Good morning. And welcome to Hilton Worldwide Holdings Second Quarter 2014 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, today’s call is being recorded. Thank you. I will now turn the call over to Mr. Christian Charnaux, Vice President of Investor Relations. You may begin, Mr. Charnaux.

Thank you, Sally. Welcome to the Hilton Worldwide second quarter 2014 earnings call. Before we begin, we'd like remind you that our discussion this morning will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements, and forward-looking statements made today are effective only as of today. We undertake no obligation to publicly update or revise these statements. The factors that could cause actual results to differ are discussed in our SEC filings. You can find a reconciliation of the non-GAAP financial measures discussed in today's call in our earnings press release and on our website at www.hiltonworldwide.com. This morning, Chris Nassetta, our President and Chief Executive Officer, will provide an overview of our second quarter results and will describe the current operating environment, as well as the company’s outlook for the remainder of 2014. Kevin Jacobs, our Executive Vice President and Chief Financial Officer, will then provide greater detail on our results and outlook. Following their remarks, we will be available to respond to your questions. With that, I’m pleased to turn the call over to Chris.

Thanks, Christian. Good morning, everyone, and thanks for joining us today. We're pleased to report another quarter of great results, highlighted by strong topline revenue growth, fee growth and ownership segment performance, which led the results at the top end of our guidance range. We continue to feel very good about the macro set up for the remainder of the year and as a result, we've raised our full year adjusted EBITDA and EPS guidance. In the second quarter we exceeded the high-end of our guidance on system-wide comp RevPAR growth up 6.7% on a currency neutral basis, growth was driven by a 4% increase in average rate, a 2 percentage point increase in occupancy to 78%. Strong growth in transient demand combined with continued group performance delivered solid RevPAR growth for the quarter. Transient revenue grew over 7% system-wide. In the U.S. we saw particular strength with rack RevPAR in the quarter, up 14%. Government business also stabilized up over 3% year-over-year in the U.S. after five consecutive quarters of decline. Group revenue in the quarter was in line with expectations up 5% system-wide in the Americas and we continue to expect pickup in the back half of the year based on strong group revenue position, at both our Big 8 and a larger set of U.S. managed hotels. Our group revenue position for both the third and fourth quarter is up in the mid to high single digits. In Europe, strong group performance in the U.K., Italy and Portugal continue to drive positive momentum. As we look to the first half of 2015, we are seeing a similarly positive story with group revenue position up 8% across all U.S. full-service and luxury properties. Ancillary revenue growth continued as expected in the quarter with SMB at our owned and…

Thanks, Chris, and good morning, everyone. As Chris mentioned, we are very pleased with our results for the second quarter, which came in at the high-end of our expectations. For the second quarter 2014, diluted earnings per share totaled $0.21, ahead of our guidance of $0.18 to $0.20. Total management and franchise fees were $371 million in the second quarter, an increase of 14% over the second quarter of 2013, driven by both new units and topline growth. Franchise fees continued to perform strongly up 15% in the quarter. Given the strength to-date and our expectations for the remainder of the year, we’re increasing our comparable management franchise -- management and franchise fee growth estimates by 100 basis points to 11% to 13%. In our ownership segment, adjusted EBITDA for the second quarter of $291 million was 8% higher year-over-year, adjusted for our non-comp increase in affiliate fees. This performance was driven by U.S. RevPAR growth for the segment of 6.4% and strong operating margin growth at owned hotels globally which grew nearly 150 basis points excluding non-comp affiliate fees. Our timeshare segment continues its transition to a more capital light business with third-party developed interval comprising 57% of sales in the quarter and representing about 82% of our total supply at quarter end. Second quarter adjusted EBITDA of $69 million was 15% better than prior year, driven by favorable transient rental and club revenue and margin growth, higher sales and marketing and G&A contribution and higher owned and fee-for-service sales Corporate expense and other was $80 million in the second quarter compared to $67 million in the prior year. The majority of this increase in net expense relates to incremental public company costs including stock compensation expense, which as we discussed last quarter are not evenly distributed throughout the…

Thank you. (Operator Instruction) Your first question comes from the line of Shaun Kelley with Bank of America. Your line is open.

