Hyatt Hotels Corporation (H) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Hyatt Hotels Corporation Earnings Conference Call. My name is Tahisha, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Atish Shah, Senior Vice President of Investor Relations, please proceed.

Thank you, Tahisha. Good day, everyone, and thank you for joining us for Hyatt's Second Quarter 2013 Earnings Call. We want to thank everyone in the investment community for joining us today. Here with me in Chicago is Mark Hoplamazian, Hyatt's President and Chief Executive Officer; and Gebhard Rainer, Hyatt's Chief Financial Officer. Mark is going to start by making some brief remarks, and then we're going to read and respond to questions emailed to us this morning. Finally, we will take live Q&A towards the end of the call. Before we get started, let me remind everyone that certain statements made on this call are not historical facts and are considered forward-looking statements. These statements are subject to numerous risks and uncertainties as described in our Annual Report on Form 10-K and other SEC filings, which could cause our actual results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the earnings release that we issued earlier this morning, along with the comments on this call, are made only as of today, July 31, 2013, and we undertake no obligation to publicly update any of these forward-looking statements as actual events unfold. You can find the reconciliation of non-GAAP financial measures referred to in our remarks on our website at hyatt.com under the Press Release section of our Investor Relations link and in this morning's earnings release. An archive of this call will be available on our website for 90 days, and a telephone replay of this call will be available for 1 week per the information included in this morning's release. Before we get started, I wanted to point out that our disclosure this morning contains a new schedule on capital expenditures and investment spending. It's located on Page 12 of the schedules. Similar to the brand statistics that we started providing earlier this year, we'll be providing this detail each quarter so you can have a better handle on our aggregate investing activity, including CapEx and other investments given that it's a big part of our value creation focus. And with that, I'll turn it over to Mark to get started.

Thank you, Atish. Good morning, and welcome to Hyatt's Second Quarter 2013 Earnings Call. I'd like to speak with you about 2 topics on today's call. First, I'll discuss second quarter results and share some thoughts on our outlook. And second, I will talk about growth and transactions that we recently announced. Our second quarter financial performance was strong on both a stand-alone basis and as compared to our strong second quarter in 2012. We benefited from higher rates, improved food and beverage sales and good flow-through, as well as earnings from recent acquisitions, renovated hotels and newly opened managed and franchised hotels. With occupancy at prior peak levels in a number of markets around the world, RevPAR growth was driven primarily by higher room rates. Adjusted EBITDA increased over 17%, comparable U.S. RevPAR increased over 6% and comparable owned and leased margins increased 230 basis points. At owned and leased hotels, occupancy rates increased less than 1% to nearly 80% overall, but average room rates were up over 6%. Our owned and leased hotel results were strong due to specific market performance, as well as some renovation impact from last year. In fact, 5 owned and leased hotels, 4 in the U.S. and 1 outside the U.S., each grew EBITDA by over 50%. These 5 hotels had an average RevPAR gain of over 18% and they contributed about 100 basis points of the 230 basis point margin improvement. Food and beverage at our comparable owned and leased hotels was a driver of better quarterly performance as well. Banquet revenue increased almost 12% in the quarter, in part due to a shift of mix of the groups that we're serving. At U.S. full service hotels, transient revenue represented over 50% of room revenue in the second quarter. Transient room revenue…

Thanks, Mark. That concludes our prepare remarks. for our question-and-answer session, we'll do what we've been doing the last few quarters and read to you questions that have been submitted to us by e-mail this morning. We'll start with the category of second quarter RevPAR trends and renovations. We had a few questions on this topic. The first question being, you posted solid results across your own portfolio, 7%-plus RevPAR growth. How much of that strength was the result of continued tailwinds from renovations coming back online?

Well, our best estimate is approximately 50 to 100 basis points, but it's hard to measure since we see impact from renovations and market factors as well. As a general note, we had last major renovations on our owned and leased portfolio now. San Francisco was really the last one to be completed. So looking at the markets with San Francisco, New York, Chicago, San Antonio, markets are strong. Atlanta remains weak, as Mark pointed out earlier. And as I said earlier, we have market factors that have to be taken into consideration here as well.

