Host Hotels & Resorts Inc (HST) 2002 Q2 法說會逐字稿

Good day and welcome to the Host Marriott Corporation's second quarter 2002 results conference call. Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to the senior vice-president of investor relations, Mr. Greg [ Larson ].

Please go ahead, sir.

Thank you, and good morning. Welcome to our second quarter earnings call.

Before we start, I'd like to remind everyone that many of the comments made today are considered to be forward looking statements under federal securities laws. As ascribed in our filings with the SEC these statements are subject to numerous risks and uncertainties which could cause future results to differ from those expressed. We are not obligated to publicly update or revise these forward looking statements.

This morning, charisma seen a our president and chief executive officer will provide a brief overview of our second quarter results and then we'll focus on the current operating environment and the company's outlook for 2002. Robert par sons, our chief financial officer, will follow Chris and provide greater detail on our second quarter results, including regional performing. Following their remarks, we will respond to your questions. And now here's Chris.

Thanks, Greg. And good morning, everybody. Let me start by saying that the second quarter continued to be challenging. Although our hotels have shown substantial improvement compared to last fall, the rate of improvement has moderated and as anticipated margin comparisons have become more difficult. Given this challenging not environment, we are pleased with our performance thus far in 2002. Today we'll update you on our second quarter results and our outlook for the balance for the year.

Our second quarter diluted FFO per share was 36 cents exceeding the consensus estimate by 1 sent per share. Our comp rev declined nine.8 percent par declined nine.8 percent for the quarter while operating profit margins decreased 2.7 percentage points. Resulting in a ratio of rev part even decline of 1.7 times. Year to date our comp rev par declined 11 percent while operating profit margins decreased 1.five percentage points resulting in a year to date rev par to even rash ratio of 1.three times.

These declines in rev par margins are generally consistent with our prior guidance, although at the lower end. Our rev par declined for the quarter was driven prior room rates of 7.9 percent combined with an occupancy decline of 1.6 percentage points. Our comparable hotel EBITDA for the quarter declined 17 percent to 235 million compared to the second quarter of 2001. Our year to date EBITDA declined 4.6 percent over the prior year to 443 million. Achieving our rev par and EBITDA guidance this year has been difficult due to the inconsistent rate of economic growth which has resulted in lower than anticipated business travel. However, our continuing efforts to control hotel operating costs and our ability to shift our mix of business has enabled us to meet expectations during the first half of this challenging year. For the remainder of the year, we'll continue to focus on improving margins and maximizing rev par by maintaining the optimal mix in our hotels. Trends in the second quarter were consistent with what we have experienced earlier this year as group business continued to be our strongest segment, representing 42 percent of our business year to date.

The individual business traveler segment still has not returned to expected levels and thus far has represented slightly less than 27 percent of our business, down from 32 percent last year. As a result, our large hotels have focused more on short term group business and discounted individual travelers. Not surprisingly, our urban report and resort and convention hotels representing 71 percent of our EBITDA have taken advantage of this trend and have continued to out perform the portfolio as a whole with total rsm par declined just over 7 percent for the quarter. Although gripe business typically ask a lower rate than the individual business traveler, this difference in rate has been partially set off by food and beverage revenues which represent 32 percent of our total revenues year to date. For example, due in part to our ability to maintain levels of group business, food and beverage revenues were only down five.5 percent for the quarter and 6 percent year to date. Year to date our group booking pace is slightly behind last year but the room rate is actually up slightly. The same trend holds true for next year. Currently our definite group bookings for our convention hotels are projected to be 12 percent higher than the actual number of group night rates we experienced last year. Our hotel continue to out perform the competition with year to date penetration index of 118 percent. The result of these trends is that occupancy appears to be stabilizing, but room rates have continued to decline. The significant portion of this decline is a result in the change of mix of business to lower rated group and transient segments rather than simply a reduction in rates. We expect these trends in the travel industry to continue threw the second half of 2002.

Ultimately, the key to a complete recovery and for approved pricing power will be the return to the individual business traveler. The convisions for such a rebound are gradually coming into place, though not equally for all industries and certainly not as quickly as we had anticipated. However, as the pace of economic growth continues to improve, increased corporate profitability and business investment will follow resulting in improved business competence and increased airline travel creating rising demand for our properties. We expect this to occur potentially late this year, but more likely in the first half of 2003.

As mentioned earlier, we continue to benefit from the aggressive cost control efforts initiated last spring. Our objective in 2002 is to protect the long term efficiencies we have achieved so that as business recovers, our margins will strengthen resulting in greater profitability. Clearly our cost cutting efforts have been effective as margins have remained consistent with our forecast, despite tough comparisons and continuing rev par declines.

Second quarter operating profit margins although weaker than the first quarter were in line with our expectations. The second quarter was impacted by difficult margin comparisons with 2001 since we began our work early last year to implement decisive measures to reduce cost. Our expectation is that operating margins comparisons will continue to be challenging throughout the year with overall margins continuing to decline in the third quarter consistent with a corresponding decline in rev par, but then turning positive in the fourth quarter as rev par also turns positive. For the year we've forecast margin declines of 75 to 150 basis points for our comp hotels.

As we mentioned earlier in an earlier call, we've been negotiating modifications to certain of the agreements that govern our relationship with Marriott international. We are now in the process of obtaining third-party consents and expect this translax will be completed during the third quart. As previously disclosed we believe these changes in the relationship with Marriott international will create more balance in the company to provide meaningful economic to our company as well as preserve and strengthen our relationship with Marriott international.