Hi. Good morning, everyone.

Good morning, Shaun.

I just want, Chris or Kevin, I just wanted to ask about the outlook for the back half year. So when we look at your 5.5% to 7%, that’s actually below what we are seeing for some of the peers out there and so I just want a little bit of color since you did come in at the high-end of everyone. I think across the global hotel peer set for the [C-Corp] (ph) for the second quarter? What are you guys seeing now, does that brand mix and group in terms of the outlook or do you think that just overall conservatism?

No. I mean, I think, Shaun, good question, I mean, I think, if you look at our guidance for the full year, I believe we are at the midpoint the highest in the industry, which we think is reflective of our performance, which if you look at the last couple quarters and including second quarter numbers, we just gave you are beating the competition. So I think, we feel really good about the second half of the year. Transient business, as we discussed in Q2 is great. We see no reason why it’s not going to continue. I discussed -- I described sort of the group position in both the big hotels and the broader group of managed hotels in the back half, both third and fourth quarter being strong. So we feel good about the second half of your performance. And obviously, with our midpoint highest in the industry, we feel good about that. And obviously, our objective is try and -- it would be to try and outperform that and try and perform at the higher levels of what we’ve given you.

All right. Thank you very much.

Your next question comes from the line of Joe Greff with JPMorgan. Your line is open.

Good morning, guys.

Good morning, Joe.

Chris, you had mentioned that the pipeline increased 18% year-over-year and we actually saw nice sequential growth 2Q end versus 1Q end. Can you talk at a high level view what brands or geographies you're seeing incremental interest in and that represents either that year-over-year or sequential change? And then on the topic of my second question, my follow-up is on the topic of net rooms growth, which you guys outpaced both your large cap lodging Citicorp peers on. When you think about next year and you’re thinking about the pipeline build, and I'm not sure if you want to get into sort of guidance related question for 2015, but directionally it would be intuitive that your net rooms growth or your net room addition would accelerate. And I guess how are you just probably thinking about that at this point as well? Thank you.

Yeah. Happy to handle both. In terms of pipeline and where we are seeing the growth, I think it’s generally across the globe. We continue to have good to see great progress in all the major regions around the world. The U.S. has picked up probably as a percentage matter a little bit more than the rest of the world for us. That’s because the U.S. story right now is almost entirely a limited service story. We think we have the best limited service brands in the business that we’re getting far more than our fair share. I mean, we’re getting 20-plus percent of the deals and we’re 10% of the market. So, in terms of rooms under construction, so the U.S. has picked up a little bit more, but we talked about many times, the strategy is really with -- this great geographic distribution that we have and this great change scale distribution that we have is to really be strategic about how we deploy brands around the world, the right brands at the right time based on conditions in the market and customer demand. And so we are continuing to see broad pick up across the world and all the major regions. As I said little bit heavier percentage wise in the U.S. I think you're right and then I don't want to get into giving guidance for 2015 while I am sitting here in the middle of this year having just reported the second quarter. But I think your assumption is right, Joe, and that is to say, we’re having great success converting a pipeline into rooms under construction. We have more rooms under construction than anybody in the business and in every major region of the world, which I mentioned in my comments. Those rooms once they are under construction, obviously will highly likely to deliver. It’s very unusual once under construction that they would not deliver. So I think we still believe that last year was really the Nadir. We had a big pick up from last year this year sort of mid-4s to 6% or at the midpoint of our range in terms of net unit growth. And while I don’t have the exact number because this year is still playing out in terms of rooms we will get under construction, but it’s certainly our belief that that will continue to accelerate.

Thank you very much.

Your next question comes from the line of Carlo Santarelli with Deutsche Bank. Your line is open.

Thank you and good morning. Just if I could ask a question on the owned hotel segment, obviously you guys will start to lap some easier occupancy and we have already been seeing rate contributing north of 60% of the RevPAR core growth in that segment. Obviously saw margins pick up a little bit within this segment this quarter, but how do you guys foresee the cadence through the back half of the year of margin acceleration within that segment specifically?

