Host Hotels & Resorts Inc (HST) 2002 Q3 法說會逐字稿

This is premier conferencing online for today's host Marriott Corporation conference call.

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Good day everyone and welcome to the Host Marriott Corporation third 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 . Please go ahead Sir.

Thank you and good morning.

Welcome to our third 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 Log.

After describing our filings with the FBC 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 Christopher Nassetta our President and Chief Executive Officer will provide a brief over view of our third quarter result and then we'll describe the current operating environment and update the company's out look for the balance of 2002.

Robert Parsons our Chief Financial Officer will follow Chris and provide greater detail on our third quarter results including regional performance. To following their remarks we will respond to your questions.

And now here's Chris.

Good morning. Thanks for joining us today.

Give it a weak operating environment, we're pleased with our third quarter results. Although our hotels have shown improvement throughout the year. Over all demand for lodgings remain weak and as anticipated margin comparisons have become more difficult.

Our third quarter delude FSO per share was 15 cents exceeding the consensus estimate of 11 cents per share. This was primarily the result of recognizing three cents per share business interruption insurance proceeds from the World Trade Center hotel, which we had not expected to recognize until the fourth quarter.

Excluding the recognition of this business interruption insurance, which Robert will cover in more detail, our results slightly exceeded analyst's consensus for the quarter. Our comparable declined 8.9 percent for the third quarter compared to 2001 level while operating profit margins decreased 4.4 percentage points for the same period.

In evaluating our performance remember our quarter ended September 6, not September 30, so excludes the strong year over year period in late September. Year to date our power declined 10.4 percent while operating profit margins decreased 2.5 percentage points.

These declines in power margins are generally consistent with the trend we expected for the quarter and reflect the slower than anticipated growth in the overall economy.

Our power declines for the quarter was primarily driven by decline in average room rates of 6.7 percent combined with decline of 1.7 percentage points.

Our hotel declined 26 percent in the third quarter and 17 percent year to date compared to similar periods in 2001. Our EBITDA for the first three-quarters of 2002 was 602 million including 159 million in the third quarter.

Achieving our power and EBITDA guidance this year has been difficult due to the decline in business travel resulting from the weak economy. Although our continued efforts to control hotel operating costs and our ability to ship our business ... has enabled us to meet expectations during the first three quarters of the year.

Trends in the third quarter were consistent with what we experienced earlier this year as group business continued to be our strongest segment. The individual business traveler segment still has not strengthened and as a result our large hotels have focused their efforts on short-term group business and discounted individual and leisure travelers.

Our large urban resort and convention hotels which represent 69 percent of our EBITDA have taken advantage of their flexible meeting and catering facilities allowing them to handle both large and small groups and as a result continue to out perform the portfolio as a whole with total power decline of approximately 7.5 percent year to date.

Our hardest hit properties continue to be airport hotels as the weakness in airline traffic has resulted in declines in power of 15 percent this quarter, although group business typically has a lower rate than individual business traveler this difference in rate has been partially offset by additional food and beverage revenues which were down only four percent for the quarter and five percent year to date or about half the decline in room revenues for the same period.

Year to date food and beverage revenues represent 32 percent of total revenue versus approximately 30 percent last year.

Booking cycles remain short both for individual business travelers and for groups. Our future group bookings are about eight percent behind last year, with room rates remaining relatively flat. However indicative of the shorter bookings cycle group bookings for the first half of next year are stronger than in the second half.

Currently we're in the middle of negotiating our 2003 arrangements with our special corporate customers. This group comprises approximately 10 percent of our room nights. Based on where we are today we expect that the average rate for this segment will be flat to modestly down next year.

A good understanding of what is occurring in our business can best be seen by looking at the changes in our business mix over the past two years for example for the first three quarters, individual corporate business travelers have declined from 35 percent of total room nights in 2000 to 27 percent this year.

At the same time discounted business has increased from 26 percent to 33 percent. While group business has increased slightly to 40 percent. As a result while is remains downward pressure on averaging rate goes from the absolute rejections in rate and the changing mix.

Over all the change in mix of our customers from premium and group the lower rate of group segments is responsible for approximately 50 percent of decline in average rate.

Not withstanding the current challenges we do see light at the end of the tunnel. As the economy begins to strengthen corporate profits should increase allowing companies to relax restrictive corporate travel policy. This will create rising demand for our properties which when coupled with historically low increases in supply to get the bright future for our portfolio of well-situated name brand property in urban resort and airport locations.

In fact the recent press release by summaries the recent survey showing that business travelers expect to increase their travel in 2003 and that brand and location remain the most influential factors in choosing a hotel.

Our result this quarter has begun to reflect the modifications to our management agreement Marriott International which we completed in late July. Some of these changes are readily apparent such as the increase in available cash of $125 million. Other benefits will gradually increase over time. For example we estimate that we will have a cash flow benefit of $8 million in 2002 as a result of reduced in self-management and other cost reductions.

I sense by 2006 these increases in cash flow should go to approximately $25 million a year. Other changes included in expanding the pool of hotels that we can sell by existing management agreements to 46 properties which provides us with greater flexibility and recycling capital and adding restrictions for properties and 10 markets.

We are also receiving more detailed reporting and gained additional controls over our hotel operations including operating in budget shared service programs and system wide programs. We believe these changes have created meaningful value for our company.