On the acquisition front we recently announced the acquisition of the 1139 room boss top ton Marriott [ Kopli ] place one of the largest hotels in Boston for $214 million or $188,000 per room. Consistent with our strategy acquiring high quality urban hotels, we have added this property in an attractive nine times 2001 EBITDA multiple. A purchase price represents approximately 65 percent of replacement cost. The Boston market has been particularly soft during the last year with the hotels cash flow down over 35 percent from 2000 level.

As a result, we believe there is meaningful up side potential over the next couple of years as the Boston market recovers and we implement our asset management strategies. We I remain interested in both single asset and port folio transactions where we can add value to the company and expect over the next couple of years there will be more opportunities to acquire assets that are consistent with our target profile. We believe our disappoint approach at buying the best assets in the best markets with the best brands and operators will provide meaning of the up side potential over the next several years. On the disposition front we are continuing to our efforts to sell noncore assets and slower growth markets that are not consistent with our preferred portfolio. We are currently forecasting dispositions of 75 to $100,000,000 this year.

For the balance of the year it will be challenging as we work to improve our rev par and maintain our operating margins. Bookings short and current uncertainty of he can recovery it is difficult to provide a precise forecast for the second half of the year. Based on our belief that the economy will continue to grow, though more slowly than previously anticipated our guidance for 2002 is that rev par will be down two to four percent with margins down to 75 to 150 basis points. These assumptions translate into $1.05 to a $1.15 of FFO per share and EBITDA of $860 to $900 million. Consistent with our prior comments, our policy on common dividends continues to be to generally distribute the minimum amount necessary to maintain REIT at that time us with us an amount approximately equal it our taxable income. We expect to be able to reinstate a minimal dividend on our common stock during the fourth quarter as long as we continue to see improvement in our operations. We do plan to continue to pay dividends on both our quips and preferred stock.

To finish up, considering the difficult environment, we are very pleased with our hotel operations in the second quarter and we're confident that the year over year performance will continue to improve. Will continue to carefully monitor cost controls and maximize operating margins. While we believe that a full recovery will take slightly longer than has been anticipated, the fundamentals over the next several years remains very strong. We continue to see supply growth moderate and expect it should remain at very low levels for several years.

As we look to 2003 and beyond, this low supply growth matched with a strengthening economy and increasing demand should result in meaningful growth and rev par earnings and dividends. We are confident about the future and believe that the strength of our company and the unmatched location, quality and growth potential of our assets will provide superior returns to our investors.

Thank you and now let me turn the call offer to Robert Parsons to give a bit more detail on the second quarter.

Well, thanks, Chris, and good morning.

Before we get started, let me remind you that it is important to remember that both the Easter and the pass over holidays are included in our second quarter results. While most other companies, these holidays fell in the first quarter. If these traditionally weak poor yodz were excluded from our second quarter, we would have reported a rev par decline of only 8 percent in the second quarter-inch stead of our reported nine.8 percent decline.

Looking forward, on a similar note, our third quarter ends on September 6, and so we will not include the period after September 11th in our third quarter results. While many other companies will include the entire month of September in their third quarter, which should be an exceptionally strong year over year period. If our reporting period was adjusted to include the entire month of September, we would expect that our third quarter reported rev par would increase by approximately ten percentage points.

With that background, let me give you a little more detail on our second quarter results. We continue to see the benefits of our strategic focus on the ownership of large hotels in urban, down ton and resort locations. Rev par for our downtown urban hotels declined eight.7 percent for the second quarter, while our resort hotels performed even better with the decline of only 1.4 percent. Some specific examples during the second quarter include the four seasons Philadelphia property with rev par up nearly 10 percent. The 514 room JW Marriott Houston hotel with rev par down 4.1, the thousand room San Antonio river center up 13 percent and the 884 room desert springs report up 4.3 percent.

Our urban resort locations which represent 71 percent of our quarterly EBITDA has out performed our portfolio as a whole by 260 basis points with second quarter rev par of 7.2 percent and out performed or suburban hotels by 620 basis points. Results for suburban and airport hotels as expected, were much weaker. Our 18 airport hotels had rev par declines of 17 percent for the quarter and 20 percent year to date. Reflecting the continued challenges in the airline industry.

On a similar note, our suburban properties had rev par declines of 13 percent for the quarter and 16 percent year to date. We had mixed results across the country as some regions continued to be impacted by weakness in the technology and financial services sectors, but other areas seemed to benefit from a gradually strengthening economy and significant increases in government per dives. Both group and transient booking cycles have shortened. For example, the Marriott Atlanta mar key recently booked at 600 room piece of group business on just 7 day's notice. Although this is not typical, it is an indication of the booking cycle for group business continues to be tight.

During the quarter our more challenging markets included San Francisco, Tampa, Boston and Los Angeles and Chicago. While our strongest performing markets were San Antonio, Orlando, San Diego and Philadelphia.

Let me give you a few specific examples from these markets. The Atlanta region which represents 12 percent of EBITDA for the quarter performed pretty much in line with our portfolio. Rev par declined 9 percent for the quarter, which was driven by a decline in occupancy of only one and a half percentage points, but a decline in average room rates of 7 percent. The 220 million expansion of the Georgia world Congress convention center will open next month, and this should help to drive additional demand.

Results for our Florida region which represents almost 18 percent of our EBITDA for the quarter were mixed. Rev par decreased 7 percent for the quarter with occupancy down 1 percentage point, and a decline in room rates of five.8 percent. Operating profit margins for the region declined 2 percentage points.

