right now in periods like this, of uncertainty, to at least start by focusing on that. I think we want to continue to invest in our core portfolio.
We think that by continuing to position our assets, we will end up in a scenario where, as when we ultimately recover, you know that we will, we want to be in a position to be even in a better and stronger competitor than we already are. That when you go to the next step, which is, investing outside your portfolio, you really look at what are the opportunities internationally, what are the opportunities to buy our stock and, and select intelligently among those alternatives, with recognizing that in the case of some of the opportunities to invest internationally, we are building some businesses that we think down the road will contribute meaningfully to the FFO.
David Loeb - Robert W. Baird
Okay. One other topic, in your prepared remarks it sounded like you were seeing some of the impact of reduced airlift.
Any thoughts on how big an impact that particular piece is on your third and fourth quarter numbers?
Ed Walter
It is hard to isolate that particular issue alone, as you look at the Q3 and Q4 numbers. I would say, as we assessed the likely impact of that, we’ve had the opportunity to look at some analysis that we’ve done that suggested that as you get into October you are probably looking at an overall reduction in capacity that is in the 6 to 7 range.
It feels like the absolute level of capacity reduction you are going to run into in the major market for most of our hotels are we are, will short of that. So, we suspect that the real impact of the travel, the capacity restrictions will not be that heavy on our business or any hotel.
The leisure side is where we are more concerned. It is clear that what the airlines are trying to do with their entire capacity restriction program is really they have reduced their reliance on trying to fill planes with lower-priced customers.
Consequently push rates up by raising their overall average rate. That is clearly hitting at leisure.
A lot of their l capacity reductions have been targeted at major leisure markets. So that, that would include Orlando and for us that would include Hawaii.
We’ve anticipated a fairly significant deterioration for Hawaii for the rest of the year, in part because of those capacity reductions.
David Loeb - Robert W. Baird
Okay. Great.
Thank you.
Operator
We will go next to Jeff Donnelly of Wachovia Securities.
Jeff Donnelly - Wachovia Securities
Hi, good morning, Ed.
Ed Walter
Good morning.
Jeff Donnelly - Wachovia Securities
I know you have not given guidance for 2009 and I do not expect you to, but there is so much speculation right now in the marketplace and some within the industry that, hotels could see 5% or perhaps greater declines in RevPAR next year. I am curious if there are rates of RevPAR growth or decline that is striking personally as improbable, meaning that if you had to a wide range today for what the industry could face next year.
Where would you put that lower band of RevPAR growth? Can you give us a sense?
Ed Walter
Jeff, it is hard to try to do that right now. There have been enough changes over the six to eight weeks in 2008.
Trying to project that out to '09 is difficult. What I would say about '09, and I do not think this will surprise people.
The primary thing that is going to determine what happens in '09 is, what is going to happen from the standpoint of GDP growth in the overall health of the economy and I think that is obviously since that drives logic demand, that is going to be critical. We are concerned as we look at '09 that the consensus forecast for '09 appear to have deteriorated since the beginning of this year especially on the business investment side that does not make us particularly optimistic about demand growth in the beginning part of '09.
We are also a little bit concerned about the fact supply is going to be slightly higher in '09 than in '08. Now the reality is the level of supply in '09, compared to our portfolio, compared to our market, it is slightly more than 2% is still at or below the long-term average for supply.
So, in the long run it does not really represent a big problem. However, I think in the short run, looking at ’09, that is not a positive factor.
The other side of that though is that, we are still seeing fairly decent group bookings for next year. The pace in our room nights, perspective is matching up with where we were at this time last year, which is good and the rate is up in the 3.5 range.
So, if we were to project at this minute, we will be anticipating that we’ve higher group revenues next year than we had this year. Those group bookings represent about half of the overall group room nights that we are going to have for next year.
So, the current are not overly favorable some of the smaller data points like the group bookings are not as bad as you might think. I think, we are going to be obviously look at real carefully at that and we will do our best to give you some better insight into that, that will probably be more satisfying come October.