I think if you look at the guidance for the full year which I think is as good as anything out there, we’re at a 150 basis points. We had a very strong margin growth in the first quarter because we were lapping some easier comps, but also we still had some of our ops effectiveness things rolling out. In this quarter, we were sort of on the higher end of the target of the range for the year. So by definition, we’re going to see margin growth more in line with the overall expectations for the year through the rest of the year. That’s not because anything is going wrong, it’s just that comps get harder as it relates to certain initiatives that we had going on in the hotel. So in the last couple of years, we’ve had outsized margin growth because we had some opportunities to do things quite efficiently that build a much stronger base to leverage off of in terms of our cost structure and now we're getting very healthy margin growth, I think industry-leading margin growth, but we will tamper into that this year into that 100 to 150 basis point range. So we feel very good about what's going on in the cost and the margin side as well as overall performance on the topline for the rest of the year. The big hotels have a -- will have an uptick from the second quarter in the second half of the year driven by group position, which is quite strong as I said. In the big hotels, group position in the third and fourth quarters in the high single-digits, low double-digits.

Okay. Thank you, Chris. And if I could just ask one follow-up. As you guys obviously think about your balance sheet and positioning of your balance sheet and think about the cash flow, obviously that you will be generating for debt paydown and obviously assuming an EBITDA growth next year on top of this year’s guidance, it looks if you will be somewhere in the mid-to-low 3 times leverage range by year end, next year. So I guess the question more or less is how do you think about your capital return strategy at that point in time? I know investment grade is the primary focus, but where do you feel you need to be to be comfortable there before you start kind of pursuing other measures of the capital returns?

Great question. I that your math is directionally right, we are going to end this year based on the guidance we’ve given in the low-4s. If you fast forward and make some assumptions, you’re in the zone of being 3 to 4, which is our target. Our target is to get to a range where we can be a low grade, investment grade rating. And we do believe it’s in that range. Obviously the rating agencies will have a lot to say about that, but that’s based on a lot of work that we did as part of getting our initial ratings. And once we get to that sort of level of lower grade, investment grade our belief remains that we’re not in the business of hoarding capital. We are perfectly comfortable at that level of leverage that we have a balance sheet that is bulletproof and can deal with anything that might come at it. And so we would be very much looking at that point to take our free cash flow and give it back to shareholders. And the way we would do that, I would say at first we would probably to make sure that we can appeal to yield investors to have some dividend that would likely sink up with where our competitive set is and then whatever remaining cash flow is available after that. It would be very simple we would give it back to shareholders in the way we think that they wanted back and that would either be through buybacks or dividends. And I think we would make that judgment based on what our view is at the time that shareholders are looking for. We would be looking at the owners of the company. If we have excess cash flow, we think are entitled to get that cash back to way that they wanted. And as we I think have proven, we are able to perform at the top end of the industry both from a operating point of view, but also from a unit growth point of view without the need for a lot of capital. So we don’t see that changing. We do think that once we get through the deleveraging that we will have a significant amount of free cash flow to be able to return to investors.

Thanks a lot, guys.

Your next question comes from the line of Harry Curtis with Nomura. Your line is open.

Thanks and good morning.

Hey, Harry.

Good morning. I had a broader question and then a more narrow question. The broader one is that, Chris, you’ve seen a number of lodging cycles. And as you look into 2015, what if anything versus say 2013 and into the first half of 2014, what if anything has changed that that you know that will continue to drive occupancy pricing margins forward? Are you more encouraged by any one or two factors?

I think Harry the answer would be exactly what you and most everybody on the phone would expect. I think we are getting -- I do believe we’re sort of right at the mid cycle. We have very strong real-time indications that the things that you would typically experience at this part of the cycle are occurring. You're getting back to very high occupancy levels. You have an ability because of the return of group business to really start to get more aggressive on your mix of business and because of the overall strength in the transient business and return of group business, you're able to move rates up in an absolute sense. So I think 2015 is going to be another very, very good year simply because you’ve got a lot more business coming in the funnel to manage. You are going to get -- we are going to be able to be much more aggressive on mix. We are going to be able to be more aggressive on moving rates up and all of that’s going to be good for topline and all of that should flow through the bottom line should create a higher flow through situation. So we’re sitting here as we look to the rest of the year. Of course, as I already described feeling quite good and it’s too early to give guidance, so I am not going to do that, but the setup for next year feels terrific really, really strong.