Some of our weaker performances came from our Tampa and Miami hotels, which had rev par declines ranging from 12 to 27 percent, driven by a manager last minute group cancellation in softer city wide convention activity.

However, the 2,000 room Orlando World Center Marriott, our largest property, had a much stronger than expected quarter with an increase in rev par of 7.7 percent, obviously helped by Disney's 100 years of magic celebration. Looking out west, the performance in our pacific region which represented about 20 percent of our EBITDA continues to trail the portfolio as a whole. Rev par declines for the region were 15 percent for the quarter with operating profit margins down 4.6 percentage points. The combined impact of fewer city wide conventions, significant reductions in airline travel to San Francisco airport, and exceptionally poor high tech business climate and declining attendance at city wide conventions has resulted in second quarter rev par declines of 27 percent at our six properties in San Francisco and silicon valley, with few encouraging signs for the balance of the year.

We have seen similar weak results in our Los Angeles properties with a rev par decline of 19 percent year to date. So this rate of decline moderated in the second quarter.

One exception in this region has been the 1300 room San Diego Marriott Hotel which had a rev par decrease for the quarter of less than 2 percent, due to a slight increase in occupancy and a minor decline in average rate. We expect the pacific region to continue to struggle during the second half of 2002, particularly in the technology corridor around San Francisco.

Our mid Atlantic region which includes New York City continued to exceed our expectations. Rev par was down 7 and a half percent for the quarter and 7.1 percent year to date with operating profit margins down 1.three percentage points on a year to date basis.

This region represented approximately 15 percent of our total EBITDA for the quarter. Our two comparable hotels in the New York City market demonstrated meaningful recovery from last fall and we're only down nine.6 percent in rev par during the quarter. For example, the New York mar key ran 90 percent occupancy with a $221 average room rate. Concerns about the continuing reduction in traffic at LaGuardia Airport, some new supply additions and decrease in international travel into New York City make the second half more difficult to predict, although we have been able to continue to increase our market share.

Our Philadelphia properties had an impressive quarter and continue to exceed our expectations, led by the performance of the 1400 room Philadelphia Marriott convention center which had a decrease of less than 1 percent in rev par for the quarter as a result of stronger than expected group bookings. Year to date rev par of this hotel is up 5 percent.

Our south central region continues to out perform the portfolio with a strong second quarter. Rev par declined 2 percent due to an increase in occupancy of 1.nine percentage points combined with a decrease this room rates of 4.3 percent. Operating profit margins were up almost 1 percentage point for the quarter. Our three hotels in San Antonio had a spectacular quarter with rev par increases of over 12 and-a-half percent. As we continue to benefit from the renovated convention center.

Occupancy for these properties was up 7 percentage points for the quarter combined with the three.8 percent increase in room rates.

The south central region contributed approximately 11 percent of our EBITDA for the second quarter.

Overall, we have been successful in keeping our margin decline to a minimum by controlling cost. During the second quarter energy costs were down over 10 percent helping to offset a 68 percent increase in insurance costs. Marketing costs have also been reduced by almost 8 percent this quarter mostly as a result of labor reductions. Our joint venture which owns 120 courtyard hotels had rev par declines of just under 11 percent for the quarter. These hotels have not performed as well as our full service hotels, primarily as a result of unfavorable price comparisons with full service properties. We expected that if if the economy recovers the rate differential will return to more historical level which should improve our results.

This year our Ritz Carlton properties have also lagged portfolio as a whole. Rev par declines for the quarter of 12 percent, although some hotels have performed much better, including the Ritz Carlton Naples, which had a decline in rev par of only four and a half percent and the Ritz Carlton Atlanta which had an increase of rev par of just under 2 percent. Overall the Ritz Carlton property results were impacted by lower international travel and increased room discounting in an effort to inaudible corporate business ne. Let me update you for just a moment on the situation in norm New York.

We are continuing to work with the appropriate parties as they decide how the world trade senster site will be redeveloped. Clearly it will take a number of years to fully resolve these issues. We continue to make progress in our discussions with our insurance companies to resolve our claims for insurance payments for both property damage and business interruptions coverage related to the Marriott World Trade Center and the Marriott financial center. This year to date we have received payments totaling $40 million, including $10 million received since quarter end.

Special restrictive accounting rules developed for the world center disaster have delayed our ability to recognize a portion of the business interruption advances as income until we resolve certain matters with our insurance providers. To date we have not recognized any profits for the $40 million of cash we have received, although we have used approximately $13 million to offset expenses and another $5 million to repair specific property damage. Our forecasted results for 2002 assume that in the fourth quarter we will be able to recognize $15 million of these insurance proceeds as profits. If we are not able to resolve these matters with our insurance carriers by year-end, we would likely have to delay income recognition until next year, even though we have already received this cash. We will keep you updated on this as we work through these issues through the balance of the year.

On a more positive note, the Marriott financial center property reopened on January 7 and is renting occupancy levels of 71 percent, just slightly below last year, although rates do continue to be soft. For the most recent quarter, the hotel recognized a small operating profit for the first time since last September. In addition to these New York properties, the insurance market nationwide were significantly impacted by the terrist attacks. It has become more difficult and more expensive to obtain insurance for our hotels. We recently obtained new comprehensive insurance policies, including general liability, property, business interruption and other risks with respect to all of our properties. We believe the insurance coverage acquired is the best available in the market, and appropriately protects our property. Although the costs are in line with our estimates, these policies do carry substantially higher premiums than in prior years. We are also continuing to work with various industry groups on current legislation in Congress which will provide a much needed government backstop to the insurance industry and make terrorism insurance more readily available at more moderate cost levels.