Jeff Donnelly - Wachovia Securities
Maybe building on that, where on your experience, do you think the industry begins to loose pricing power at least they no longer able to get positive rate go, do you have a sense of where that occupancy level is? Maybe related to that, do you have a gut sense of where in the next twelve months that the change in the number of, if I call, sellout nights in the industry, where you tend to get disproportionate profits on a given night?
Larry Harvey
As it relates to overall occupancy levels, it seems to me, as we went through the last downturn and then we went though the recovery. It was for our portfolio and I really only can assess it from that standpoint.
For our portfolio, what we typically found is that we’ve got much below 72%, 73%. We would start to run against the challenges in trying to maintain pricing.
We are still above that level at this point. However, we are obviously getting closer to it as we work our way through this year.
The second part of your question, again was?
Jeff Donnelly - Wachovia Securities
Just pertaining to, if you had a sense of the change in the number of sellout nights that you are facing in your portfolio?
Larry Harvey
I do not know that I have any real good data points on that. The one insight I could throw out relative to that though that we will suggest so far that has been holding up is that if we look at where our weakness in actual occupancy turned out to be.
It was on the weekends. During the week, we continue to maintain the same level of occupancy that we did last year.
Weekends are where we seem to be suffering a bit more and I suspect if that is also where we had more troubles maintaining pricing.
Jeff Donnelly - Wachovia Securities
Just one last question is I know your shares are down 50% in the past year and some of the peers or I should say but some of your peers are seeing their prices fall 70% to 80%. I know it is premature, but Host has a pretty good balance sheet.
Where does acquisition activity fall in your mind right now and when do you think that might actually come back on the radar screen, is it six months, is it 12 months or is it just, it is hard to say?
Larry Harvey
I would answer you consistent with the way I answered part of David's question is acquisition activities were always on our screen because we are always paying attention to what is available in the market. Having said that, when your stock is at the price that our stock is at, you need to be comfortable that there are a fairly great returns coming out of a particular individual acquisition in order to pursue that as opposed to buying back stock.
I suspect that what we will see as you normally do in a market, is that as we work our way through the next year and a half, we will ultimately see pricing on the part of sellers become more realistic from a buyer's perspective, and as the economic outlook changes and the prospects for better growth begin to become more apparent, you will also find it is easier for a purchaser to justify an acquisition. However, I think it is going to take a little while before that happens and I suspect it will certainly take in sometime into next year.
As it relates to other broader corporate acquisitions, which is I think part of what you were hinting out with your question, you know that is something that we’ve typically not focused on. We’ve done a couple of larger acquisitions in our history, but the way we generally built the company is one asset at a time.
I would not see that as a priority for us.
Jeff Donnelly - Wachovia Securities
Great, thank you.
Operator
We will take our next question from Nap Overton at Morgan Keegan.
Nap Overton - Morgan Keegan
Yes, my questions have been addressed. Thank you.
Ed Walter
Okay.
Operator
We will go next to William Truelove at UBS.
William Truelove - UBS
Hey, good morning.
Ed Walter
Good morning
William Truelove - UBS
So, getting back to cap rates and asset evaluations, where your stock is. If you are saying that generally you think you give 7 to 7.5% is the credit cap, do you think that was correct.
I just want to be sure that you think generally that is the correct cap rate, given the current financing environment?
Ed Walter
Well no, I am not saying that necessarily represents the right cap rate for us is the buyer. What I am probably giving you a little bit more of a feel for is, based upon what we are seeing.
When we try to estimate where transactions are happening that probably is the best indication that we can come up with per value given the limited amount of data that is out here.
William Truelove - UBS
For your portfolio it’s specifically right.
Ed Walter
Yes.
William Truelove - UBS
Yes. So then if there is such a differential, are you moving more aggressively in finding additional assets to sell to be more aggressive on share repurchases.
So, you could use more money faster that way then buying, because obviously you just said you do not want to buy a large portfolio of assets and I would agree with you that is very risky. However, could you not more aggressively sell your assets to repurchase stock?