Okay. As it relates to second quarter RevPAR, did the government headwinds that the company saw in the first quarter abate?

Government remains weak. We stated that in the first quarter. Room nights fell by about 1/2, again consistent with the first quarter. But we stated that in the first quarter as well, government represents less than 5% of our overall mix. And the partial reason for that mix change over that decrease in Government business is a result of our active revenue management as well.

The next quarter -- question relates to renovation impact. Second quarter versus first quarter in terms of dollars, what was the renovation impact in second quarter versus first quarter?

We had talked about renovation impact from managed properties being under renovation. So therefore, it's really a management fee impact. And in the first quarter, the renovation-only impact was in the range of $2 million to $3 million and in the second quarter was probably in the range of about $1 million.

The last question on this topic, monthly trends for transient group RevPAR across the quarter, how much of the group shift out of last quarter was moved into this quarter? And also what was April, May and June, the trend of each month within the quarter?

The group revenue was strong in April, up nearly 20%. It was more or less flat in May and slightly down in June, as Mark pointed out in his prepared remarks as well. Transient revenue was up in the mid-single digits for April, was high single digits for May and June. We had 130 basis point shift in RevPAR on our U.S. portfolio. But despite the progression during the quarter and the Easter effect, we are -- we're still very pleased with the RevPAR in general as it progresses.

Next topic was some additional information on a couple of markets. Can you provide updated views on both New York City and D.C.?

Sure. So on New York, first of all, just by way of reminder, we got 2 owned properties, the Grand Hyatt New York and the Andaz on Fifth Avenue. We have the Andaz Wall Street, which is a managed property and then we have 3 franchise properties, Hyatt at 48th and Lex; Hyatt Union Square, which just opened; and the Hyatt Place on 36th Street. We have 2 other hotels coming, the Hyatt Times Square, which will open later this year and the Park Hyatt New York, which will open next year. New York was strong for us. We were up in the high single digits, mostly rate-driven. We outperformed our comp sets. And it was really driven again by strong transient demand. New York, obviously, has a number of submarkets, but we're seeing good performance in each of the submarkets in which we're active. And I think the additional supply coming online seems to be getting absorbed. And since a fair amount of the new supply coming online is ours, we're paying a lot of attention to how we're actually penetrating the market. And in the case of -- I was scouring these properties last week, as a matter of fact, and as I look at the penetration in -- the Hyatt channel penetration and Hyatt customer base penetration in the Hyatt Place and the Hyatt Union Square, which were the 2 most recently opened, we're bringing a significant measure of business through our channels. So New York is quite strong and nothing but positive for us at this point. In D.C., D.C. is a different story in terms of its current performance. Remains a bit challenging. We had RevPAR up slightly in the quarter. Government business, as we talked about, has been challenging and we've seen a decline in room nights and part of that is revenue management and part of it is underlying demand. Group remains somewhat weak at this point as 2014 paces down a bit. In D.C., we own the Park Hyatt Washington, D.C. We manage the Grand Hyatt and the Hyatt Regency, both of those hotels have had some renovation impact this year. It's turned out to be a very good time, I think, to renovate given the overall market performance. And we got more than a dozen other hotels in the D.C. area in Greater D.C.

Next question has to do with Easter. Can you quantify the Easter shift to EBITDA between the quarters?

The Easter shift on EBITDA during the quarter was approximately $2 million to $3 million. And as stated earlier 130 basis points on RevPAR on the Americas portfolio.

Okay. Next question is on margins. Is owned hotel margin improvement that we saw in the second quarter sustainable in the second half?

Okay. While we continue to focus on costs and on efficiencies, our mix shift has continued and this is really a contributing factor. So margins in the second quarter were up 230 basis points helped by the 5 hotels that Mark pointed out during the remarks, which significantly outperformed further [indiscernible] factors and impacted margins of those 5 hotels by approximately 100 basis points.

Okay. We had 2 questions related to our ASPAC region and China. The first question regarding ASPAC, how much of performance was driven by renovations versus government austerity measures versus supply and demand issues versus potentially a China macro slowdown?