Maintaining the superior standards of our hotels has always been a priority. We will continue our disciplined approach to capital spending through 2002 with a focus on property maintenance and selected improvements that will serve to maintain our high quality standards. We believe that our current level of expenditures will be sufficient to maintain the high quality of our properties, particularly given the considerable investments we have made in recent years to upgrade and maintain the quality of our hotels. Although we have modestly reduced our capital spending, particularly in certain ROI and other discretionary areas, we will still spend approximately $185 million or approximately 5 percent of hotel revenues in maintaining the outstanding quality of our portfolio.

In addition, we continue to devote careful attention to routine repair and in maintenance work that will help to preserve value of our asset. As an example, our repairs and maintenance expense are only down 2 percent for the quarter and less than 4 percent year to date despite the drop in room revenues of approximately 10 percent in the same period.

Given the changing economic environment today, we have focused on main taring our liquidity, securing our balance sheet and remaining flexible so we can deal with this current uncertainty and take advantage of opportunities that will enhance shareholder value. At the end of the second quarter we had over $240 million of cash after completing our acquisition of the Boston [ Kopli ] hotel and no significant debt maturities until 2005. One of the results of the Marriott negotiations will be the return of a significant amount of working capital from our property. We expect to receive these funds when this transaction is completed sometime in the third quarter. In June we completed our negotiations at a new credit facility which provides the company with an aggregate revolving loan commitment of up to $400 million. The loan has an initial maturity of 2005 which is two years beyond the credit facility. The old credit facility. With an option to expand for an additional year. This enhanced facility will bear interest at a floating rate and has much greater flexibility. As a result we are in a good position to deal with the uncertainties of this day as well as to take advantage of the opportunities that may arise in the future. At this time we have no borrowings under the credit facility. As a result, we are in a good position to deal with the uncertainties of this day as well as to take advantage of the opportunities that may arise in the future.

At this time we have no borrowings under the credit facility. Although forecasting is currently challenging, we believe that our diluted FFO per share for 2002 will be within the range of $1.05 and $1.15. As a reminder our FFO allocation between quarters may be slightly different than in the past as a result of the pace of the economic recovery, the year over year impacted last September, and the acquired accounting treatment for the business interruption advances. To help you in modeling the balance of the year, we expect that in the third quarter which ends prior to September 11th, we will recognize ten cents to 13 cents of FFO per share with rev par declines of approximately 6 to 8 percent. For the fourth quarter we expect 35 to 41 cents of FFO with rev par up 13 to 18 percent as our comparisons become significantly easier in the fourth quarter. Our outlook for the second half of 2002 is slightly softer than previously anticipated. Primarily as a result of the uncertainty in the timing of the economic recovery which is important to help drive the return in the business traveler.

Despite some rant volatility our stock price has rebounded since the beginning of the year reflecting market confidence in our company. We are convinced that we are following the right strategy and we have the highest quality portfolio of hotels. We believe the market will ultimately reflect this in the value of our stock. We have worked hard to position our company to properly deal with the changing operating environment and to be prepared to take advantage of the opportunities that will arise over the next few years. Our primary goal will continue to be to increase shareholder value through the prudent use of capital and to max eyes the return of our existing assets. Well, thank you and we will now be happy to respond to any questions that you might have.

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question you may do so by express pressing the star key by the dig I had 1 on your touch tone telephone. Again ladies and gentlemen to ask the question that's star 1 on your touch tone telephone. We'll pause for a moment) touching the star key followed by the digit 1 on your touch tone telephone. Again, lainl, to ask a question that's star 1 on your touch tone telephone. We'll pause for a moment to assemble the roster.

[Pause.]

We'll take our first question from Perry Curtis from J.P. Morgan.

Hi. Good morning.

Hi, Perry.

You touch on your management fee line item. It sounds to me like it was not impacted or has not been impacted yet by the renegotiated incentive management contracts. And to what degree might the second quarter have looked different had that been struck at the beginning of the second quarter?

Perry, is that another way of asking how much this is going to impact when we close the deal?

Let me say, it is not reflected in any of the numbers that you see. We expect, as I described at close in the third quarter we're not too far off of getting the deal done. At that point we will get a credit. But remember, and at that point we'll try and give you a little bit better information obviously. It will be part of our future disclosures. But remember that we said that particularly in the IMF it starts at one level and then ramps up over the next three or four years. So we have anticipated it in our guidance that we've given you, and I think you should expect on that particular line item that it's not going to be particularly meaningful this year but that it will grow over time to be a more meaningful number.

All right. Very good, thanks.

Our next question comes from [inaudible] with Bank of America securities.

I have a come quick ones for you on the demand side and I have one about the [ M and A ] front.

With respect to the back half of the year, the third quarter number just like Marriott seemed particularly hard hit in terms of guidance. I wonder if you could talk a little bit more about those issues there in terms of discowpting leisure. And then also you had an initial '03 expectation of being up five to 6 percent I remember correctly at the last quarterly call you didn't touch on '03 yet. I was wonder if you might be able to talk about what rate pressures might go into 'zero P three from where you sit do today. And then to talk about with respect to [ M and A ], knock on wood let's hope we don't have another external shock to the system, but what happens to Host Marriott if we do? You have a lot of credit cash, you have a lot of credit availability, some dispositions capital judgments which would be helpful your leverage also would sky rocket and I'm wondering what that means to you? Do you become a net seller of assets under that situation or would you still be an acquirer of assets if you get such an opportunity?

