Ashford Hospitality Trust Inc (AHT) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Ashford Hospitality Trust's third quarter 2012 conference call. During today's presentation all parties will be in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). This conference is being recorded today, Thursday, November 1, 2012. At this time, I would like to turn the conference over to [Mary Lynn Meek]. Please go ahead.

Good day, everyone, and welcome to Ashford Hospitality Trust's conference call to review the Company's results for the third quarter of 2012. On the call today will be Monty Bennett, Chief Executive Officer; Douglas Kessler, President; David Kimichik, Chief Financial Officer; and Jeremy Welter, Executive Vice President of Asset Management. Results, as well as notice of the accessibility of this conference call on a listen only basis over the internet, were distributed yesterday afternoon in a press release that has been covered by the financial media.

At this time let me remind you that certain statements and assumptions in this conference call contain or are based upon forward-looking information and are being made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous assumptions, uncertainties, and known or unknown risks, which could cause actual results to differ materially from those anticipated. These risk factors are more fully disclosed in the section entitled Risk Factors in Ashford's Registration Statement on form S3 and other filings with the Securities and Exchange Commission. The forward-looking statements included in this conference call are only made as of the date of this call, and the Company is not obligated to publicly update or revise them.

In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the Company's earnings release and accompanying tables or schedules, which have been filed on Form 8-K with the SEC on October 31, 2012, and may also be accessed through the Company's website at www.ahtreit.com. Each listener is encouraged to review these reconciliations provided in the earnings release together with all other information provided in the release.

I will now turn the call over to Monty Bennett. Please go ahead, sir.

Thank you and good morning. We are pleased to report another solid quarter of EBITDA growth from improved RevPAR performance and operating margin expansion. Furthermore, our capital market strategies continue to enhance Ashford's financial flexibility. Risk mitigation is one of our key priorities, as well as the ability to pursue accretive investment opportunities as they may arise.

During the quarter, we achieved RevPAR growth of 5.9% for all hotels and continuing operations, including 6.6% for all legacy hotels and 3.4% for the hotels in the Highland Hospitality portfolio. Approximately 86% of this RevPAR growth was generated from increases in our average daily rates, and we expect this trend to continue.

Overall RevPAR growth continues to be driven by improving demand in the midst of a historically low period of new hotel room supply. This improvement in the lodging industry fundamentals is occurring in spite of the sluggish economic growth. A positive change in any or all of these situations could lead to even greater acceleration in the already recovering lodging sector.

Looking ahead, PKF Hospitality Research continues to forecast strong RevPAR growth for US hotels, of 6.2% in 2013 and 8.8% in 2014. A key factor in this growth is the relatively low new supply due to the limited availability of hotel construction financing. In fact, the supply forecasts for PKF have actually come down recently, projecting net new supply growth for 2012, 2013, and 2014 of 0.4%, 0.8% and 1.3% respectively. Given these favorable trends, we believe we are not even at the halfway point in the cycle and maintain that this period appears to be a very attractive time to invest in lodging stocks.

In terms of adjusted EBITDA, we are very pleased to report on our strong growth of 14.4% over the prior year, with an adjusted EBITDA of $80 million. We achieved hotel EBITDA margin improvement of 216 basis points for all of our hotels. We expect increasing revenues and our cost control measures will continue to drive improved performance. EBITDA growth is the major operational focus for our team, given that the benefits of this growth within our leverage platform and existing share counts have strong potential for shareholder value creation.

In our legacy portfolio we generated EBITDA flows of 70% and margin improvement of 221 basis points during the third quarter. In the Highland portfolio, we achieved EBITDA flows of 97% and margin improvement of 189 basis points. The Highland portfolio continued to experience strong EBITDA flow through during the quarter as a result of improved property management and the benefits of capital expenditures designed to unlock value in these assets. The Highland portfolio continues to perform in line with our original underwriting expectations, and we continue to work on enhancing Highland's top-line performance with the goal of achieving even better results in the quarters to come.

For the third quarter of 2012, Ashford reported AFFO per diluted share of $0.31 compared to $0.38 a year ago. This year-over-year difference is due in part to the gains we experienced from the interest rate hedges that terminated in 2011, affecting AFFO per share by $0.12. We expect to see declining impact from our hedges in our financial reporting as the economic recovery continues and the hedges terminate.