On a related note we recently completed negotiations with the manager of our four Swiss hotels properties to settle between our companies. Which should add significant value to our company over time. These changes include giving us the right to re-flag both the Atlanta and Boston properties in the short term as well as providing opportunity to re-flag our properties in New York in three years and Chicago in five years.

We remain interested and expect that there will be increasing opportunities to acquire assets that are consistent with our target profile of luxury up skill properties and hard to duplicate urban resort and down town locations which have significant barriers to entry.

We continue to have discussions with interested parties on a number of potential transactions involving both individual properties and portfolios of hotels where we believe that we could add value to our company.

However these thoughts are very preliminary and it is too early to determine if any transactions will actually be completed. We remain disciplined in our approach to buying the best assets and the best markets with the best brands and managed by the best operators while focusing on achieving returns that exceed our cost of capital.

This strategy should add to a strong base of growth and provide up side potential for our shareholders over the next several years. On the front were continuing our efforts to sell assets that are not consistent with our long-term strategic goals.

Our ability to complete transactions has been by or recently changed agreement with Marriott International which increased our abilities to sell assets by management agreements.

We are currently working on sale of up to eight sales which depending on the number of transactions we're able to complete could result in proceeds of between 100 million and 275 million dollars. The proceeds would be recycled into other assets that match our target profile or used to pay down debt.

The fourth quarter appears to be following the same pattern as the rest of 2002 although an unpredictable economy still makes forecasting very difficult. Booking cycles remain short, airline traffic remains below 2001 levels and business travel has not materially improved.

Based on our believe that the economy will continue to grow though more slowly that previously anticipated our current guidance is there whole year of 2002. will be down four to five percent with margins now approximately 1.5 percentage points.

These assumptions translate into a range of $1.05 to $1.10 in FFO per share and EBITDA of 860 to 875 million dollars. Since visibility remains limited it's difficult to give specific guidance on 2003. We're just beginning our budget cycle, which should give us a better feel for next year.

However we now think it is unlikely that will be as strong in 2003 as many had predicted earlier this year our best estimate at this time is that growth will likely be flat to up four percent this range reflects our believe that a full economic recovery is more likely to occur in the second half of 2003.

Additionally we expect the certain costs such as wages, benefits and insurance will increase at a rate greater than inflation in 2003 creating the potential for further margin deterioration at this levels.

Our policy on paying dividends continues to be to distribute the minimum amount necessary to maintain status, which is generally an amount equal to our taxable income.

Based upon our current outlook we expect that for 2002 the dividend on our common stock if any would be minimal although we intent to continue to pay the dividend on our and preferred shares.

While the short term is not as encouraging as we would like and maybe a little choppy we still believe that the immediate, intermediate and long-term outlook for the industry remains very positive. fundamentals will continue to gain strength over the next several years. We continue to see the supply growth rate that should remain at historically low levels for a number of years.

As we look to 2003 and beyond this low supply growth that's with a straightening economy and increasing demands should result in meaningful growth in earnings and dividends.

We are also confident about the long term future and strength of our company based on the the location quality and growth potential of our assets which have historically outperformed the industry.

We believe that they will continue to do so and that we should be able to provide superior returns to our investors. We will continue to update you as the reminder of the year unfolds and thank you for being with us today. I'm going to turn the call over now to Robert Parsons to cover our third quarter in a little more detail.

Thanks Chris and good morning everyone.

Before we get started let me remind you that our third quarter ended on September 6th and so the period after September 11th is not included in our results while most other companies will include the entire month of September in their third quarter to help you in thinking about our results our for the third quarter on a calendar basis would actually have been up approximately three percent with that background let me give you a little more detail on our third quarter operations.

We continue to have mixed results across the country as some regions continue to be impacted by weakness in the technology and financial services sectors but other areas seem to be benefiting from strong group and convention activity as well as increases in government business driven by higher .

During the quarter our more challenging markets included San Francisco, Orlando, Chicago, Denver and while our strongest performing markets were San Antonio, Tampa, San Diego, Washington DC and Boston.

We also continue to see the benefits of our strategic focus on the ownership of large hotels in urban, down town and resort locations. These 53 properties which represent 69 percent of our year to day EBITDA have out performed our comparable portfolio as a hole by 280 basis point.

With the year to day decline of 7.6 percent. Our 18 hotels as expected under performed with a decline of 15 percent for the quarter.

Primarily as a result of reduced air travel with our Newark and San Francisco properties particularly soft. Although not a major component of our business mix we have selectively felt the impact of significant declines in international travel ranging from 10 - 15 percent.

Particularly at several of our hotels in gateway locations such as San Francisco and New York. Other cities such as Boston, Orlando and Miami have also been impacted.

Additionally several of our Ritz-Carlton hotels particularly in San Francisco and Florida which have traditionally drawn from the upscale international traveler have also been affected by this decline.

Results for our Suburban properties were the best they've been this year with a decline of 8 percent for the quarter though year to day is the decline is 13 percent.

Booking cycles do remain extremely short. Requiring our properties to focus on booking short-term groups and leisure business. Fortunately our properties have the flexible facilities to focus on a broad range of group business as can be seen by the ability of the property to book 83,000 room nights in 2002 for 2002.

This exceeds the historic average for this property by approximately 25,000 rooms or 30 percent. Although this is just one hotel it is an indication that the booking cycle for group business continues to be tight.

As expected it is not been possible to continue the levels of flow through achieved earlier this year. Although we have been successful in keeping our margin decline to a minimum by strictly controlling cost.