Okay. Part of my answer is all the above. So let me break down ASPAC for just a second. We had -- our comparable hotels in Asia Pacific, excluding Greater China, grew RevPAR by -- in the range of 5% in the second quarter. A lot of that was driven by Japan. And we had a RevPAR contraction in Greater China, about 1/3 of which was due to renovations of some key hotels. And the remaining decline really is the result of the factors that were asked in the question. It's quite difficult to actually segregate whether austerity -- how much austerity had an impact versus overall economic activity versus some other, I would say, very short-lived issues like the bird flu issues and the like. So the other thing I would point out quickly, however, is that the performance by submarket within China is quite varied. So Northern China has been the weakest year-to-date. Eastern China is next in line. And Southern China is actually relatively positive, it's somewhat positive in RevPAR. So what you see is a contraction of business. And I think one of the reasons why Northern China is -- which includes Beijing is relatively more impacted, negatively impacted, is that -- is because of the austerity program. And while we've seen RevPAR contract, I'm happy to report that we maintain comp set leadership in our hotels in Beijing. So I would say that while the overall story is somewhat challenging, our relative performance has been encouraging in terms of our maintenance of our #1 position in our respective comp sets. The environment is challenging at the moment. And I think that the banquet and entertainment factor in a number of our hotels, which have very high-end outlets and we operate at the top end of the banquet market, those are the places that have really taken the primary hit on the austerity front. So that's what I would say. In terms of new supply, yes, there is new supply coming on and there's, I'd say, a lot of variability in terms of magnitude across the markets. I would not say that, that was a primary driver of results in the second quarter year-to-date.

And the second question on China. Your peers have highlighted the softening economy, coupled with continued fallout from the political transition. What they left out was the continued ramp-up in supply. How concerned are you about the supply picture in China in which in some cities could be as high 10% to 20%?

Yes, this is an interesting one. I guess there are a couple of things I would point out. First, ramping -- new openings and ramping has 2 separate impacts. The first is as new supply comes into the market, it tends to have a negative impact on existing players. If you have -- happened to have had a number of openings in 2011, let's say, or 2012 and you're seeing a ramp-up of your own properties, that will tend to buoy your results for at least the short term, so you have a ramp issue that can be beneficial as well. We did not have a lot of openings in '11 and '12, so our opening schedule is now ramping a bit and we may see some of that going forward. The second thing I would say is in terms of the underlying business and how we think about it, you really have to think about what's happening on the supply side relative to the demand over the coming decade, at least, I would say more than that. Because these hotels take several years to get constructed and then open and then ramp, time takes longer. So the underwriting that we're looking at, looks out much longer than the coming few quarters or the coming few years. And we've been extremely diligent about maintaining quality in the pipeline locations, the product that's being built, the owners that we're doing business with and the like. The other thing I would point out is that in terms of our activity base on the new development front, part of what we're seeing evolve is a growing commercial class of middle management folks and I think that, that will continue to provide good demand for our Hyatt Place and Hyatt House properties. We don't have any open yet, but our development activity for those 2 brands is quite high at the moment. And I think that they will serve a very important role in filling out additional distribution and presence in a number of submarkets.

We have one question on our EAME SWA region. The EAME Southwest Asia region continued to do quite well. Can you split out performance between Europe and the rest of the region?

Okay, let me break it out into 3 areas. Europe, the Middle East or GCC, which is a strong area for us and then South Asia. So leading to this -- just by way of reminders, in Europe, we're already represented in key gateway cities, which has helped us through the downtime in Europe right now. So when we look at Europe, Europe is up in the range of about 3% from a RevPAR perspective and the U.K. is a little bit behind that. Again, in Europe, we predominantly operate in the luxury segment, our owned properties in Europe are all in the luxury segment. The GCC, for us, was up in the range of about -- in the mid-teens and South Asia was in the high single digits, around 7%, 8%, which is actually a very notable point for us because it's an indication that reflects the stabilization of RevPAR in India, which is an important indicator and factor for us.

Okay. We had some questions on use of cash, capital allocation, first one being on the share repurchases. You bought back over 4 million shares in the quarter, reducing your flow by 3%. Can you discuss your return of capital strategy? How do you weigh the benefits of share repurchases, which potentially reduce flow versus a dividend?