As previously announced, our Board of Directors declared a dividend of $0.11 per share for the third quarter of 2012, which represents an annual rate of $0.44 per share. This covered dividends is well above our peer average. Based upon yesterday's closing price, the dividend yield is 5.1%, which is among the highest of our peer group.

Before I turn the call over to Kimo, I would like to note that we've included Jeremy Welter on this quarterly update. Jeremy is our Executive Vice President of Asset Management and is responsible for overseeing the operational performance, brand relationships, and capital expenditures within our portfolio. We decided that investors might appreciate getting to hear directly from Jeremy and his department from time to time.

With that, I will now turn the call over to Kimo to review our financial performance for the quarter.

Thanks, Monty. For the third quarter, we reported a net loss to common shareholders of $23.637 million, adjusted EBITDA of $79.954 million, and AFFO of $26.030 million or $0.31 per diluted share. At quarter's end, Ashford had total assets of $3.5 billion in continuing operations and $4.5 billion overall, including the Highlands portfolio, which is not consolidated.

We had $2.3 billion of mortgage debt in continuing operations and $3.1 billion overall including Highland. Our total combined debt currently has a blended average interest rate of 4.9%. With the maturing of some of our swap positions, we currently have 63% fixed rate debt, and 37% floating rate, all which is caps. The weighted average maturity is 3.6 years.

Since the length of a swap does not match the term of the underlying fixed rate debt, the GAAP purposes of swap is not considered an effective hedge. The result of this is that the changes in market value of these instruments must be run through our P&L each quarter as unrealized gains or losses on derivatives. These are noncash entries that will affect our net income, but will be added back for purposes of calculating our AFFO. For the third quarter it was a loss of $8 million and for the year it's a loss $23.7 million.

At quarter's end our legacy portfolio consisted of 95 hotels in continued operations, contained 19,967 rooms. Additionally we own 71.74% of the 28 Highland hotels containing 5,800 net rooms in a joint venture. All combined we currently own a total of 25,767 net rooms. We also own a position in one performing mezzanine loan, the Ritz Carlton in Key Biscayne, Florida, with an outstanding balance of $4 million. Hotel operating profit for all hotels including Highland was up by $10.3 million or 13% for the quarter.

Our share count currently stands at 85.8 million fully diluted shares outstanding, which are comprised at 68.2 million common shares and 17.6 million OP units. During the quarter we received a payment of $5 million from a guarantor on a previously fully impaired mezzanine loan. This payment is reflected on the income statement as a negative impairment charge and has been excluded for purposes of calculating adjusted EBITDA and AFFO.

Lastly, I would like to take a moment to discuss the additional financial disclosure we began providing last quarter, which was based on several conversations we had with many of you on this call. This includes a more detailed disclosure of our debt and trailing 12 month EBITDA by loan pool.

This quarter we added to one of the schedules the trailing 12 month EBITDA debt yield. We hope that this additional information enables you to prepare a bottom up evaluation analysis on Ashford rather than a top done approach. We anticipate that this should lead to more accurate indications of our value when summarizing the individual portfolios and taking into consideration that all of our loan pools are non-recourse. We hope this additional disclosure helps you in refining your models and perspective on the Company.

I'd now like to turn it over to Jeremy Welter or some additional insight on asset performance during the quarter.

Thank you, Kimo and good morning, everyone. As previously stated by Monty, our third quarter RevPAR increased 5.9% for all hotels in continuing operation, including 6.6% for all legacy hotels and 3.4% for the hotels in the Highland portfolio. Total portfolio RevPAR index slightly increased during the third quarter. We observed strong underlying market trends across our portfolio, which contributed to significant growth in average daily rate of 5.2% and 4.7% for our legacy and Highland portfolios respectively.

Leisure travel continued its resurgence during a strong summer season. Group travel also outpaced our expectations and many of our key MSAs. However, some of the demand growth has been neutralized by further reduction in government related room night utilization and ancillary spending across our portfolio. As we have stated on previous calls, the lodging recovery is broad based, with our highest RevPAR growth in major markets coming from Houston, Jacksonville, Chicago, as well as Tampa and Charlotte, all of which delivered over 15% RevPAR growth for the quarter.

It is worth highlighting some onetime events that impacted our results in the third quarter. The Republican and Democratic National Conventions were held in Tampa and Charlotte respectively. Our five hotels in these markets benefited tremendously from the convention and outperformed even our own internal expectation.