In the third quarter our productivity was up and our cost per occupied room actually declined by four percent. Year to date our energy costs were down almost 11 percent helping to off set a 97 percent increase in property insurance.

Marketing costs have also been reduced by almost eight percent for the year. Mostly as a result of labor reductions and better efficiency and we have achieved significantly more savings in property taxes then we had anticipated.

With that over view let me give you a few specific examples from around the country. The region, which represents 12 percent of EBITDA, did not perform quite as well as the rest of our portfolio.

declined 10 percent for the quarter, which was driven by a decline in room rates of 11 percent and offset by a slide increase in occupancy. Although the our largest hotel in the region performed much better with only an eight percent decline in .

It's performance was offset by the poor performance of some of the suburban properties in the region which have declines of as much as 20 percent.

Results for our Florida region, which represented slightly over six percent of our EBITDA, were mixed. power decreased 13 percent primarily due to weaker performance in the Orlando and Miami markets while operating profit margins for the region declined 7.5 percentage points.

Our strongest performance in this region came from our camper hotels driven by a power increase of over six- percent at our 700 room camper waterside Marriott.

Our specific region representing about 24 percent of our EBITDA had power and margin decline in line with our overall portfolio, which was actually a pleasant surprise and one of this regions best quarters in quite a while.

power declined 8.4 percent with operating profit margins down 5.7 percentage points. The San Francisco area continues to suffer from the slump in hi Tec and financial business and significant reductions in air flying travel.

power declined 19 percent for the quarter at our six properties in the San Francisco and Silicon Valley area and we have few indications that this will materially improve in the near future although the opening of the new West convention center, located near our 1,500 Marriott should eventually help.

Further South the San Diego market continues to perform well with our three properties achieving a six percent increase in power driven by a four percent increase in room rates and an increase in occupancy of 1.6 percentage points.

Back out to the mid Atlantic region which slipped a little this quarter although New York city continues to perform better than expected. power was down 9.9 percent for the quarter and eight- percent year to date with year to date operating profit margins down 2.1 percentage points.

This region represented approximately 17 percent of our EBITDA. Our two comparable hotels in New York City continued to improve and their power decline of 5.9 percent is almost entirely due to a 5.4 percent decline in room rate.

The 2,000 room New York Marriott Marquee ran 90 percent occupancy this quarter. We continue to have encouraging news from the New York financial center hotel which reported a decline in power of only 7.6 percent for the third quarter with occupancy levels now running at about 78 percent.

Although we have been able to continue to increase our market share in New York we will continue to feel some room rate pressure from the continuing reduction in traffic at La Guardia and Kennedy Airports, some new supply additions in this market and reductions in international travel.

This year the performance of our Ritz-Carlton properties has lagged the portfolio as a whole, with power declines of 14 percent for the year and 15 percent for the quarter.

Some hotels have performed better including our two Ritz-Carlton properties in Atlanta which were down about nine percent year to date. Overall the lower volume of international travel and corporate efforts to reduce costs has impacted the Ritz-Carlton properties, which have relied more on high intransigent business.

Let me spend a few minutes talking about our courtyard joint venture, which has been the focus of several recent articles. As a reminder in October 2000 Host Marriott and Marriott International entered into a joint venture to acquire these courtyard hotels which contain approximately 17,500 guestrooms.

We entered into this arrangement as part of the settlement of litigation with the limited partners of seven partnerships which were organized in the mid 80s.

Host Marriott and Marriott International arranged to provided the partners liquidity in return for settling the lawsuit. Our cash investment was approximately 90 million. Marriott International made a similar equity investment and also made a loan of approximately of 200 million.

All of these proceeds were used to purchase the courtyard properties from the limited partners. This was an efficient way for us to settle this lawsuit.

Marriott International manages the properties. Host Marriott is the manager. The joint venture is owned 50 percent by Host Marriott and 50 percent by Marriott International.

All major decisions require approval from both Host Marriott and Marriott International. Since we do not own more than 50 percent of the joint venture or control major decisions we do not consolidate the joint venture under generally accepted accounting principles.

A joint venture owns two partnerships. Courtyard one and courtyard two. Together owning 120 courtyard hotels. The partnerships have approximately $716 million dollars of third party financing in addition to Marriott's debt.

This third party debt is comprised of 281 million of CMBS Mortgage debt at courtyard one. 308 million of CBM Mortgage debt at courtyard two and 127 million of senior notes also held as a courtyard two partnership.

This third party debt matures between 2008 and 2012. The senior notes do not but the CMBS Mortgage debt does have a heavy amortization schedule. With amortization totaling approximately $29 million a year.

The $200 million of debt is held at the joint venture level and supported by excess cash flow from both partnerships. All of the debt in the joint venture and the two individual partnerships is non-recourse to Host Marriott.

We do not have any guarantees or similar obligations to the joint venture or the underlined partnerships. We record our share of the joint venture income or loss. In our income statement under equity and earnings of . Year to date we have recorded a book loss of approximately five million dollars.

Our courtyard joint venture had decline to nine percent in the third quarter and just under 13 percent year to date.

The venture generated $472 million in revenue in 2001 and $305 million for the first three-quarters of 2002. Operating margins are down about two percentage points.

These hotels have not performed as well as our full service hotels this year. Primarily as a result of unfavorable price comparisons with full service properties. We expected as the economy recovers however this rate differential will return to more historic levels which should improve the results for these courtyard hotels.

Courtyard has always had strong brand preference as shown by the 130 percent market share that the 120 properties in our joint venture have had this year.