Let me take them one at a time. Demand for the third quarter, you're hearing from both ourselves and MI that we're expecting lighter demands and thus greater rev par declines. Results from a process of going through and reforecasting all of our hotels and looking at the third quarter in reality is business that we had hoped would materialize in the third quarter hasn't and we had certainly hoped in the second half of the year you'd start to see a slight although not a meaningful but at least a slight pick up from where we were in terms of the individual business traveler and it's just not happening. So what's what's happening is we're continuing to fill rooms not far of, but we're continuing (Mark) to have to rely heavily on lower rated group business and lower rated transient business. So it's just a reflection of a reforecasting that anticipates really no improvement from where we are in terms of the individual business traveler. In terms of '03 expectations, we didn't give guidance for a reason, and that is as I stated in my comments, it's hard enough for us honestly to give you guidance for the rest of this year with the uncertainty and what's going on in the economy, so we didn't think it was prudent fit to try and give '03 guidance. Obviously as we get into the fall, we'll try and give you a little bit better sense of it, but I think we said plus or minus 5 percent in the last call. You said five or 6. I think we said plus or minus five. I think it's hard to say today what that number would be. I think it's fair to say that if we think it's going to take till the first half of '03 to really have some of this recovery take hold, that that probably is too aggressive right now and I think in terms of our numbers, well again, we're not going to give specific guidance. I think given that we've trimmed our numbers for the rest of this year and given what I just said, and that is that we were suggesting we think it will take part of next year really for this recovery to take hold the way we had hoped or the way we hoped it will, that obviously both of those things would have an influence on next year's numbers in the sense of having a negative influence on next year's numbers. So that's the kind of a directional answer, I know, but we don't feel like sitting here today with the visibility we have it's responsible to try and give more precise guidance than that. Certainly we will as we get later into the year.

On the [ M and A ] side, I guess you started out with an [ M and A ] question, Jay, but it really related to what happens if another terrist attack or something, we have another shock to the system, and are we kind of, you know, out of steam at that point. I guess what I'd say is we have really focused on stabilizing our balance sheet and both during our liquidity starting with, you know, middle of last year certainly post nine-11 in a way that we could take several more shocks to the system without having any kind of massive problem. And so I would say to you, we're still in a position to be able to did that. We have $240 million of cash on hand. We don't have any maturities, really, until '05. We have a $400 million new credit facility that has a terrific amount of flexibility. We're going to get a significant additional amount of liquidity in the form of getting our working capital back when we close our deal with MMI. So I think from a liquidity view in terms of cash on hand and access to capital through our credit facility, I think we're in great shape. We could sustain a number of additional shocks to the system terrorism or otherwise and still be in great shape.

In terms of relating it back to [ M and A ], obviously it depends on what it is. If we had another event like nine-11 ires I think our first priority as it was after that date to make sure we have stability in the company and liquidity to deal with whatever might unfold as a result of those events. And I don't think at that moment in time we with worried about [ M and A ] as much as we were worried about making sure we had great strength and stability to make it through a difficult time. Depending on the event, that obviously would factor into our thinking, but so a massive shock to our economy and system, I think obviously we're survivable we're in great shape and we'll survive and prosper. If it's a - and I think we have the capacity given all the sources of capital that I just described to be in the game. I would say to you if it's a massive shock I think we along with everybody else are going to be focused on other thing. If there are less massive shocks that occur to the system, certainly an opportunity to rise out of it I think a long-winded way of saying we're in good shape to make it through those and to take advantage of opportunities to through the credit facility.

Okay. Thanks a lot.

Yep.

Our next question comes from Mike [inaudible] with Salomon Smith Barney.

Hey, guys.

Hey, Mike.

Chris, try to get a little bit better feel for the momentum in the margin on the margin. I know you had a bun of of your operators together recently. Maybe one way of looking at it would be if you looked at a big major market, what percentage of them would you say are just kind of delicate in terms of operating performance and then which markets are improving are there any markets that are a little bit worse on the market?

You know what I would say, Mike, is it pretty much all balances out. There are some that have been improving. I mean San Antonio, you heard about a couple of them. San Antonio has been strong, Orlando has been strong, fill I has been strong, San Diego has been strosm strong. Some of them have been improving some strong. New Orleans D.C. has been improving Atlanta has been improving. Some have been either stalled or getting worse like San Francisco, Boston, orange county, Chicago. In the way I look at it is I think the plus is kind of negate the minuses. And I think what's happening is right now, at least for the time being I think you're seeing - it's stable. I mean it's not overall getting materially worse, but it's not getting materially better, and it does, I think, as I stated in my comments relate back to getting out of the business of selling discounted rooms which means getting some pricing power back, which is heavily dependent on corporate America, corporate earnings and the individual business traveler.

Okay. And just a quick question for Robert. Robert, just on my math it looks like there is a bit of a disconnect between the new FFO guy and the EBITDA guidance. Looks like you're guiding the FFO down by a few more pennies than the EBITDA change would dictate. Is there smig happening between those two numbers that's specific, inaudible.

No. There is a slight disconnect, but I think it's just basically rounding.

Okay.

I don't think you're missing anything there.

Okay. Thanks.

Our next question comes from David Anders of Merrill Lynch.

Could you comment on the bid ask spread on properties has been pretty wide and obviously narrowed for you in Boston. What else have you seen out there in the market right now with respect to property transactions?