Despite the conventions lasting less than a week, these five properties experienced RevPAR growth of over 20% for the entire quarter. The five day pick up for our Tampa and Charlotte assets translated into 155% increase in ADR, a 44% -- 44 point increase in occupancy, and a 366% increase in RevPAR as compared to the prior year. Affecting the performance of the Highland portfolio was this year's timing of the Jewish holiday as well as Hurricane Irene, which provided a boost to 2011's comparable results.

Setting aside onetime events, I'd like to give you some additional color on a few of our major markets. The Washington DC area is the largest market in our portfolio, representing approximately 10% of our rooms and approximately 15% of our EBITDA. With a number of our hotels centered in the Crystal City area near Reagan Airport, the ongoing base realignment and closure plan, or BRAC, being implemented by the Department of Defense has been challenging. But resilient group travel and strong summer leisure travel drove RevPAR for our DC hotels higher by 6.1%, the best quarter of 2012 yet.

Our asset management team recognized the challenges in DC and proactively worked with our managers to group up for our big box DC assets during the quarter, which in turn led to RevPAR gains of 8.6% and 10.6% for the Marriott Gateway and Capital Hilton respectively. Looking ahead, group room bookings in 2013 are thus far solid, and the long term fundamentals in Crystal City will remain strong due to its strategic location near the Pentagon and downtown Washington DC. While the DC's market growth is still slower relative to other gateway cities, we remain confident in its excellent long term prospects and expect to see improved performance following the presidential election.

Turning to another markets. The San Francisco Bay area was one of our strongest performing MSAs in our portfolio this quarter, with RevPAR increasing over 13%, driven almost entirely by increases in ADR. Our Orlando hotels, which represent 7% of our rooms, experienced RevPAR growth of 9.1% for the quarter, which again evidenced the pickup of summer leisure.

Our asset management team continues to be among the most aggressive in the industry in resisting cost creep and controlling margins, as evidenced by our hotel EBITDA flows of 74% and margin improvement of 216 basis points. The team continues to be laser focused with our third party property and brand managers by monitoring head count, labor costs and scheduling. We are also pleased by the team's success in working through the challenges we were presented with Marriott sales transformation, which impacted our Marriott-managed portfolio during this rollout.

The final markets were rolled out in the third quarter of 2011, and we have worked actively with Marriott on deployment, business development, key account coverage and overall sales and revenue management strategies. We're beginning to see the benefits of these initiatives, with a net result of 9.6% increase in quarterly RevPAR in our Marriott-managed legacy assets.

Looking ahead we remain optimistic for 2013, particularly as we consider the favorable hotel demand and net new supply imbalance. We have analyzed our properties and believe average net new supply for 2013 in our specific markets should be less than 1%.

In terms of capital expenditures, we continue to strategically invest to strengthen our assets' competitive positions. Year-to-date we have investigated $82 million. Of this amount, $27 million or 33% was owner funded above and beyond our FF&E reserve. We recently completed transformational lobby and public space renovations for our two Highland portfolio DC independent hotels, the Churchill and Melrose. During the second quarter we completed the rooms renovation of our Key West asset, which benefited the property in the third quarter as it grew RevPAR by 9.8%.

Now I would like to turn the call over to Douglas to discuss our capital market strategies.

Thank you, Jeremy, and good morning, everyone. Throughout the year our capital market strategies have focused on two key themes; we're actively managing debt maturities and maintaining disciplined approaches to cash accessibility and utilization. Our capital goal remains to be in a strong position to weather any short-term market fluctuations while also being ready to pursue accretive investment opportunities.

We continue to carefully monitor the capital markets and have seen some improving trends, especially lately with regards to the availability of debt. We have successfully refinanced our 2012 maturities and are already working on our loans maturing in 2013 and beyond. With the high debt yields on these upcoming refinancings, we do not expect any capital will be needed for the pay downs.

For example, we're in the process of refinancing our $101 million of loans maturing in the first and second quarter of 2013 on three very strong performing assets within the Highland portfolio. We also see an opportunity with the recent improvement in the debt markets to pursue an early refinance of the $154 million non-recourse loan currently at 12.72% interest rate that is set to mature in December 2015. We hope to make an announcement in the near future on these refinancing initiatives.