Despite lower levels of cash flow today the partnerships and the joint venture have been and continue to be current in all payments to their lenders. Including the loan to Marriott International.

We are confident that each of the two partnerships will continue to have the ability to pay all third party debt service on the CMBF and the senior notes although unlikely in the event it is needed the partnerships also have the ability to defer ground rep payments and certain fees to make debt service obligations under the CMBF and senior notes making any default unlikely.

If cash flow is insufficient for the joint venture to continue to pay all of the interest on the debt the joint venture consistent with the terms of the loan can all or part of the 26 million dollars interest due on the debt until there is sufficient cash flow to make these payments you can find some additional information about courtyard in our previously filled 2001 10K as well as in the third 10Qs which will be filled shortly by both Host Marriott and courtyard partnership.

Let me ship years for a moment and update you on the situation in New York we are continuing to work with the appropriate parties as they decide how the world trade center site will be redeveloped clearly it will take a number of years to resolve these issues.

As mentioned we were able to recognize some of the business interruption insurance proceeds that we had previously received as revenue in this quarter rather than in the fourth quarter as our previous guidance suggested.

Meanwhile we are continuing our efforts to resolve our insurance claims for both property damage and business interruption related to the Marriott World Trade Center and the Marriott Financial Center Hotels.

As we communicated to you at the end of our second quarter our previous guidance included 15 million dollars of pre-tax income recognition of business interruption insurance in the fourth quarter of this year.

Through negotiations with our insurance company we were able to meet the requirements to recognize 11 million dollars of pre-tax income or three cents per share after tax from these proceeds in the third quarter.

We are hopeful that we can recognize the remaining four million dollars in the fourth quarter although like the 11 million this income recognition is subject to special restrictive accounting rules.

Since September 2001 we have also used an additional 14 million dollars of these insurance proceeds to off set operating expenses of the two properties including pay roll, ground rent and operating losses. We expect that we will continue to receive business interruption payments from our insurance carriers for some time for both these properties.

However we may be required to delay income recognition of further proceeds even though we have received the cash - we'll keep you posted on this as we work through these issues maintaining the superior standards of our hotels has always been a priority. We will continue our disciplined approach to capital spending for the remainder of the year and have just began or budget process and a review of capital projects for 2003.

Our focus will continue to be on property maintenance and collected improvement that will serve to maintain our high quality standards. We have spent approximately 129 million dollars year to date and expect to spend approximately 180 million dollars for the full year or approximately five percent of hotel revenue.

Given the changing economic environment we have focused on maintaining our liquidity recycling capital and remaining flexible so that we can deal with the current uncertainties as well as take advantage of opportunities that will enhance share holder value.

At the end of the third quarter we had over 394 million dollars of cash including the approximately 125 million as a result of return of a significant amount of working capital and that the from our properties related to the completion of our negotiations with Marriott International.

In addition to the two the $394 million of cash we are currently holding you'll see on our balance sheet an additional $120 million of restricted cash which primarily consists of various reserves held by lenders and which will be returned to us as these loans mature or other conditions are met and just as a reminder we have not made any draws on our credit facility which matures in 2005 and continues to provide the company with the revolving loan availability of 300 million.

We would also like to announce today that the company has changed it's accounting for stock options. Beginning in the third quarter of 2002 we will record compensation expense for the fair value of any options issued. Although we have not issued any options in 2002 we expect that as in previous years we will issue options in the fourth quarter.

We believe that this change will more reflect the affect of stock options on net income and is consistent with our goal of providing transparent reporting of results.

For Host Marriott stock options has historically been used to compensate our mid level management team. Our senior management team has not received stock options since 1993 but instead we have used a restricted stock program, which is always been expensed currently. As a result we do not expect that this change will have a material affect on our earnings.

In 2002 the increase in compensation expense should be approximately $300 thousand. As I'm a sure you are aware subsequent to our second quarter earnings release we filed with the the recently required certifications regarding our companies financial reporting process and internal controls.

We intend to file a similar certification for the third quarter. From our prospective we believe that this is a formalization of our pre existing effort to provide you with complete accurate and timely information about our operations and the plans for the future.

As a result of a cautious business environment International and REIT in an over all economic slow down four castings continues to be a challenge. We believe that our per share for 2002 will be with in the range of a dollar five to a dollar 10.

We expect that in the fourth quarter, which began on September 7th, we will recognize 28 to 33 cent for that per share. With rent increases of approximately 10 to 12 percent as our comparisons becomes significantly easier.

Remember to make sure to adjust your fourth quarter projections to back out the three cents of that we had expected in fourth quarter but recognized in the third.

We are convinced that we are following the right strategy and that we do have the highest quality portfolio hotels. Which has historically and should continue to out perform our competition.

We have worked hard to position our company to properly deal with the change in the operating environment and to be prepared to take advantage of the opportunities that will arise over next few years.

Our goal has been and will continue to be increase shareholder value through the prudent use of capital and to maximize the return on our existing assets.

Well thank you very much and we would now be happy to respond to questions that you might have.

Thank you. Today's questions and answers session will be connected . If you would like to ask a question you may do so by pressing the star key followed by the digit one on your touch-tone phone.

We will come to you in the order that you signal and we will pause for one moment to assemble our roster. Again star one to ask a question. Our first question comes from with JP Morgan.

Hi good morning guys.

Good morning.