Sure. So a number of points to be made here. The first is just a reiteration of what we've said in the past, which is our approach to this is to consider our cash resources, our debt capacity and our asset base as a part of resources that we have available to us. And we remain focused, primarily on utilizing our capital to grow our business. So our focus continues to remain on investing for our future and for growth. And I think we've demonstrated that we're quite active on that front. We do believe that, given our cash flow characteristics and our overall capital base, that we can also return capital to shareholders and we've elected to do that through share repurchases. I would say that the share repurchase decision is quite appropriate for growing company, which would like to -- like ours, which -- and we'd like to maintain flexibility with regard to utilization of capital going forward. That's really one of the primary considerations relative to a dividend. And of course, our assessment is to the underlying attractiveness of the stock. Another issue that has been discussed and asked about in the past, so let me address it clearly now, is the impact on float. And I would just point out that our float today is higher than it was when we first came public. So we are currently a little over 44 million shares of Class A stock and that compares to a bit under 44 million shares of Class A stock at the beginning of 2010. And part of that has to do with the fact that Class A shares have been converted from Class B -- sorry, Class B shares have been converted to Class A shares over the past several years to some degree. And we've also effectuated a portion of our share repurchase by way of buying Class B shares. So I think the impact on the float when you look at it cumulatively over time has not really been significant at all in a negative sense. So that's how we've been thinking about it and continue to think about it.

Second question was, does the board have plans to re-up the repurchase authorization?

We will continue to evaluate it. As I said before, we look at it in the context of our investment activity and we look at all the different alternatives that would be available to us. So yes, we'll continue to evaluate that as we move forward.

Next question, what was the driving force behind increasing your CapEx budget to $500 million in '13?

So I want to be clear about this. We have [indiscernible] addresses this. Our [indiscernible] down from $275 million to $250 million. A lot of the [indiscernible] see sort of a rolling off of major renovation activity, both owned and managed properties, by the end of this year. Our investment spending guidance, which is really new investments in new projects and new hotels is now $500 million, which is an increase from our prior guidance because we've now included the $325 million planned investment in Playa, as well as the $85 million acquisition, which is already closed of the Driskill Hotel in the first quarter.

Great. The next, however, was asset sales and dispositions. The question -- the first question, have you observed any repricing of those assets either that you're selling or you see in the marketplace as a result of the shift in the 10-year Treasury?

We really had very strong interest in our properties from buyers across the spectrum and have not seen any material change in price expectations.

For the 2 dispositions, why will they be operating under franchise agreements versus management? Is this a broader trend? Any updates related to the other 4 properties you are marketing?

The management and franchise decision is really market-dependent and property-dependent. In one case, in the Fisherman's Wharf example, the market really is populated with a number of full service hotels, all of which are franchised. So I think that the incidence of franchising in that -- or franchised management in that location is clear. The other things that we take into account relate to the level of food and beverage operations and activity, as well as Group business where our involvement, number of touch points and integration on the national and group sales side is more significant. In terms of the other 4 assets, we're seeing strong interest, as I mentioned, and we'll provide an update if and when we close.

Related to that, what is your plan for future asset sales, and what's your view on cap rate compression? We've heard from several contacts that despite their concerns over higher interest rates, cap rates on hotels have actually fallen.

So on the assets for sale that remain for sale and ones that we would consider going forward, I'd just maybe just take a step back and quickly review how we've been thinking about this, which is that we intended to be, and we have been, active through the cycle. So we've had transactions over the past 4 years buying and selling properties. If you look at the more recent past, we had sold 11 select-service hotels to Summit, really helping to establish a new and first-class institutional owner of select-service Hyatt-branded properties. We've sold 4 JV properties over the past year, 2 in Seattle, 1 in Kyoto and the Waikiki transaction that just closed and then the 2 full service hotels that we just sold in the second quarter. And these are all the result of being actively engaged in dialogue with a lot of market participants. And trying to be both responsive and proactive where we think that there are attractive opportunities for us to pursue. So we will continue to focus on generating capital from our owned hotel base to fund new opportunities. That's really been our consistent approach to our capital recycling program. And on the select-service front, we have been, and I'll reiterate it again, we continue to be very active to look for potential deals, and in some cases, involving more than 1 or 2 properties, so bigger portfolio deals. Again, very much designed to broaden the base of quality owners that we've got, institutional owners as well as prompt and allow us to pursue new avenues for development, especially in urban markets around the United States.