During the third quarter we added a new participant to our senior credit facility, upsizing this facility to $165 million from $145 million. The terms of this credit facility remain unchanged, and we retained the option, subject to lender approval, to further expand the facility to an aggregate size of $225 million. The syndicate now consists of six banks including Bank of America Merrill Lynch, who we recently added; Deutsche Bank; Morgan Stanley; UBS; Credit Suisse; and our lead arranger, KeyBanc. Currently this facility remains undrawn and all the other Company debt is non-recourse.

On the transaction side during the quarter we transferred the Hilton El Conquistador in Tucson to receiver as part of a consensual foreclosure. By eliminating this hotel from our portfolio and removing the associated $19.7 million debt balance it will be approximately $0.03 accretive to AFFO based upon its trailing 12-month EBITDA contribution of negative $1.7 million.

The other hotel sales effort we mentioned earlier in the year, namely the Doubletree Columbus, has taken longer to complete. This unencumbered asset is relatively small in value, and we hope to report soon on our progress. Regarding other asset sales, the market for hotels remains attractive, and we regularly receive interest from unsolicited buyers for several of our hotels.

Our preference, though, is to hold onto those assets rather than selling them at this point in the lodging cycle. There are several reasons for this. We anticipate seeing improvement in net operating income in our hotels, and as a result an increase in value over time. Second, we continue to see more investment capital flowing into the lodging sector. Third, with capital flows increase and the interest rate market remaining relatively low for the foreseeable future, we do not expect any near-term risk of cap rate expansion. Of course, we are constantly evaluating these factors and our analysis is subject to change as conditions fluctuate.

Since we've stated that it is not a good time for us to sell, you might wonder why we aren't buying at this point in the cycle. The answer is that finding accretive hotel investments remains a challenge for us, given our current cost of capital and share price. The acquisition market is extremely competitive for high-quality hotels. While we continue to actively underwrite opportunities, we see no need to issues equity at a depressed EBITDA multiple to chase investments. We want our growth to be meaningful and believe that our strategies are a highly aligned with shareholder interests, given on our 21% insider ownership.

That concludes our prepared remarks, and we will now open it up for your questions.

(Operator Instructions). First question is Ryan Meliker with MLV & Company.

Hey, good morning, guys. Congratulations on a really solid quarter here. Just a quick question with regards to the dividend. I'm wondering if you can give us some color on how the Board is going to think about the dividend heading into 2013. It looks like you guys have some solid FFO, and potentially AFFO coverage depending on how your CapEx shapes out next year. How is the Board going to think about the dividend in terms of a potential raise? Is it going to be based on AFFO and cash flow, or is it going to be focused more on taxable income and potential uses of the cash, aside from returning it to shareholders? Thanks.

Sure, Ryan. This is Monty. Let me try to give little color, at least kind of how we're thinking about it as well. As you know, in our December Board meeting is when we all get together, and we set guidance for our upcoming dividend policy for the upcoming year. And last year I think we were at $0.40 for the year, and this year we're $0.44.

We're not constrained in any way by taxable income, and so we've got flexibility on the dividend. So there's kind of one marker in regards to it. Because of the amortization in our loans and because our Highland pool is a cash strapped -- a couple of the others are cash strapped, while the properties are performing well, a lot of our excess cash goes to pay down our existing debt, and that is materially deleveraging us over time, which a number of our investors like to hear.

So on one hand we've got our profitability, GAAP based or FFO based, which is very strong and attractive. On the other hand cash flow is not as strong as it could be because the money is going to pay down debt, which some people kind of count that in cash flow or not. And so those are kind of book ends of what we're looking at, so there's no appetite to do anything besides keeping it or raising it, but I would imagine that if it is a raise, it would be a modest raise, because the Board and the management team just don't want to get ahead of ourselves too much on just pure raw cash flow. So I think that's our thoughts for now.

Monty, that's helpful. It makes a lot of sense, but I mean I guess just to pry a little bit, can you help me understand? Are there specific metrics that the Board looks at to understand where you're comfortable, whether it's a percentage of cash available for distribution after that debt -- after those debt amortizations, et cetera, that they're comfortable paying out? Or is it -- or is there something else that they're really looking at to get so we can understand if those metrics start to outperform that we might be able to see a potential for some changes?