: Could you give us a little bit more color on the supply/demand imbalance. Specifically what I'm trying to get a sense of is in 2002 we're still bringing on a fair number of hotel rooms in an environment that where we're at over capacity and do you think that that's going to take longer to absorb that in this economic environment. When do we see pricing is it going to take longer in the 2003 and 2004 than you guys or we might be expecting giving that supply growth.

it's Chris - Chris Nassetta the answer is you're right that there is in the upper end of the business certainly more supply in '02 than you can experience in '03. It's still well below you know kind of historical high levels than actually below the 30 year average at this point but there is still some new supply coming into the market the latter part of this year and the first half of '03.

As you get into the second half of '03 you get into '04 and '05 obviously that situation becomes very positive getting into the second half of next year and '04 and '05 it goes below one percent so very very favorable but there still is a little bit of supply to absorb and yes you're right in a very weak demand environment it takes a little bit longer to absorb that supply.

In terms of when we think we turn the corner obviously it has a lot to do with the demand side and when that picks up which has a lot to do with when the economy picks up and particularly corporate profits start to turn the corner and start moving up rather than sideways or down.

Our best sent to that and that's really all it is at this point is that it's likely to be more of a second half of '03 experience than at least the first part of the first half of '03 so that being said certainly back on the supply side it probably matches up nicely with fact that the latter half of '03 supplies are really starting to drop off and certainly our expectation is that the demand side starts to pick up.

Some of the GDP results while it's hard on all of us out there to recognize that anything other than the economy is very weak right now and certainly all of the business trends that we're experiencing suggest that. GDP growth has not been as anemic as maybe corporate products have been which does suggest that consistent with prior experience that on a lag to GDP growth you will start to eventually see a pick up in demand in our hotels, particularly on the corporate side because corporate profits will ultimately start to pick up as a result of the economy picking up generally so.

So it's a longwinded way of saying I think that we are really looking more towards the latter part or the second half of '03 moreso than the first half of '03 for that dynamic to take shape meaning pricing power to really start to shift in a meaningful way.

Very good thank you.

Our next question comes from with Lehman Brothers.

Hi guys just to go a little further with your kind of outlook for '03 you talked to you know power camping in that flat to plus four range and you know costs creeping up more than inflation. What kind of effort per share grows this kind of realistic given that scenario and what you take on in terms of insurance proceeds if you're getting 15 million in your numbers this year what we should be looking for in 03.

on the 03 guidance if we could be more specific we would try and be more specific. The reason that we're not is that we're just starting our budget process and we think the responsible thing to do is to really go through the process on an asset by asset basis and rule that up into an overall obviously an overall corporate budget and then we'll have a much better sense of where we think things are going to be next year.

The a major issue obviously for next year given the comments am I prepared statement are going to be what we think is going to happen on the cost side or the margin side.

And until we've really gone through it asset by asset we just don't have a good enough feel for that and since that can have such a material impact on our guys from FFO and SRFFO growth rate. We'd rather go through that process before we give you any more specific guidance.

In terms of guidance on the insurance proceed ...

Yes I think the way I would think about the business interruption insurance is that it would probably be a little bit less next year than this year. We obviously still have the you kinda the full impact from the World Trade Center property but as a financial center property continues to improve in operations kind of .

The difference there would be a little bit less next year than this year.

OK and then just a follow up on your kind of increased disclosure around courtyard. Is it your sense then that you know there's physically no need for additional likely right downs in the future.

We certainly we certainly don't have ...

You can go any right down on our investment.

Perfect thank you.

Our next question comes from , & Associates.

Morning guys a couple of questions. First of all if you could maybe tell us when you think that budget process will be over and whether we'll have to wait until you know early next year when you report fourth quarter results to get some sort of guidance from you on 03.

I think it's probably that's about the time frame. In this process we go through the very comprehensive process that'll take a good part of the remainder of this year. So I think it's probably you're looking to very late this year early next year to get more specific guidance.

In the crisis that $4 million of potential proceeds from business interruption insurance in the fourth quarter included in your guidance.

Yes it is.

Yes it is.

And the cash is already in hand. The question is relative to our negotiations with our insurance carriers whether we will be able to reach agreement so that we could take it into income.

Ok and then finally how long do you would you be comfortable keeping $400 million of cash in your books. These will be an alternative of say you know buying back stock at less then eight dollars a share.

For a little bit longer obviously there is a lot of uncertainty in the world around us. The economy still is weak the command is weak particularly as we described in the corporate segment there is a threat of going to us going the country going to war with Iraq and that kind of environment we are more comfortable keeping heavier cash balances for a little bit longer period of time.

We certainly don't intend to keep that heavier cash balance longer term. But I would say at least another quarter maybe two until we have a little bit more visibility in terms of where we're going to be next year in terms of our own operations as well as where the world is going to be next year.

At that point obviously we would use some portion of those cash balances. These are invest in our portfolio invest in other assets or for pay down debts.

All right thank you.

Yeah.

, Morgan Stanley.

I wanted to go a little bit further into your comments - the one thing I don't know I thought your comment on growth was interesting and you've been looking at that quiet closely I've already - always thought that and really track each other pretty closely but it seems to me that that relationship sort of and it seems like that if you look back certainly to where growth kind of rebounded back to the level it's at now.

was higher than it is now - in the early 90's and then additionally it seems like even if you pull out the impact of September 11th that the decline in has been much more significant in the difference between the decline and the decline in has been much greater than it was in the early '90s and I was curious to - if you had any thoughts on that?