Ed Walter
I would agree with you that, that represents an intriguing opportunity for us and that we’ve been in the market attempting to sell assets on a consistent basis. We’ve been an active seller of assets over the last five years.
We’ve seen a slow down in the ability our people to complete transaction that really goes back to last fall. As I mentioned in our prepared remarks, we are hoping that there is $150 million plus or minus worth of transactions that we are working on.
I hope that all of that closes and certainly to redeploying those proceeds and just buying back stock would be an attractive option. That is because I think they based on where we are currently priced, we would be buying our own company at a better multiple than where we would be selling.
However, it is just hard to get them done right now. I think that while there certainly are interested buyers in the market and people are actively working those transactions.
The ability to pull together their debt and their equity financing in that turbulent environment has proven very complex.
William Truelove - UBS
Okay so it is fair to say your increasing your activity on the sell side is just been hard to getting closed, right?
Ed Walter
We are increasing. I would say that we are continuing to work hard at getting sales done and then we hope that we are in a position to actually report additional sale.
William Truelove - UBS
Right and then one last question then, giving thoughts again on margins, or going back to time we haven't heard since maybe the 90's, talk about your RevPAR, the EBITDA multiplier effect. What used to be sometimes like a 2 times, or probably a 100 basis points change in RevPAR, there is 200 basis points in, or 2% change in EBITDA.
Given the contingency plans that you see in place by your operators, is there a multiplier effect, that you feel might be a reasonable one, is it 2 times, is it 1.5? What do you think is a reasonable way of thinking about the going-forward approach, given that you know the contingency plans in place of your operators?
Ed Walter
I know that in the past the industry has defaulted those rules at times, in order to make things a little bit easier to assess. The tricky thing of course is that, especially with a portfolio like ours, it becomes a lot more complex in just where RevPAR is because food and beverage is a big part of our overall profitability, is a big part of our overall revenue stream.
So, there is a lot going on within it. Somewhere in that two times area, maybe a little bit more is probably not a bad rough measure.
In fact, that is what you chose to use. However, I think, typically the way we assess it, is more to look at what is actually happening with margins, make some assumptions with respect to margins and let that carry out.
Because there just are so many moving parts right now in the overall machine, it is just a safer way to try to look at it.
William Truelove - UBS
All right, thanks so much.
Operator
We will take our next question from Patrick Scholes at FBR Capital Markets.
Patrick Scholes - FBR Capital Markets
Hi, good morning. With your third quarter RevPAR expected to decline between two and 4% and you implied fourth quarter basically flat range, what are your expectations for your year-over-year change in incentive management fee payout for those quarters?
Larry Harvey
I would say overall if you looked at what we expect to see happen in incentive management fees for the year that we are expecting them to be relatively flat for the full year, it probably means they go down marginally in the second half of the year.
Patrick Scholes - FBR Capital Markets
Okay. Thank you.
Then just touching on what is your target leverage ratio. Is it still around approximately 3.5, 4 times?
Larry Harvey
Leverage meeting our…
Patrick Scholes - FBR Capital Markets
Debt to EBITDA?
Larry Harvey
Debt to EBITDA I think we probably, we would be comfortable being at a higher level of leverage than that.
Patrick Scholes - FBR Capital Markets
Okay. So,
Larry Harvey
I think we would probably, will be comfortable. We tend to look more at coverage frankly than we do at leverage.
I think we’ve generally this year we are in the high threes in terms of coverage EBITDA and interest coverage. We would be comfortable being at three maybe slightly below.
Patrick Scholes - FBR Capital Markets
Okay. Thank you.
One last question, it looks like in international you did 22% year-over-year RevPAR and same-store RevPAR, excluding foreign exchange what would that have been?
Larry Harvey
It was roughly half so around 11%.
Patrick Scholes - FBR Capital Markets
Okay. Thank you.
That is it.
Operator
We will take our next question from Smedes Rose at KBW.