We haven't even talked about it with the Board this year, so I haven't -- what I'm relaying to you is kind of what I gather from our Board meetings but not specifically related to the dividend. But what they will be looking at is cash flow, total cash flow, total cash flow without paying down the debt and amortizing, and then FFO and AFFO and CAD and on and on. So I wish I could give you more color on that, but I would just be stepping out ahead of myself. It's going to be those metrics that they are going it look at in deciding what to do next year.

Okay. That's helpful. And then just the second question I had is, without providing any guidance -- because I know you guys hate that G word -- can you just give us some color on if you're seeing any changes in trends over the past month or so and heading into 4Q and 2013 that would make you want to adjust how you're operating your properties, take a more cautious approach to whether it be revenue management or managing your properties from a staffing standpoint?

Sure. We -- you're right. We don't give guidance, but we will talk about the industry, and the industry still seems to be hanging in there quite well. We don't see any signs why the industry is going to do anything but continue to move up and demands continue to move up, and we all know that the net new supply is pretty modest. So we continue to remain optimistic.

The question mark that everyone has is the so-called fiscal cliff and how much of a drag on GDP it's going to be. And then the backup to that is how much will it affect hotel room demand, because hotel room demand has been cruising along pretty well -- very well actually -- compared to GDP performance. And that's just an unknown, and as you know that's a political decision that's got to be made sometime in the not too distance future. And there's probably a lot of other people that could speculate on that better than we could, but there's estimates that drag on GDP could be any were 0% to 1.5% to 3%, depending upon all different kind of scenarios.

But at least right now overall in the industry we don't see that affecting the industry, and we just don't see it yet. That doesn't mean it won't. All that being said, we are particularly focused on costs and especially labor, and we set our labor schedules very short-term so we can flex them. And we will look at the upcoming week or few weeks or months and adjust our labor accordingly, and so you can expect that, though, if revenues do soften a little bit, that we will be very responsive.

Those responsive efforts are usually done much quicker and better by our affiliate Remington, and the brands take longer to convince them that they should shift gears and adjust course. So if something like that happens, I think you will see that our Remington managed portfolio can adjust and will adjust immediately, and the brands just take longer as we've got to convince them that they need to start cutting back.

Okay. That's helpful. And then just one quick follow-up here. I know in 3Q business investment spend turned negative. Does that concern you at all, or -- and from what you just said it sounds like you're not seeing any indication that negative turn in business spend is leading to a slowing in demand to start the fourth quarter.

We haven't seen it. The overall economic indicators are fairly mixed, and they just continue to stay mixed. And as you know, Ryan, the hotel industry is typically a laggard to overall GDP, and so whatever GDP does it shows up a couple quarters later in hotel demand. And so it would be natural that if that declining business spend were to affect hotel demand, that it wouldn't affect it yet. And we're not seeing it.

Fair enough. All right. I'll get back in the queue with anything else. Thanks a lot.

Thank you.

Your next question is from the line of Will Marks with JMP Securities. Please go ahead.

Thank you. Good morning, everyone. I just had a -- I guess a little bit of a follow-up related to no guidance, but has your own view changed at all? I mean, if you were giving guidance, is your outlook for the year a little bit lower than it was three months ago?

We just can't comment on it. We just can't comment on guidance for our own portfolio. Regarding the industry, the industry seems to be doing well, so we don't see any big changes or movements. But again, for our own portfolio we just aren't in the habit of providing guidance.

We just don't find it constructive, because we find that analysts and investors and even management team become more concerned about hitting one specific number or another rather than focusing on operations or improving performance. And as you can see, lining up our performance against our peers, both this quarter and year to date or even historically, our team continues to most just really great numbers on flowthroughs and EBITDA growth and the liable. So I wish I could answer more of that for you.

No, that's fine. Do you try to look at your portfolio as geographically representative of the country as a whole but with plans or hope to outperform?

Historically we have focused our portfolio as trying to be fairly representative of the entire industry so that our RevPAR performance didn't veer materially. Over the past couple of years that hasn't been the case as much, because in this recovery we've found that upper upscale hotels, especially in the last year or so, have been one of the underperforming segments. And we believe that's due to the fact that while transient rebounded quickly after the fall-off in 2007, 2008, group is still just slow coming back. It is just slow.