I'd say, David, the bid ask is still reasonably wide. It's come in somewhat. I'm kind of generalizing here. If it was 200 basis points before, it's down to maybe 100, 150. Boston [ Kopli ] was a unique opportunity for us an aspect that we tracked for a long time we wanted to add to the portfolio. An owner at the time that really made a decision to kind of exit the lodging industry, and so they wanted to exit it and they were willing to transact business at prices that we think made a great deal of sense for us.

There were other things we were looking at in the market and I think over the next, I don't know, two to six quarters there are going to be other opportunities that I think we will get done, but it's not today the situation where you see any kind of real meaningful volume of activity for the types of assets that we're looking at. There's still a pretty good spread. We're really focusing our time on looking for the unfortunately or fortunately the needles in the hey stack like Boston where we have a particular asset that we have targeted that we like and we're able to structure a transaction where we can get premium economics for inaudible I think we'll continue to find some of those. I think volume will pick up over time. I think for the rest of the year I wouldn't honestly forecast much of anything. Again, while we're looking at a number of different deals, I still think that the spreads in most cases are too large to transact business. But I think, you know, they come in probably 100 basis points, and I think as we get into the next several quarters you'll start to get across over point. You'll see some additional vol you'll iewm. You're not going to see the volume of transactions that we saw (Mark) in the early mid '90s after that dislocation. The dynamics are not in place to see that happened, but you'll certainly see at least in my opinion, more activity than you're seek today.

Thanks. Hey Robert, just a follow-up on a comment you made. The 15 million that you're anticipating or that's in the guidance from the insurance payment, that comes in Q4, and that's of the 40 million that you recognized or that's paid; is that correct?

That's correct.

Okay. Thanks.

Our next question comes from Steve Kent with Goldman Sachs.

Hi, Chris. Could you just comment a little bit more I guess on the September, October trends? We're hearing from some of the other companies that, in fact, a couple of weeks in there, especially surrounding September 11th there is almost a more torl yum of on travel it's surprising you thought your September was going to be very, very strong even with these comparisons. Could you tell me what's going on there for big conference convention bookings sort of around that time?

You know, we have not really seen that. We've looked at our group business and also in the business transient side during that time period, and we have not really seen that trend. I think transient may be a little bit softer, but our group business seems to be holding up pretty well during that week.

Steve, we have seen the phenomena you're hearing from other people we had all our operators in a couple months ago. They were saying there was kind of a natural resistance to that week in that general period of time, but we had everybody back in last week, and asked the question again, and our impression is that that's not as much of an issue.

One thing you might also keep in mind there are several holidays that follow in that general time period, and those are traditionally weak period. So that is something that is normally during that time of year and will impact operations.

Okay. Thanks.

Our next question comes from Ashley Crane from Morgan Stanley.

[Inaudible.]

Good morning, guys. How does that change or has that change from the previous guidance?

It hasn't changed. That's the same number we've had there for the full year.

Great, thanks. And Chris, the stock has fallen quite a bit off its recent high's. How has that impacted if at all your likelihood to use it as a currency in acquisitions?

It certainly has impacted it. I think we have said in the past that we would consider using O P units or our stock as part of transactions where we can create value for the company on a per share basis, and also potentially have a secondary benefit which is improving our credit modestly. Obviously to meet the first standard which is to create value for the company on a per share basis the lower the stock and the lowerrer the multiple the more difficult that is. So I would say it certainly - it has to and has impacted our thinking in that regard, at least on a temporary basis we certainly are hopeful that given that the fundamentals that we've all talked about for the next several years are very, very strong, notwithstanding that we have - it's going to be a little bit weaker than we thought for a period of time given that the strength of the fundamentals over the next several years that the stock will recover and perform quite well over time and that there may be opportunities where we could use the inaudible stock. As we sit here today certainly that had to be factored in and will be factored into our thinking and impact those opportunities.

Chris, given that kind of disconnect between short term valuations and longer term potential, is there a price point at which you want to buy back your stock? You go back in)

Obviously there is some price at which you consider buying your stock. Not at this point in terms of where it is in the sense that the leverage of the company would be affected in a way that we think would not be prudent given where the economy is and where the company is.

All right. Thanks, guys.

Yep.

Our next question comes from Jim Fulton, Prudential Securities.

Thank you. Good morning.

I have a couple of more questions on this $40 million [inaudible]. You talked about the 15 million being assumed in your FFO guidance. It's also safe to assume in your EBITDA guidance?

Yes, that's correct.

How much of the remainder of the 40 million is potentially recognizable in 2003?

Well, Jim, it depends on when we're able to resolve these issues with our insurance companies. When those issues are fully resolved, we would be able to recognize all of them. But remember that we laid out for you today, they added a $40 million in cash that we've currently received. We used 13 million of that to offset expenses and 5 million of it to repair specific property damage.

So there's 22 million left, 15 of which we have suggested that we are hopeful if we can work^out our issues we will take in income to the Q4.

So the differential from plus any additional cash?

Plus any additional cash we take in from now till the end of the year.

Okay. Very good. You mentioned, you referred to the increment as working capital when you reached a settlement with Marriott inaudible and you're sensitive about tell graphic a number in here in terms of that settlement. Can you give some, you know, bread box type of number or idea in terms of the cash increment that this could mean? Are we talking 25 million, are we talking 75 million? What kind of number - what's at risk.

The closer to the higher end. But we'll give you better guidance when we actually close the deal.

Okay. In terms of the capital spending that Robert talked about, he talked about 180 million inaudible in 2002 for capex. You also mentioned M and R spending which is in addition to that, not capex going through the income statement. Of the 180 million that of course does not include any acquisitions inaudible. Can you talk about any - what the major projects are if there are any in that 180 million, number one, and number two, do you have a preliminary idea of what the spending will be in 2003?