Smedes Rose - KBW
Hi, thanks. You have answered most of my questions.
However, I just wanted to ask you in your guidance for EBITDA the distribution received from equity investment it looks like its going down, is that mostly reflection of your European joint venture and does that include the contribution from the Amsterdam Hotel bought by that JV and I guess any more color on why that would be going down with the inclusion of that hotel now?
Ed Walter
Hold on one second Smedes, Larry just maybe certainly looking for same thing you asked.
Larry Harvey
I think the equity distributions we are taking are an adjustment in our forecast as well. You are looking at the full year?
Smedes Rose - KBW
Yes. I mean looking at your full year guidance and the change from the guidance as of the first quarter, it looks like, it is about $5 million decline and I would just, is that mostly the European asset, the contribution for you and?
Ed Walter
It is also some timing on our Asian investments. We’ve now pushed those back.
So, it is a combination of both.
Smedes Rose - KBW
So, your underlying assumptions for the European assets are in line with where they were or is it fair to say that international properties are starting to see some of the same falloff as the US properties?
Ed Walter
We’ve seen, I would say, as Larry described when he went through what was going on with RevPAR in Europe. The pace in the second quarter there was slower than it had been in the first quarter and so we are seeing some decline in Europe compared to where the budgets were.
The decline compared to the budgets is not as extreme as what we’ve seen in the States. I think you saw a little bit of that is being reflected there.
Smedes Rose - KBW
Okay. Then, the only thing I wanted to ask you, have you seen, when you look at the supply growth in your markets presumably things scheduled to come on line in '09 or out of the ground and are going to open.
However, are you seeing or hearing of cancellations or things getting stretched out due to lack of financing further out?
Larry Harvey
We are just clearly seeing that. I mean even as I looked at some updated numbers for what was going to happen this year.
I noticed the other day that the expectation for completions in '08 is following the pattern that we’ve seen over the last three years, whereas you work your way through the quarter, whatever the starting point is, it seems to drop by a quarter to 35 basis points, a quarter of 1% to 35 basis points off, by the time we get towards the end of the year. So, I am seeing the number for '08 decline.
I think that right now some of that is sliding into '09, but at the same time I think you are seeing some assumptions with respect to some of the '09 completions become extended. As you look out at '10, we see based upon what under construction at this point in time, which is the only thing that I think you can really count on being delivered, we see a material drop off in supply in 2010.
Our estimate right now, it would probably be roughly 1%, and it would not surprise me given the overall outlook if that even fall further. So, I think that as you think about fundamentals for our industry and you look out past 2009 that clearly is one of the plus points.
Frankly, thinking about the fact that the '09 supply is slightly over two for our market, would end up being the high point in this cycle is, as I mentioned earlier I think quite a plus in thinking about the long-term health of the industry.
Smedes Rose - KBW
Okay. Thanks.
Then just on the final point, such as it is your airport hotels, have the airlines I say take capacity out, I mean they already talking about reducing contract business at those hotels, I know it is not a huge part of your overall business, but could maybe less flights means less crews, less contract business, which I think its part of all airport business right?
Ed Walter
I am sure that if they are reducing their flight capacity by 6% or 7% that we are going to feel some effect from that in our contract business. The thing I would remind everybody is the contract business only represents 3% or 4% of our overall business mix.
So, it maybe an issue at a hotel or two, but it should not be an issue for us overall.
Smedes Rose - KBW
Okay. Thank you.
Ed Walter
Right.
Operator
Ladies and gentlemen, that will conclude today's question-and-answer session. I would like to turn the conference back over to Mr.
Walter for any additional or closing remarks.
Ed Walter
Well, thank you for joining us on this call today. We appreciate the opportunity to discuss our second quarter results and outlook with you.
We look forward to providing you with more insights into what is proving to be an ever interesting 2008, during our third quarter call on October. Have a great remainder of your week.
Operator
Ladies and gentlemen, this does conclude today's presentation. We thank everyone for their participation.
You may disconnect your lines at any time.