And all the additional monies that are spent with group, F&B adds on and et cetera, it is slower. And so it's interesting as you see the hotels, because you will find mid scale hotels are doing very well, and luxury hotels are starting to rebound very well, and they're starting to rebound because they're able to cut their price and steal all the group that's out there. And so that leaves upper upscale hotels like Marriotts and Hiltons and the like, which we and most of the competitors in the REIT space own, struggling a little bit more on the group side. And whenever we can get a good solid group base, like we did in DC at a couple hotels this quarter, then we can really knock it out of the park, because we yield manage that transient business.

So that is our desire, and never what I would have thought that having high-quality upper upscale hotels would cause us to underperform the overall industry for the past year or two, but that has been the case. And it has been the case for our competitors. If you look at the RevPAR growth for our competitors and ourselves compared to the overall industry, the publicly traded REITs by and large have underperformed. Hopefully that will start to change as the group demand solidifies and absorbs all the addition -- new supply addition and starts to get some traction on the group side. But it's just a slow process coming.

Your next question is from the line of Robin Farley with UBS. Please go ahead.

-- Questions. First is your comments on DC. It seemed like a quarter ago your body language was a little bit more talking about how that might be difficult to come back over the next year or two. There was some empty office space. So I'm just wondering with the outperformance in this quarter if there was something kind of one time that drove that? I know you mentioned your Crystal City location is better than overall DC, but your tone seems a little different than a quarter ago, so I wanted to ask about that. And then I've got a question after that as well.

Sure. My tone on DC still remains over the next year or two in that we finally are in a position of very little net new supply in the DC area, and demand is going to slowly grow out there, depending upon what the federal government does with their expenditures. And we seem to be at the bottom of the office space absorption with the BRAC closing process out in Crystal City, and so we're going to be on a long trend improving out there, but it's just going to take some time.

That said, off to the side, if you have a quarter where you have a good group month, well then you can do well, and this quarter we happened to do pretty well at the Marriott Crystal City with some nice groups and at the Capital Hilton and a little bit at the Melrose hotel with some groups. And so depends upon whether you can get some good group bases, and the stars and the moons happened to align in the third quarter for some good groups, and we will have a nice quarter going forward if we can get that group in there, but as you know about group, it's spotty. Sometimes you can get a great quarter, sometimes you can't.

In stronger times you can offset that with more transients, but with the condition of the DC market that's just much harder to do. So we see gradual improvement in the DC market and in our hotels, but I think you will see little -- a few bounces along the way.

Okay, great, that's helpful. Thanks. My other question is -- I was going to ask about kind of the gap between the legacy and Highland portfolio, but you mentioned it was the East Coast exposure and Hurricane Irene last year. And I guess that was kind of suggesting that Hurricane Irene had actually been a positive for you last year, so I guess in light of Hurricane Sandy, I wonder if you could comment at all on what the impact that you have seen or that you expect from that for Q4?

Sure. And a good question, and I should have included it in my script, but regarding Sandy it looks like our damage -- physical damages could be under $1 million. Now these reports are still coming in, and so we could get a surprise from somewhere as the damage reports filter through the managers and back to us, but we think that the damage is going to be fairly modest. We're calculating the revenue loss at about $3 million.

Now, that could grow a little bit, because we still have a couple of properties without power; our Hyatt Long Island and our Courtyard Basking Ridge in New Jersey, so that could continue to rise. However, we have already offset some of that revenue loss with incremental business from people having to stay at our hotels because their homes are without power or because of construction crews and the like coming through, and that's been a pickup so far of about $0.5 million. And we expect that to grow certainly more materially than we expect the BI to grow. Or the revenue loss, I should say.

We are making application with our carriers to recover this lost business. It's a very technical process about what qualifies and what doesn't, but right now we're kind of ballparking it as maybe we will get about half of that back of the $3 million we lost in insurance reimbursements. So that's about where we are on Sandy. And it could ultimately be a net increase. We will just have to see how much incremental amount business we can pick up.

And last year was Irene an incremental positive?

It was an incremental positive, and in comparison to many of our Highland assets that are East Coast concentrated, they had that comparison and didn't perform as well comparably because Irene was a net positive for us.

So is there -- and maybe this is obvious, but I am going to ask it anyway -- is there something that you're seeing with this year that would make it not a net positive? Is it just that more business travel would have been taking place in October versus August last year and that the kind of business that is disrupted is more valuable this year?