You know, I think the easiest way to think about it, Jim, is that the majority of that, the vast majority of that money just as it's been in the past years, is for room renovations and redoes of lobbies and the normal types of maintenance and renovation that you do in hotels. And what we try to do on a regular cycle, update our rooms and to redo our public space. And so the vast majority of that money is being spent on those types of items.

So there's no substantial incremental inaudible.

No. In fact, we've always told people that we spend around 5 percent of our revenues in maintaining our properties, and that's what we're continuing to do.

Jim, we're in the process, in fact we were in the process before we bought the hotel, doing a rooms renovation at the hotel, and there are other spaces within the hotel, some of the public spaces, meeting space, are being redone over time. The majority of that funding is going to come from F S A reserves going forward, or F F and A reserves that we inherited as part of the deal. We did get whatever F F and A reserves were in place. We were transferred to us when we bought the deal.

Now, over time, my guess is and they're not hard numbers, that we will add to that because they're going to be opportunities for ROI investing etc., in that property over the next several years, but those numbers would be in out years, not built into the numbers we're talking this year.

We have added a little bit of a additional disclosure in our press release at this time in the supplemental schedule where we had broken out the capital expenditures, and that might give you a little bit more flavor for what we were just talking about. As you can see the vast majority of it is renewals and maintain our existing properties.

Okay. Just to be clear, your guidance for full year 2002 inaudible?

That is correct.

Inaudible. The final question, Chris, if you could just go over this a little more slowly this time, at the time you bought the Marriott, the copy Marriott, you indicated what the multiple was on I guess the 01 EBITDA as well as the decline that the hotel is currently experiencing flt just to help us understand better how you underwrite this asset and what your projections are as you look out, I think you've said before you typically underwrite these acquisitions on I think you said a five year IRR.

Ten year IRR. If we shorten that period in the case of the Boston Marriott say three or four-year period, can you help us understand how you - what kind of wrap up you would anticipate with that asset and how that helps you to get to the purchase price you said you arrived at in this case?

Yes. I think as we described, Jim, in the past what we're looking at a number of different metrics when we're buying an asset in term of obviously impact on earnings and A V per share to the company. Probably the primary target that we're trying to meet is getting a meaningful premium to our cost to capital on - and looking at a comparison of the ten year unleveraged IRR compared to our weighted average cost to capital make sure we're getting 250 to three: 350 point premium to that. In this case we do think that we did that. (Mark) we obviously an advertise pated given the incredible fall off (anticipated) in the cash flow of assets in 2000, we did anticipate a meaningful recovery over time. I don't have all the numbers sitting in front of me, but I think that we were not overly aggressive. I think we were looking really at getting back to EBITDA levels consistent with 2000, and in '05, in 2005 to 2006, so we have a fairly gradual ramp up to getting back to EBITDA levels that were consistent with '300 levels in that kind of time frame.

Okay. Good.

We obviously expected this year, the EBITDA levels could be modestly off of what they were in 2001, and then in 2003 we would expect that the EBITDA levels would be modestly up from '02 levels and probably at or above the '01 EBITDA levels.

And the completion of the rooms renovation?

Completion of the rooms renovation should be October.

Okay. Thank you.

Uh-huh.

[William Truelove], UBS Warburg.

Hi, thank you. I have one follow-up to Jim's question on acquisitions for the rest of the year in the guidance. You said you were expecting to sell 175 to $100 million in dispositions. Was that included in the 202 FFO something.

Yes, it is.

Then the second question is about the $13 million that has been used to offset expenses this year. It has impacted the P and L so far, right? So in a way it has been recognized.

Well, we have not recognized any profits. From the P and L standpoint this has been neutral transaction. We have used the cash to offset the expenses we've incurred so there's been a zero impact on nblg. There is World Trade Center total was destroyed, a break even, not had any positive EBITDA.

Okay.

Or negative.

Or negative it's just break even.

So what type of expenses - expense lines does that impact, that 13 million?

Ground rent and other types of payments.

Okay.

Operating expenses, too, and clean up costs, things like that.

And my final question is in 2003, assuming that you get this resolved in fourth quarter to get the recognize the profit, in 2003 is there going to be inaudible you'll be recognizing profit, or would it be a one-time payment?

It will depend on how it works out. If we were to settle with the insurance company totally, because we were exiting and not rebuilding, it would be a onetime type of payment. If ultimately we're going to rebuild the hotel, then it would be a series of periodic payment that we would get, but be able to take into income at that point theoretically because we've resolved these technical issues.

So the fact -

And I can't give you a better guidance in the sense that we don't - this is obviously a very complex equation. It's going to take many, many months if not years to figure out exactly where we stand in this overall equation. We're one small part of a very, very large redevelopment plan. Just yesterday, actually, the port authority and the lower Manhattan development counsel disclosed that they have six options. In fact you can go on the L M.D. web site and read about the six options. So it's a process. It's really just started to swing into full gear with an expectation that by the end of the year they'll have narrowed it down to one preferred option, and obviously we're going go fob involved in that process and try to figure out how we fit into that option or whether we fit swo into that option.

Okay. So even though you an advertise palet being able to recognize some profit in the fourth quarter from that, you don't know how that would impact 2003 with that kind of agreement to recognize in the fourth quarter?