Very good. And then my follow-up question was on the Hilton brand, which from the topline perspective did lag the other brands. And just thought it would be useful to have you discuss what those -- what the factors maybe behind that, and is that an opportunity for you?

I don't -- I mean having looked at it pretty carefully, I think the simple answer is just geography, specific geography of the brand. You can take out -- if we play around with it, take at sort of adjust for a few geographies and it’s right in mind with everybody else. And there we don’t believe there is any issue with it. I think you will see as those geographies sort of stabilize, you will see the Hilton brand back where it should be.

Yeah, Harry, the systemwide, that’s our revenue weighted, right. So the bigger hotels in a couple of the markets as I mentioned in my comments that had just softer citywide those drive more because they are bigger revenue hotels.

Chicago in the quarter, those have a huge impact because they are really big hotels.

And we have some big hotels with a fair amount of revenue in the Middle East.

Yeah, Egypt, Saudi Arabia…

And that’s all historically because of the way business grew in those parts of world more Hilton.

Great. That’s it from me. Thanks guys.

Okay. Thanks.

The next question comes from the line of Steven Kent with Goldman Sachs. Your line is open.

Hi. Good morning.

Good morning.

Could you just talk a little bit about your real estate value maximization programs? Are some of the ideas you’ve talked about in the past, Hilton New York, in particular, and the Waldorf. I know, Hilton New York, you’ve made quite a bit of progress. Any commentary on Waldorf or any of the others?

Yeah, we're making good progress in the things that we've talked with you guys about in the last couple of quarters. So we broke ground or I should say our partner Blackstone broke ground at the Hilton Hawaiian Village to start our newest timeshare tower. We’re in registration. We believe it will be actually selling units by the end of the year. So we’re often running and everything is progressing as planned at the Hilton New York. Terrific progress -- the design work for the retail platform. I think we’re in good shape to get that under construction early next year and get that in process in delivering EBITDA in the year next year because it can be done relatively quickly. On the timeshare at the New York Hilton again, quite good progress. We’re in for registration at the moment and believe we will obtain that registration by year end. We haven’t talked about it but we are way down the road in the process of getting incremental entitlement at the Hilton Waikoloa Village to do incremental timeshare in one or more of the towers. We do believe that long-term maximization of that asset, given it’s a very large hotel in a market that does not have enough airlift for a very large hotel is to convert one or more towers overtime to timeshare. We had to go through an entitlement process. We’re largely done with that. The reason we have not talked much about it is because we have other inventory that we’re selling in at that market. So it’s not going to occur in terms of getting into the conversion and sale. It will not occur in the short term because it doesn’t make sense at this exact moment. But over the intermediate term, over the next couple of years, we will move forward with that and we do believe there is a very significant value arbitrage on that. And then on the Waldorf, of course the big one, there is nothing new to report. We are making really good progress as we talked about last time. We have very good understanding of what the various uses to maximize the opportunity are. We have a very good understanding of the tax structuring opportunities to make sure that whatever we’re doing is maximizing the sort of after-tax value accretion benefits to shareholders. And we are now out officially, sort of, in a process. I’m trying to find a counterparty to make this all happen. It is still our objective that as I said on the last couple of calls, we’ll be able to weigh that all out in details by the end of the year and we’re making -- we’re making good progress against that.

Great. Thanks for the detail.

Yeah.

Your next question comes from the line of Felicia Hendrix with Barclays. Your line is open.

Hi. Good morning. Thank you. Chris, unlike your closest peers, you were able to grow RevPAR sequentially in the quarter. I’m just wondering, do you attribute that more to -- I mean, you talked about that in the highlights behind how you had quarter. But I mean, do you think that that is attributable more to geographic mix or RevPAR index gains?