Yeah I have a few generally thoughts I think you're right that there has been a if you actually do the analysis and look at the between growth and growth in demand at this point the relationship has it's a lower then it typically than it has been in the last several years.

Now that in our minds in the analysis we do is not unusual and a down period of time - in a down period of time you will generally find that the between growth and demand growth in our business and does .

And that demand in our business typically is harder hit in that environment meaning that the as that demand gets lower than what you also find if you look at history in the business and analyze it is that coming out of down turn it flips around the other way meaning that there's still a for a period of time although ultimately I would say to you that the two come back together.

In other words I think that longer term there is a very high correlation. But in this kind of period of time there's a bit of a in the sense that going down demand is lower than where is and then coming out demand will be higher than where is so it excentuates it and it is clearly somewhat on a lag.

I think in this kind of environment the way we look at it is coming out of this down turn when we do hit the point of inflection that demand in our business will exceed we will continue to be but in positive sense cause demand will greatly exceed growth and that clearly there is a lag effect in terms of where growth starts to before that will happen cause growth is going right now we're not seeing that rise in demand.

But that will happen on a lag in that you will see growth greatly in excess. I mean you will see demand growth in our business greatly in excess of if you look at prior cycles and certainly we think this one will form up to be similar to prior cycles.

In the shorter term because that that relationship has again I would say to you that it is not unusual it's a typical experience in this type of environment .

Another way of looking at - a metric to look at in our minds that will have much more direct impact shorter term is corporate profits.

I mean I think it the weakest segment of our business right now is the corporate travel segment of our business it's where we're loosing the majority of our rate and that's why we've lost our pricing power and so when you look at turning the corner in terms of hitting the inflection point and getting our pricing power back - we believe that it's heavily related to corporate profits.

Sop in terms of a metric to look at in the shorter term I think corporate profits are probably metrics you can look at. a great metric to look a longer term come back to the and there will a very high and when we hit on that as I say I think we'll have some great demand growths in excess of that number.

OK and ...

Those that answer you.

It does and then the growth that you are looking for next year does sort of flat to positive is that could you give a sense of what you think is first half of what you think is second half like just very generally.

I do not I guess as specific as I can get would be first half a lot weaker than the second half. I mean how exactly blends out I don't know because we are just in the process of going through our budget by property as I described and were not deep enough in to that to judge it on an accurate basis but clearly we think the first and second the first quarter weakest second quarter a little bit stronger and the second half of the year clearly more productive from an operational point of view.

OK and I guess just one last thing along the same lines. When you look at the three different groups you mentioned discount and I would assume a leisure part is part of the 33 percent in the discount rate group.

Yes.

What do you what are the trends are you seeing generally for those three groups when you kind of look out or it sounds like the part is probably down.

we see group been kind of modest you know modestly up. I say is probably left to are you for all of those three.

Three kind of based on real trends that your seeing and not sort of but what your really actually seeing as far as looking.

Well what we're actually experiencing right now is just I guess the only trend we have is that the corporate business is still weak so we haven't turned the corner there. You can see from the numbers that we described is the corporate side of it is still weak and we haven't seen honestly any great time of strengthening yet the group business is still relatively strong I mean were eight percent off in our advanced bookings for next year that's more up second half of the year experience that the first half of the year so that doesn't trouble us as much because the booking cycles are so short you'd expect the second half of the year to be way off because people are booking in a different kind of pattern than they have historically.

business we expect you know the consumers stick with us we will relatively stable. I mean it is not a large component of our business. The discount business is as you know has been strong I mean it is obviously grown as a strong in an odd sort of way I mean it is not the business we want to be strong but it has grown as percent of our over all business and the trend there is that is going to remain relatively strong so the trend that you want to see to know that you have hit the point I said it probably two or three different ways now that you really that you want to see corporate profits moving up you want to see that corporate travel segment of our business grow those in terms of the percentage of the make up of our business but also grow in the sense of been able to get rate pressure back in to the system and feel it grow so to grow our rates again.

Next year we would expect that the increases that you are going to see to get to the zero our of four par are going to be occupant you know a lot of occupancy related change and honestly mix of business change meaning we're hoping certainly in the second half of the year that the corporate side of the business is stronger and so were going to be taking out the discount business some segment of that percentage of our discount business and replacing it with the highest rate of business we have which is the corporate business so that's depending on having corporate profits move up the economy strengthening et cetera obviously as we move in the next year but that you know that's what's going to make it happen.

Were going to see some increase in demand from an occupancy point of view and a change in the mix of business. We're not anticipating at least as we get into the early stages of our budget process that we're going to have a significant amount of pricing power to really start raising absolute rates as much as we're going to be able to use the increase in demand to change our mix of business.

OK that's really helpful thank you very much.

We'll go next to with Salomon Smith Barney.

We're all ... thanks.

with Prudential Security.

All right thank you just a couple of questions guys. First of all the fourth quarter guidance that you gave Robert does that provide for at the lower end some disposition.

We can't hear you Jim can you repeat.

Sorry the question was the guidance range that Robert gave for the fourth quarter does that include at the lower end some sales.

Ah Jim since we believe that those dispositions are actually going to occur towards the end of the quarter it's not going to have a material impact one way or the other. But yes we have begged into the guidance what we think will happen on sale.

OK and going from your comments on the release as well as I guess in your prepared comments the implication here is that acquisitions while you're looking at things they're preliminary and there are unlikely to be any acquisitions until next year.