We don't know that yet. And we don't, and the reason we're giving - reviewing it with you is that we have issues to work out with the insurance company to take it in the fourth quarter. I don't think it's an issue in the sense that we've got the money and it's a matter of when we book it, but there certainly is some chance that we can't sort out all these issues and we end up having to book it next year. So we just wanted to make sure we highlighted it for everybody.

All right. Great. Thanks a lot.

Uh-huh.

The Joyce minor Lehman Brothers.

Hey guys just a couple more questions of clarification on the world trade world financial properties. About what percent your EBITDA properties were prior to September 11th?

Three and a half, three, three and a half percent.

Okay. It wasn't that gigantic per se.

No.

But basically you're saying based on the insurance payments that you're receiving, the properties are running kind of break even to your results this year. And does that include what you're expecting in the way of the fourth quarter payments?

No, we're expecting that $15 million would be over break even.

Okay.

When it is able to be booked. We have the money now but we haven't been able to book it because of the accounting rule.

One thing you might just add, we have complete business interruption coverage and we've gotten some payments under those policies, we'll continue to get more payments. What we're trying to help you understand is that of the $40 million that we've already received and that we have on our books, how we're handling it for financial reporting purposes. That's really what we've been trying to explain today. We have that money right now, but we're trying to help you understand that we have not included any income from that so far this year, but we are forecasting to include $15 million of income in the fourth quarter.

The way it thrip cly works, this is to how everybody would deal with the situation is, you get advance payments under these kinds of insurance policies, and until you have final resolution with - in the form of a settlement with your insurance company, they consider them advance payments. Which means in theory they're advances that could have to be repaid. Although that is not in practice how it occurs. From an accounting, from a gap point of view until you have finality on the issues with the insurance provider and they turn from advance payments into final payments, you can't book them. Again, from the way that it actually works in the real world, these advance payments, I'm not aware of any occasion when advance payments personally I'm not aware of any occasion where advance payments have ever been repaid. So we're sitting on the money. They made these payments knowing full well that they owe us this and more, but from a technical point of view until they turn into final payments, they can't be booked.

It's really just a timing issue. 00:59:34 We're trying to help you understand the timing 00:59:36 issue. 00:59:36 00:59:36 >>ANALYST: Okay. What also seems kind of 00:59:39 interesting is basically if the properties were 00:59:42 still standing and seeing the kind of you know 10 00:59:45 percent rev par declines than the rest of New York 00:59:49 market is seeing, you'd actually being posting 00:59:53 15 percent) properties were still standing and seeing the kind of you know 10 percent rev par declines that the rest of the New York market is seeing, you'd actually be posting, you know, I don't know, 15 percent or so EBITDA declines on that three-and-a-half percent, but instead you're seeing break even ; is that right?

Right now -

For financial reporting purposes that's right.

And they're helping you in a way.

No, no, not break even versus last year.

We're getting zero EBITDA. Not breaking even versus last year. We are op setting expenses so the impact the properties we think in last year had a little over $30 million.

$30 million.

Thirty, a little over 30 million in EBITDA last year. What we rate now we have booked zero EBITDA from those properties and what we have assumed is that we will book effectively $15 million of what would have been last year over 30 million.

Okay. So they'll be down 50 percent?

It's not helping us. The result is that it's hurting us, but it ultimately we're getting the cash and we will be able to book it. This is Robert Scott. It's just a timing issue.

Okay. I think that's clear.

If not, we're happy to answer more questions on it.

Chris, one more question for you which is just on the dividend front I know that when you got inaudible dividends part of it was rules ea quierg that you don't have to pay out as much. I guess I thought part of it was capital conservation, too. But then I kind of see you go spend a much of bub much of money on a hotel in Boston. I guess that indicates it's not really capital conservation. It's just REIT rules. So should we really be expecting step-by-step your dividend comes up with required payments, we don't necessarily get back to kind of a nice fat dividend deal any time soon?

Well, it will go back eventually to where it was, but Joyce, as we've talked and as we've disclosed many, many times our policy has always been since we converted to a REIT the other 98 distribute the other amount, necessary to maintain our REIT status so that's all we're doing here. Clearly capital preservation was also an issue at the end of last year for us and everybody else in the world. But we haven't changed our policy and I think you're right to expect that we will start - we will reinstate our dividend. It will likely be the end of this year if everything - if operations continue to improve, and then of course next year with the expected improvement you'll see the dividend next year and you'll see it in rollover time. And given financial and operating leverage as the business recovers, I think you should expect that you'll see it grow pretty nicely over time time and eventually it will be back to, as you described that big fat dividend that we used to have. But we will do it incrementally over time time consistent with what our prior policy has been. We won't do, you know, a big jump immediately back to where we were.

Okay. So it will be different than what some of your REIT peers like [inaudible] and [ Ameristar ] are doing?

Nobody has done it yet, so I guess we'll have to wait and see.

Okay. I guess relative to what their intentions have been.

Yes. I mean I'm not sure exactly where they are, but I think they have had a policy of dividending out a percentage of their free cash flow as compared to our policy which has always been to dividend out what we need to dividend out to maintain REIT status.

Okay. Thanks.

Uh-huh.

There appear to be no further questions at this time. I'd like to turn the could conference back over to you for your additional and closing remarks.

Thanks. Well, we're pleased with our second quarter results even though we are in a difficult operating environment. Our properties continue to perform quite well, all things considered.

We look forward to updating you in the fall from our new headquarters. We're moving our offices here in about two weeks. You can get our new address on our web site. Thanks for joining us today and have a great summer.

This does conclude today's conference. Thank you or your participation. You may now disconnect.