I think it’s more to do with RevPAR index gains. We had gains as I said over a 100 bps for the small system. Every single brand gained share. We have a bunch of different initiatives going on, on the revenue management side that have been very helpful, particularly in the limited service space where we’ve been deploying a whole new revenue management technology base. So I do believe it as almost everything to do. I mean -- let me put it this way. If you compare our RevPAR against one of our primary competitors, we overlapped pretty much perfectly and our performance was significantly better than theirs. So I think it is not -- that in and of itself, I think suggest it has a lot more to do with market share gains and things that we’re doing versus geography. We are very much of the belief that I have been shy about saying is that we have something reasonably unique which is we have very large scale, very large geographic diversification, very significant changed scale diversification and that you have great brand strategies, you connect those dots with great commercial strategies. We believe that it is a very powerful thing in terms of driving customer loyalty because we can serve all of customers’ need, no matter what they are wherever in world -- wherever they want to be in the world and they are able to stay loyal to us. Now obviously you’ve got a good brand, you’ve got good strategies on the revenue side but the makeup of what we have properly managed, I think, really does allow us to drive great results and hopefully our job. And we plan to continue to drive increasing market share premiums. By the way, those market share premiums then are the reasons why we can drive these huge pipeline numbers and rooms under construction and net unit growth because in the end, it’s all third-party capital. We’re not buying rooms. We’re not investing any major money. It’s third-party money that’s investing with us and investing with us because they're looking at these market share premiums. I'm describing and they're making the judgment that they are going to make more money by working with us than their other options.

It’s really helpful. Thank you. And then just talk about your pipeline for a second, in light of your Curio and then the newest accessible lifestyle brand. Is there any way to help us think through when we look at your pipeline growth for 2016, how much of a driver those two new brands could be?

Not yet. I mean, we try to give you a sense of what you know, obviously we’ve done in Curio to date and how many deals we have in motion. Curio is going to take off, I think, at a pretty good clip. Our lifestyle brand, their gestation period will be a little longer just because the -- it will be a little bit heavier proportion of new build and major renovation versus Curio which is almost immediate conversion opportunity of great independent hotels. So that will take a little bit longer. What I would -- we’re not giving guidance obviously. We talked about net unit growth. The way I think it all sort of boils down to expectations on -- what -- how many rooms are we going to deliver on an net basis into the system over time. As I said, we’ll give you in the next -- sometime before the year is out obviously a little bit more visibility in the next year when we haven't. But I do believe as I said I think to Joe’s question that last year was the natter and that net unit growth is going to continue to pick up and part of that pickup is going to be contributions from Curio in our lifestyle brand.

Okay. Perfect, thank you.

Your next question comes from the line of David Loeb with Baird. Your line is open.

Hi. Chris, first thanks for the very clear explanation of capital allocation strategy, that’s helpful. To follow-up on Curio in the lifestyle brand, can you talk a little bit about your willingness to commit capital and how much capital you think you might need in order to jumpstart those two brands?

I think the answer is very simple, David and good question, limited de minimis amounts of capital. We don't view those brands as any different than any of the others in the sense that we will occasionally on a strategic deal make a minor contribution most typically, almost exclusively in the form of key money. We would look at those two brands, particularly as they get started in that same way. But I think when you look at the aggregate of what that means to take de minimis amount of capital. If you look at our entire pipeline, less than 5% by number of deals have had any contribution of key money. So that means more than 95% of the number of deals that we’re doing are what we would call dry deals. There's no investment from us. We think of these two brands as sort of a similar phenomena. We believe with the strength that I described of the overall system in our commercial engines that we have a lot to offer to owners and that we should not have to deploy our balance sheet to make these things happen in any material way.

So just a follow-up on that, would you consider lower franchise fees as an incentive for Curio in particular. Have you done some of that already?

Well, I think all of us in the business on strategic deals will look at ramp-ups on franchises and things. And so yeah we would look at those particularly as new brands in that same way. But that’s pretty typical in the business and that’s very short-lived generally. I mean, it’s not long-term discounts. It’s basically sort of as hotels are coming into the system giving -- new or conversion giving them a chance to sort of ramp up. So we would consider that in some cases. Again we view that as an investment just like key money. So if we’re going to discount fees, we look at it relative to do we need to do it as a strategic deal on all of the same things we look at when we invest key money. One way or another, that’s an investment as well. And so on occasion, we will do that. Just as everybody has and just as we’ve done with other brands.