I think for the remainder of this year that's a reasonable assumption.

OK can you give us some idea of the comparative rates on acquisitions versus dispositions.

Yeah I will but I would say looking at our dispositions kind of on an '02 forecasted numbers the actual numbers and then forecast for the rest of the year our dispositions are probably in the rate range of eight to nine percent and obviously we think those are very favorable rates from a standpoint of being a seller, the reason we're able to achieve that kind of rate has a lot to do with the way that we're doing it and the flexibility of being able to offer the management on these hotels. You'll see when and if we announce some of these they really all get involved assets where either they're currently franchised or and the buyer is going to be able to take over management or we're going to be converting from a management - a hotel that's under management contract to a franchise arrangement so that the buyer can take over management and that allows us to get very favorable pricing.

From the buyers side it's really hard to say people are all over the place and not a lot of deals happening but I would say at the height of the business, probably rates are you know nine to 10 generally. We're able to achieve a little bit better rates on the sale side because of the issues I just mentioned.

On the buyer side particularly on encumbered assets I'd say it's probably in the nine to 10 range so - there's still - there's not a lot of transactions happening out there right now. I think that's going to change there' certainly our impression is a number of assets are going to be coming to market the next couple of quarters whether any of those make sense for us it's hard to say right now but I think you're going to start to see an increase in volume of transactions - not to the level you saw in the mid 90s by any means or measure but an increase from what you've seen recently which is very little at the high end of the business.

I still think that there are going to be opportunities to do transactions on the right terms and portfolio deals and single assets with the use of OP units I think that's something that we've been focused on obviously our stock along with most in the industry has not performed well of late and so in this kind of environment with eight dollar stock honestly I think those kind of transactions are less likely but our expectations certainly and our hope is that as we start to get closer to an inflection point in operations is starched or to stabilize and move up and that will provide in the next certainly couple of years an opportunity for us to look at transactions with the use of LP units.

But shorter term I don't think you're going to feel a lot happen but in the next couple of quarters I think that volume that transaction of volume will increase and I think the are probably at the level by describing.

OK and one final question regarding the availability on the line of credit. It was indicated in the release of 300 million. I believe at the end of the prior quarter it was 400 million. Why the lower availability.

It's actually always I think if you read the queue it's always it's a $400 million facility. We have $300 million immediately available to us and then based on certain tests we have $400 million available to us.

And so as we go into next year or years beyond that if if certain coverage requirements are met we can we can up it to form. But it's been 300 since the time we closed the transaction. I haven't changed in terms of what the immediately available to us.

I see and so it and you won't have the availability up to 400 until that's ...

Not until we meet certain coverage requirements, which we don't anticipate at least in the next couple of quarters.

OK very good thank you.

The next question comes from with Merrill Lynch. You're all set.

Thanks.

Next question. with Bank of America.

Good morning.

Morning .

I got a few questions for you so with a couple of numbers and then I'll ask some questions about the how many reconciled some things you said about demand. can you restate what you were saying with respect to the restricted cash I didn't get all that and then also in terms of courtyard can you tell us what was last years on a year to date basis and also on a full year basis.

The equity and affiliates I know you obviously print that line statement but I think that there was some other stuff in it besides courtyard for a couple of quarters last year. And are your reporting those numbers on a pre tax basis or an operating income basis.

Well to start with in terms of the restricted cash what we said is that we also show in our balance sheet $120 million under a category called restricted cash and what that is is it's various reserves that are required to be held under certain loan agreement that our lenders hold and it's actually our money but until either the loans are repaid or certain conditions are met within those loans that money is held by the lender so it's restricted.

So that we would have tried to point it out to you what that category was in our balance sheet.

OK, so it's not supposed to grow I think I what I fire her she said that number was going to grow and I was trying ...

No we wouldn't expect that number to grow materially. I mean each loan does change a little bit depending on you know certain conditions that you go through each quarter but it shouldn't change materially.

OK.

And that is in addition to the $394 million of cash that we are currently holding. In terms of courtyard you know I don't have the number exactly but I think that last year the courtyard impact on equity earnings would have been a couple of million dollars. It's going to be in that same range.

It's five million this year through the three-quarters. It's probably two or three million dollars last year.

OK,nd then in terms of the demand side Chris you mentioned that you thought the first half would be weaker next year then the second half I think. We can understand that.

The same time that he also said that the group booking pays at this time is down eight percent versus year ago levels and I think the last time you guys talked about the groups was down about five percent or so considering what happened after September 11th.

I guess I was a little bit surprised that the pace seems to have slowed some and we're also now talking about lower numbers for the fourth quarter of this year and it sounds like things sounds like there are getting weaker in the first half of next year from the stand point and I guess my assumption was that when we were talking last time that the expectation was on a sequential basis things would basically stay the same.

No pick up in it expected but no fall off expected and I guess all I'm understand here is what exactly is happening in the fourth quarter outlook and in first half of next year is it on the group side. Is it driven on the group side is it on the business travel side getting a little bit weaker. Why are we seeing expectations come in a bit for this year as well as for the first half of next year it sounds like?

Yeah I think the simple answer is that earlier in the year for us and I think every other major lodging company we had built in and expected some kind of pick up at the end of this year and as the year has gone on I think all of us including us have realized that that pick up.

It's not really going to be there that things have remained static - weak you know maybe modestly but not any kind of dramatic move and going by you've seen that kind of out of peoples expectations and I think that's really honestly all that's happening in the fourth quarter as it relates to next year I think that probably again maybe simplification.