Okay. On to Playa. Did the Playa acquisition transaction satisfy your goal to increase your resort presence?

I'd say that the Playa deal is -- certainly is a step in the direction of really significantly expanding our presence sooner than we could have otherwise and in terms of, say, new development and construction. And so I think it does serve a very important role in our strategic desire to expand our resort base. But I think there's a lot more opportunity as we look forward. And I would also point out that we've got new resort activity underway in a number of different markets, the Andaz Wailea, which we expect to open in the third quarter; the Andaz in Papagayo in Costa Rica; we've got a new project in Thailand that we'll open later this year; and we got a newly constructed -- new opening in Sanya in Sunny Bay in China. So our focus on resort evolution and growth is a global one. The fact that we will now be able to actually think about all-inclusive resorts in the different markets in which we're active, I think, will enhance our opportunity set and our growth over time.

We had a few questions on some of the details of the Playa transaction, expected returns, outlook for cash flow and income statement impact from the investment, timing of the preferred conversion and if we were competing against others to make this investment.

So a couple of things. First, the transaction itself was really -- was not the result of an auction process as much as it was a relationship-driven dialogue with the principals Playa. And I think the manner in which the deal -- we ended up structuring the deal is reflective of a very active dialogue and back and forth, which I think served everyone's purposes quite well. In terms of the details of the deal, I really covered this already in my prepared remarks. And I think that the other point that I would make is that the company is in the market right now with that deal, so trying to go into more detail than I've already provided is probably not appropriate.

And the last question on Playa was how much do you expect it to contribute in the second half of this year?

I would say the second half of this year is probably quite modest. First of all, the exact timing of the closing is not established yet. Secondly, the actual ramp and evolution of the underlying resorts given some significant renovations that are planned to begin this year is really difficult to predict. So I would say, modest.

We had one question on topic of labor. Can you review the resolution with UNITE HERE and how this will ultimately impact your margins going forward? The person would like to understand the financial impact.

Okay, first of all, we enjoy really excellent rapport engagement with our employees, and frankly, the #1 issue and maybe the key issue is that we're thrilled to be able to provide our associates with the increases in wages that they were due. So that's really maybe the most important thing to denote. In terms of the financial impact, there's really no catch-up booking, so to speak, because we've been accruing wage increases in line with what UNITE HERE agreed with other brands for the 2009 through 2013 period. There's no unusual escalation prospectively. The wages and benefits arrangements are in line with what UNITE HERE had agreed with other brands through 2018. And the wage increases are, in general, in the range of what they've been over the past few years. So really no unusual or significant impact.

Could you provide the joint venture debt at the end of the quarter?

Yes, our JV debt at the end of the quarter was $607 million, but that does not reflect the Waikiki debt return yet.

Okay. And the last question, can you provide some details on the gain on sale of artwork?

Sure. We had a significant painting that we ended up selling. It was unusual in the sense that the artist's popularity had grown over time since we owned the painting. So whatever unique circumstance we're not sitting on a vault of other similar pieces of art and it was a -- it turned out to be a very significant gain for the company.

Okay. That captures the questions that we received in advance. We'd now like to take your questions. Tahisha, if we could please have the first question.

[Operator Instructions] Your first question comes from the line of Joseph Greff. I guess we're going to take the first question from Steven Kent.

Mark, just on the conference bookings, your comment on that. I think it was actually at our conference you said that bookings were up maybe 10%, I thought, for 2014 and now you're saying that there are more like they're going to be flat. I just wanted to know what was going on there? And then just it might be minutia in the grand scheme of your income statement, but the French hotel incentive fees that you talked about for a little bit, are those -- why can't those be smoothed out more, Mark? Because I think other hotel companies smoothed those out so you don't get that seasonality.