It's just hard to say. A lot of it is trying to estimate how many people, say, are without power and need to come and stay in our hotels and for how long. And that's just hard to predict, right? How long does it take for people to get back up in their homes for one storm versus another? The longer they're without power, the longer they stay with us. And also how close our hotels happen to be areas that need to be rebuilt and construction, and that just depends on what kind of construction crew. So I wish I could give you a little guidance on it, but it's just hard to say. It's just too early.

Okay, I appreciate that. I'm still without power. I wish you guys were right nearby here, so thanks.

Go stay in one of our hotels.

Exactly. Thanks.

(Operator Instructions). Next question is from the line of David Loeb with Robert W. Baird. Please go ahead.

Monty, I have a question about margin growth and flow through. You've had extraordinary results really in both portfolios, but particularly so in the Highland portfolio of late. How long can that go on, and what should we expect as kind of normalized flow through when you're done with kind of excess cost cutting?

Normalized flow through, as you know, our internal target is about 50%, and that's what we target, and that's what we hope for. Revealing when we would get to that 50% flow through is probably a little more guidance than I'm comfortable saying, but maybe one comment is that we're pleasantly surprised that we've been able to continue those flow throughs up through this date. At the outset I would have thought that we would have wrung it all out by now, but the crews continue to do well in bringing that -- those flow throughs out.

Okay. That's a little bit of color. I appreciate that. And can you also just talk a little bit about Highland in terms of exit strategy, both yours and your partner's. What's the longer term -- what's the time horizon Prudential, and what's your longer-term thought on that portfolio?

Sure. We like the assets. There's always a few that we would like to peel off, but generally we'd like to hold the assets for the longer term. These assets are in a fund of Prudential's that's not a long-term. They hold these kinds of investments for maybe four years, five years. And so I would expect in a couple, three years Prudential would be interested in trading out of their 28% position. They know that we would be interested in buying it, and so I imagine in a couple years we'll start having a dialogue about that -- about doing something along those lines.

Do you have some pre-negotiated buy/sell terms? Or would that -- [it would be totally negotiated at the time]?

No (inaudible -- multiple speakers). This would be just a negotiated at the time.

Okay. Thank you.

Your next question is from the line of Bob LaFleur with Cantor Fitzgerald. Please go ahead.

Hey, gentlemen. A couple questions. One, did I hear you correctly that you said PKF has got their RevPAR forecast accelerating from six and change to eight and change next year?

Yes.

Okay.

I'm sorry. From -- accelerating from 2013 to 2014.

Okay. And then the second question, along the lines of some of the earlier questions, when you look at your business and are trying to gauge whether the conditions are continuing with their strength or they're starting to tray a little bit at the edges, what are some of the proverbial canaries in the coal mine you look for at the asset level? What are some of the first things that show up when business starts to soften up that you're on guard for right now? Thanks.

Sure. The canary in the coal mine is really how the overall economy is doing, because our business lags the overall economy. And so those indicators are usually not within our portfolio as much as they are in all the public stats that are out there; GDP and the like. So, again, since we're a laggard industry, we can see it coming in that direction. As far as within our own portfolio and business, you will see people being a little more reluctant to book group, and maybe shortening the booking window, and as far as impacts on transients, many times you won't see really material impacts on those pickups for a week or two out. So transient is very difficult to forecast very far in advance.

And I know you guys do a lot of industry research. How do you think about the fact that this industry is able to produce demand in excess of GDP growth right now? Are there particulars about this economy and where the strength is that is helping it produce more hotel demand, or is this still just the residuals from recovering from a very deep down cycle?

Sure. I think it has to do with the way this recovery has been. Overall unemployment rate is about 8% and -- or even higher depending upon how you measure it. But if you're a postgraduate student, the unemployment rate is 2.5%. If you're college grad, it's 4%. If you've got a high school diploma only, it's 10%. And if you have no high school diploma it's 20%. So there is a huge diversity in the unemployment rates depending upon education levels.

And so the people that travel, both for -- on a corporate basis and that have discretionary dollars are people that are more highly educated and have more disposable income. And so those people in this economy are really doing okay. It's the folks that make a lot less and that are farther down on the economic chain that are not doing so well and that are really pulling the unemployment rate to the higher end. But those people just simply don't travel, and we think that is what's going on here.

Okay. Thanks a lot.

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