Great. Thank you.

Yeah.

Your next question comes from the line of Robin Farley with UBS. Your line is open.

Great. Thanks. I have one question and one follow-up. I guess, in the cycle, where would you say you start to get interested in monetizing real estate in the form of a potential REIT spinoff if we’re halfway through the cycle now or in the second half of the cycle, is this where you start to think about timing for that?\ And then my follow-up was really just clarifying, it sounded like in your opening remarks, that maybe there was slight lowering of guidance in the Asia-Pacific region. I think you said mid single-digit. That sounded like you were saying that through your full-year guidance for Asia-Pacific, which is just a tad low, I guess, in sort of, saying it would be the fastest growing RevPAR globally for you, which would have suggest kind of 7% or higher. So just want to clarify if that’s what the subtlety in guidance? Thanks.

Sure, sure. Both good questions. On the real estate side, I believe that it came up on the last call as well. I think the way that we look at that is less to do with exactly where we are in the cycle and more to do with, just wanting to make sure whatever we do at the real estate that it’s a value creation exercise. As it relates to the bulk of our real estate given the tax attribute, the way that we would want to do any transaction is really to do in a tax efficient way. And that it would mean in the structured transaction either for all our large parts of it. And for us to do that factoring for the cost of doing it, the cost of duplicative G&A and those things, what we really would need to see is some diversions in multiple that would suggest that a bifurcation of the business in that way would create value. The reason we have not been rushing to do it is we have not seen those conditions. And so doing it now, we think would be treading water at best. Probably going underwater slightly because there are costs of doing it as they say and cost of duplicative G&A. So I think what we would be looking for has less to do with exactly where we are on the cycle, since we wouldn't really be taking these major assets and selling them out right because the friction in that would be too great. We look at more -- at any point in time, wherever we are in the cycle to relative valuations and multiple suggest that the separation of the business would -- that parts separated would be worth more than the pieces together. And at least the way, we look at it today, we just don’t see that. The APAC question is a great question and probably, we’re trying to be settled. We did probably bring the guidance down just a smidgen and had really to do with some of the things Kevin did reference relative to Thailand and Singapore being a little bit lighter. The core areas that drive our Asia-Pac business, which are Japan and China, we still feel good about that we’re going to have a great year in Japan, very high rep progress. And China, we still think we’re in the six to seven ranges is what we thought. But just because of some disruption that you’re seeing in Thailand and Singapore, being a little weaker, it is weighted the full year down a little bit to sort of mid or little bit better single-digit.

Thank you.

Yes.

The next question comes from the line of Jeff Donnelly with Wells Fargo. Your line is open.

Good morning, guys. Chris, back on, I think Steve questioned about the Waldorf. Have you reached a point or you can say it is more or less likely that you’ll execute a transaction where you can pull cash out of the Waldorf versus finding a partner to recapitalized the development or redevelopment? And second, can you maybe discuss what your priorities are there? I mean, I know you like to end up with the flagship hotel on a smaller footprint but are there other priorities such as cash or carried equity interest or even the timeshare of any that you put important are?

I think, the priority starting maybe with the second and coming back to the first, both good question. I think, the priority for us in the end is to have a fully renovated reposition product on the full city block on Park Avenue that Waldorf Astoria represents. And as part of that a very high quality five Star minimum, I would say plus or minus 400 room Waldorf Astoria, that would be the flagship for the Waldorf Astoria brand. Now there are lot of different ways to look at the uses where that hotel could be bigger than that. There are many, I think that it could be smaller. A lot of it has to do with honestly what various counterparties might want. From our point of view, if we end up with Waldorf at its size today, we can obviously, that would be very pleasing. We could have a smaller hotel and be quite satisfied with that. Getting timeshare use into it is an option. It is not necessarily a priority in terms of something that we have that done. We would love to get cash out of Waldorf. I think the more likely efficient way of maximizing the value of the Waldorf is not going to involve getting a lot of cash out. I think its going to be trying to get a great value for the Waldorf, get the capital put in by third-party. And in some way either doing it a joint venture where we continue to have an ownership, maybe a major ownership stake in the hotel or using in some way the proceeds of that to trade in the other real estate on an efficient basis. We have not gotten to the bottom of all that because we’re out in the world of counterparty,…

Okay. Thanks.