Okay, great. Thanks, Steve. First of all, with respect to the commentary on future bookings, the comment that we made at your conference related to '14 and beyond. So there was an increase in that range for bookings prospectively, but would have included '14, '15, '16 and so forth. Overall, demand obviously is pretty strong. Transient is leading, but overall demand is still increasing and hence the occupancy progression. There has been a hyper focus on trying to disaggregate, unpack the specifics every quarter and I think sometimes the quarter-to-quarter discrete analysis kind of masks what's evolving. So a couple of observations. First, our total production for the quarter or second quarter, is up 6.5% over last year, which is pretty significant. So underlying -- and that's for all periods. We already noted that the in-the-quarter for the year bookings were up 7% and a lot of the other growth related to '15 and '16 more than '14. So that's, I think, an underlying -- evidence of underlying demand being relatively higher. Of course, rates are higher as well. And so I guess what I would say is that there's been a lot of attempt to sort of hyper scrutinize the details, but underlying all of it is a continued base of demand that is driving total production increases for us. The other thing I would point out is that we noted that in-the-quarter for the quarter bookings were up modestly, something like 1% for the quarter. But that's on top of a 33% increase in in-the-quarter for the quarter booking a year ago. So we've got an evolution here where we saw a shortening of the booking curve, significant increases in, in-the-period for the period bookings over the course of the past year and we're lapping those now. So in some ways, you have to reference a few different dynamics and also look at this, I think, over a year or 2 to really understand trend. So the key thing that I would just denote is that we are still seeing increases in total production as we move forward here. As to the French hotel accounting, I'll leave it to Gebhard to address.

Yes. Maybe see If I could shed some more light on the French hotels there and the issues. The reason here is really because we have quarterly guarantee thresholds and we have the seasonality by nature of the portfolio of the hotels. From a GAAP accounting point of view, we have these volatilities that are going to be reflected. I think both sides are aware of this and recognizes this, meaning both sides, meaning the owners and us as a management company. And there are discussions as to how to address that. But we have volatility in there and we will continue to talk about that and point it out so that you have a forewarning or understand as to how this is evolving. We said, just by way of reminder, the second and the third quarter are really the strong quarters from a seasonality point of view. So you a see fairly sizable fee income coming through our statements. The fourth and the first quarter are seasonally weak quarters. That's where we have currently the potential negative fee impact, if you look at the fourth quarter and the first quarter. That's really driven by the accounting entries required from a GAAP perspective creates that volatility.

Your next question comes from the line of Joseph Greff. Joseph Greff - JP Morgan Chase & Co, Research Division: My question is sort of similar to the first one on that group case for 2014 comment. When you look at the segments within there over the last 3 months, what has gotten -- what segments have gotten worse? And if there are any, what segments have gotten better? Second question, and Mark, I think you said this at the outset that F&B was up year-over-year when you're highlighting the 2Q. Can you talk a little bit about that? I know you mentioned group revenues were up 5% in the quarter. If you can sort of give us some detail on F&B? And then third question, which is easy. You said joint venture debt at the end of the quarter was $607 million. If we x out the Waikiki debt component, what is that net?

So on the -- thanks, Joe. On the group front, the mix shift that we've seen, which we talked about actually last quarter and continued pretty much in the same vein as well, which was away from government and other specialty groups and into, primarily, corporate and that's actually one of the reasons why our F&B revenues, which were up -- banquet revenues, sorry, were up 12% in the quarter was such an increase. So if we look at banquet revenue per occupied group room or just total revenues, they're about the same increase. And that really had to do with primarily mix shift. And it was primarily government and some other specialty group decline. And almost all of that ended up in corporate group. So that, I think, addresses both of the first 2 questions that you had. My recollection on the JV debt booking is, for us, it would be something in the range of close to $30 million adjustment, is that correct?

That's right, yes.

So it's about a $30 million adjustment down by virtue of the fact that all of the debt on the hotel, Hyatt Regency Waikiki, is now gone. Joseph Greff - JP Morgan Chase & Co, Research Division: So we'd be at $575 million?

Yes.

Your next question comes from the line of Joshua Attie.

On the French incentive fee, just to help us get the modeling right, how much was recognized in the second quarter? How much do you expect in the third quarter? And then how negative will it be in the fourth quarter and the first quarter?