But I think the answer is the same I think people you know many in the industry including us had been hopeful that as you got to the end of this year or as we got to mid-point of this year certainly the first part of next year you would start to see the pick up in the corporate side and we're just not seeing it.

So I think that our comments in the first half in the year relate more to that then anything. We're not troubled even though the group side has dropped off two to three percent as I said it's more in the second half of the year - that's not surprising cause booking cycles are very short and honestly it's probably if anything continued to get a little bit shorter that doesn't surprise me.

I think it's really a realization that we're not going to get any pick up in corporate business this year and it's hard cause we haven't seen the sign of it yet because we haven't seen corporate process starting to move the way that we'd like them to, to make any kind of assumption that it's going to really pick up in the first quarter maybe even the second quarter at this point.

So should we expect maybe if you are saying flat to obviously limited visibility here but does that therefore assuming that we might actually see down in the first half or at least in the first quarter of next year/

I think you could in the first quarter - I don't know about the full half of the year but you could in the first quarter.

OK thanks.

Yeah.

Our next question comes from .

Good morning guys.

Good morning .

A few questions for you - first is Robert I was hoping you could comment on Boston and why you believe it so strong in the third quarter relatively speaking.

Also if you could comment on is your fourth quarter expectations taken into consideration what's happening down in your region there specifically with the sniper - how that may be affecting both business and leisure travel and maybe you could give some commentary on what is trended recently for your hotels particularly on the weekends as this has been taking place and then just two other questions.

The third is on the reflaging process related to the Swiss hotels if you could talk to us about kind of how you're thinking about that and some of the options that you see in terms of new flag.

Those are the three questions I have.

OK maybe I'll come back to Boston. On the fourth quarter question of whether we built in to our expectation what's happening down here I think the answer is basically yes. Obviously we've given it a range of guidance and I think it does incorporate what's happening down here.

What's happening down here is terrible I mean to be living in it and there's no other way to describe it and somebody that's got five little kids in school down here it's a pretty horrific experience and it's not and whether it's terrorism related to what's going on in the Middle East or not it's terrorism whoever is doing it is terrorizing our community and it's effecting the country to some extent but not dramatically, but it's certainly effecting our region in a lot of different areas - retail, restaurants and basically all forms of business in our hotels.

We have on the weekends as you picked up on in terms of how you asked the question but certainly seen some cancellations at one of our hotels as an example - last weekend there was a soccer tournament for a regional or Mid Atlantic soccer tournament for young girls and it got cancelled because they're not doing outdoor activities and we had booked a lot of rooms in one of our hotels.

The net of it is that it's not that positive obviously for the region. We're hopeful that they bring this person - that they catch who's doing it and will resolve the issue. But it is not least as we see it right now, causing a major impact, it's probably so far it's probably 300 to $500,000 impact so the sooner they get him the better off we'll be but it's not massive it's not materially impeachable to our fourth quarter and it's certainly built in to what we're thinking in the range of expectations we gave you in terms of refluxing Swiss we're just in the process of working through what we want to do there obviously we just recently signed our agreement with Swiss and until we had that done we didn't want to start on that process.

Now the two assets that we have most immediately available to us are Atlanta and Boston and we're starting conversations with a number of operators ... to determine what we want to do there. Obviously we think there's some pretty terrific upside potential for us in a shift in operators in terms of being able to increase cash flow and obviously there's also value in the sense that we have ultimately you know ability to do something with this asset on an basis.

So we'll give you more information as we go, we're going to be talking to a number of the major brands on those assets and we should in the next probably couple of months make a determination there.

On Boston I'm going to ask Robert to cover that.

In terms of Boston what we saw there was that we began to see some improvement on a year over year basis compared to what had occurred earlier in the year. We have four hotels in the Boston area including the Boston properties that as you know we bought this year.

For our three comparable hotels which would exclude Boston since we just bought it this year ... total power for the third quarter was down just under seven percent on a year to date basis that was down 15 percent so you can see that we have seen some good improvements in there in the third quarter and when you look at the Boston market compared to our other top markets around the country that power decline you know was the sixth or seventh best in the Country so all we were trying to say by that comment was that if you wanted to highlight the five or six markets that are a little bit stronger in the third quarter for us Boston fell into that category.

Robert do you know was there was something specific that took place in the third quarter that benefited those hotels, or do you think its more of you know a more positive trend in what happening in that, in that area?

I think its only Boston's is still struggling a little bit, particularly in the areas that were relying more in technology or in the business, but I think that we have seen some improvement there, and we expect to see that market improve over the next couple of years. Hopefully this is the beginning of that trend.

And finally could you just remind us which of the three hotels you have in that area ?

We have the Boston Marriott at Newton. The Hyatt Regency in the Cambridge area and The Swiss Hotel in downtown Boston, and of course the Boston that we acquired this year

Which is not in common.

Right, great thank you. Appreciate that.

Thank you.

That concludes today's questions and answers session, at this time I'd like to turn the conference back over to Mr. Chris Nassetta for any closing comments.

Thanks for joining us today. It was a long call but hopefully helpful that to walk through all these issues and give you all a better understanding of what's going on in our business. We appreciate the time you committed to us this morning and we look forward to updating you as we move after we finish our fourth quarter and have a little bit more visibility and a our operations for 2003. Thanks.

As this concludes today's conference call you may disconnect at this time.