Your next question comes from the line of Smedes Rose with Evercore. Your line is open.

Thanks. I just wanted to go back to your big eight hotels, could you just maybe remind us kind of where they were in the last peak in terms of the percentage of group mix and where they are now? And kind of I know you don't want to talk about 2015 too much, but, I mean, is it fair to assume that the group will continue to strengthen there into next year, is that what you’re seeing on pace now or maybe just a little more color around that?

Yeah. Smedes, in terms of where they are versus the last cycle, they are actually about where they were before, but that doesn't mean we don't think that we can layer groups in more effectively as group demand strengthens to increase it. So I think we’ve said publicly in the past that the target there is sort of 40% and they are in the high 30s. So if we are successful as demand strengthens in the top of the funnel fills and layering groups into non-peak periods, we ought to be able to continue to drive it a little bit higher.

And I think just and it’s implied in what Kevin said, this quality of group is also taking the groups that are lower rated, lower quality groups and lower -- importantly lower spend groups that were sort of filler in a more challenging group environment and replacing them with higher quality, higher paying groups that spend more and have a lot more ancillary spend. So there is plenty of upside in sort of the transition of group going forward.

All right. Okay. Thank you.

The next question comes from the line of Thomas Allen with Morgan Stanley. Your line is open.

Hey, guys, good morning. So there is some hope that incentive management fee is close to inflection point here. Your IMF increased 15% this quarter, 17% last quarter. How should we think about the trajectory going forward? Thanks.

I think the trajectory sort of what we saw in the quarter is sort of the full year trajectory, probably would have been a little bit closer to the first quarter trajectory. But for what's going on in the Middle East, we have a handful of incentive management fee contracts that are pretty lucrative there and in Middle East we’ve got a few issues as you can read going on. So it weighted it down a little bit. But we feel great about that trajectory. I mean, notably if you look at our IMF, which I think is a little bit different, 80% of our overall IMF is outside the U. S., only 20% is inside the U.S. And why does that matter? It matters because the structure of incentive management fees outside the U.S. is different. It’s a much lower rate of structure. We don't sit behind a press the owners like sort of traditional approach inside the U.S. So, you’re going to continue to see a good -- I think this year is going to be fine sort of in the mid-teams or maybe inching up a little past that. But as we get into the next couple years, both because of improvement in performance, but importantly because the majority of the pipeline is international. Majority of those have incentive management fees because there are full service and they have these incentive management fees that don’t sit behind priorities. At those continues to enter the system, you’re going to see incentive management fee growth going to the 20-plus percent range over the next couple years. So we feel good about this year trajectory, feel very good about.

Thank you. And this is my follow-up. As you gave some good detail on the Waldorf, I think I’ll just try and push it a little more. Do you know the approximate square footage of the room base? Just trying to think if you were to lower the room count from 1,413 now to 400 to 500, how much saleable square feet would there be for other stuff? Thanks.

Yeah. Thomas, it’s a 1.6 million square foot building, so it really can vary quite a bit depending on how counterparty would want to break it up between residential and hotel. So the overall square footage is about 1.6 million.

Great. Thank you.

There are no further questions at this time. Mr. Nassetta, I’ll turn the call back over to you.

Great. Thanks, everybody. We appreciate the time here on a Friday in the middle of summer. We’ll try and find a better day, but as a new public company, Friday seemed to be the only day that we could get. We are going to do a little bit next year. Anyway, we’re very pleased as I think you could tell with both the second quarter results, but more importantly, how we feel about the second half of next year and how we feel about the broader setup going in the next year. We will look forward to catch it up with you after third quarter and I hope everybody enjoys the rest of your summer.

Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.