Right. So if you look at the overall fees from the French hotels in the second quarter, we had roughly -- approximately $10 million in additional fees that came in through those hotels. The third quarter should be about in the same area, slightly below that. In the fourth quarter, we are expecting from an incentive fee impact perspective a negative impact of roughly 1/2 of that coming through. So that's really for 2013 for this year as to where we're going to -- where we expect ourselves to end up.

I just want to reiterate that our overall outlook for the first 12 months remains intact.

Okay. And on Playa, the $18 million to $20 million EBITDA contribution implies a 17 multiple on your $325 million investment. And I guess just to help us put that into perspective, does that EBITDA number include the paid-in-kind return on your preferred investment? Will the assets be stabilized next year? And what do you expect for franchise fees on top of that EBITDA?

So a couple of things. First, that EBITDA estimate is strictly earnings, equity earnings, in effect, that we include in our adjusted EBITDA measure. It does not include any return on the convertible preferred investment. And it excludes, of course, franchise fees. Secondly, the evolution of the portfolio is going to be quite significant. These are -- it's a solid portfolio with a good earnings base. The issue is that -- or the fact is that a number of the hotels are going to go through significant renovations and ours will, as well. So what we would see is an evolution over the next 2 to 3 years of significant renovation, some expansion and then a ramp associated with that. So I would say no, we're not talking about anything that looks like a stabilized year for the coming 12 to 18 months.

What could the franchise fees be?

We haven't really provided that as a period estimate at this point because the actual timing of both the closing and of renovation and then post-renovation ramp is still under way. We're still evaluating that.

And I guess, just to help us understand the risk associated with the returns you're targeting, can you tell us what the capital structure of the venture looks like? How much debt and/or preferred is ahead of you in the capital stack? And also what's the leverage of the entity either on a debt-to-EBITDA or debt-to-value basis? And I know it's not stabilized, you can give it, I guess, either current or what you think it would be stabilized?

Yes, I'll address as much of that as I can. As I mentioned before, they're in the market with a debt deal right now, so it's not really appropriate for me to go into chapter and verse on this. But I mentioned already that they're in the market with a $650 million debt deal. So that's first. Second, if you look at our preferred investment and you include everything that's above it in the capital structure, our investment is roughly at a $160,000 per-key valuation base and that's how we thought about sort of truncation of risk and return in the overall assessment and underwriting. And I mentioned earlier that our overall expectations for returns were in the mid-teens, 10% minimum return on our convertible preferred. And the remainder comes from our common equity investment. So we obviously expect to earn a good return on that. So I think it's -- our outlook is informed by the macro factors I mentioned earlier plus the impact of renovation over the coming couple of years.

Is there any other debt besides that $650 million?

No, that's what's above us in the capital structure.

Your next question comes from the line of Bill Crow. William A. Crow - Raymond James & Associates, Inc., Research Division: I want to go back to that Group pace flat issue. How has that trended over the last couple of months? That's question number two -- or question number one. Question number two is, do you think that's more representative of the industry as we look toward '14 or because of your concentration in certain markets whether it's D.C. or Atlanta that you highlighted as being weak? Is it more representative of the company for next year?

So pace isn't -- you have to think about it in a truncated period. So '13 is relatively positive. '14 is down slightly. And we mentioned earlier it's roughly flat at this point. And it's up in '15 and '16. So when you look at time periods, they are quite varied. Some of that is market-specific and some of it is what I described last quarter, which is a bimodal -- more bimodal distribution of activity where you've got associations that are more proactive in bookings into future years. I happen to be in San Diego last week and I met with a meeting planner for a major association. They were holding their annual meeting at our hotel, the Grand Hyatt in San Diego. And they booked about 20 events every year. And they are booked fully through 2016 for their major annual meeting, which has, just to give you rough gauge, is about a 900-room peak room night piece of business with a ton of F&B and other activities. So it's a pretty significant gathering. But the other 19-or-so bookings that they make are all within the year. So even associations, while I describe this bimodal activity base, even associations are looking at a lot of smaller bookings within the coming year kind of dynamics. So that's why, as I look at kind of how we're positioned right now relative to '14, I'm not -- and given our mix of markets, I'm not sitting back and particularly concerned that we have some significant secular decline that we got on our hands. William A. Crow - Raymond James & Associates, Inc., Research Division: But is it trending down? Is it trending up?

It's down slightly -- I mean the '14 pace is down slightly from last quarter.

Your next question comes from the line of Shaun Kelley.

I'm going to apologize in advance because I'm going to try and beat the Group horse to death here. But the question I had is you mentioned that just in terms of your RevPAR, I think Group in June was down about 3%, if I caught that correctly. That's somewhat consistent with what we keep seeing in the RevPAR data. And I'm just trying to square that with the idea that pace is actually up 7% in the second half. Is the delta in-the-quarter for the quarter? And kind of how are you thinking about what's going to come in at the last minute because that seems to be where the recognized softness is, it's just with last minute stuff that are not coming across-the-board. So how do you think about the second half from that in-the-quarter for the quarter perspective?

So I guess the major difference right off the block -- right out of the block that you really need to maintain clarity around is in-the-quarter production. I mean, actual realized revenue for the quarter, itself. That's the figure that you were referring that in June, for example, was down a few percent and was up 5% for our total second quarter. That's actually realized in the quarter. The 7% figure that we've provided is production in the quarter for the year. And so as we look and say, what is in-the-quarter for the quarter production either in revenue, so we mentioned it's up about 1% year-over-year, but what that really reflects is the fact that in-the-quarter for the quarter bookings significantly increased over the first couple of quarters of last year and what we're saying is that, that higher level has been maintained. So it's both true if you look at it in dollars or you look at it in percentage terms, either way. So I guess what I would say is the in-the-quarter for the quarter booking activity base, which did increase over the course of last year at least for the first 2 quarters is a level in dollars booked that we are seeing maintained now.

Okay. And I guess my follow-up would be just on the asset sales, and I think this came up a little bit in the prepared Q&A but just trying to get a little bit better sense. I mean, obviously, low single-digit cap rates for these West Coast -- the 2 West Coast hotels that you sold are very attractive. They're pretty much at the low end of the types of things that we're seeing for institutional quality assets. Do you think that something in that range is possible for the remaining 4 that you have? Or based on the geographies, is that probably a stretch?

Look, for sure, there will be variability depending on market, depending on asset type, depending on evolution of the individual market. So I think trying to use Fisherman's Wharf as a proxy for anything other than Fisherman's Wharf is probably not a good idea. And I guess what I would say is, stay tuned. When we have something to announce, we'll definitely be proactive about doing that.

Your last question comes from the line of Harry Curtis.

Once again, just one question on Group. We focused on the numbers. Let's just shift gears a little bit and focus on what you're hearing from your customers. Why do you think that they're sitting on the fence versus really the last couple of recoveries, this is remarkably slow?

Yes, I guess it's consistent with what we've said in the past, which is I think it's some measure of confidence and some measure of, yes, cautiousness, I guess, waiting to see how things evolve further. The thing I would also point out is that we are seeing -- we've experienced and we have and continue to see an increase in overall occupancies. And as occupancy levels continue to rise and space starts to be taken up, the ability to wait and still end up with dates and space requirements that makes sense for the particular group will start to get constrained, I think. And I think that will actually start to instigate a lengthening of the booking curve overall. Overall, though, I mentioned this earlier, I think we've been -- I think the rumors of a demise of Group are exaggerated. This has been a key element of demand for this industry for many decades and continues to be an important part of our business. And I think that as we look forward and think about the long-term dynamics here, both on the association side and the corporate side, we feel that the long-term dynamics remain good. So as I said earlier, if you look at total production in the quarter, up 6.5% from last year, that's a pretty significant demonstration that there's underlying demand that's still supporting booking activity.

I'm sorry. As a follow-up, I just wanted to ask which of the markets that have the group meeting and convention space that's available that you're beginning to see incremental demand kind of looking ahead into 2014?

Well, if you just look at over the next -- I mentioned in my comments that if you look at over the next 18 months through '14, the convention calendars and the convention bookings for market-wide in Chicago and Orlando look pretty good. There are some other individual markets where we've had more calendar issues and some other underlying weakness. But those are the 2 markets I noted earlier.

Thanks, Tahisha. And with that, I'd like to thank everyone for joining us this afternoon. We look forward to talking to you soon. Thanks very much, and goodbye.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.